Common situations and criminal defense strategies for embezzlement of executive positions in the cryptocurrency industry

Embezzlement of executive positions in the crypto industry situations and defense strategies.

Introduction:

According to Wu Shuo Blockchain News, cryptocurrency exchange Bybit has sued Ms. Ho, who is responsible for paying company salaries, for abusing her authority and transferring a large amount of USDT to an address secretly owned and controlled by her. A total of 4,209,720 USDT was transferred, resulting in $117,238.46 being paid into her personal bank account.[1]

In the cryptocurrency circle, it is not uncommon for executives to be involved in legal cases, such as the previous incidents: cryptocurrency tycoon and over-the-counter (OTC) trader Zhao Dong being taken away by the police for investigation; the U.S. Commodity Futures Trading Commission (CFTC) accusing Binance and its founder Zhao Changpeng of operating a digital asset derivatives exchange illegally; OKCoin Group founder Xu Mingxing being investigated by the Shanghai police for his involvement in a coin trading rights protection dispute; and Yang Zuoxiang, founder of Shenma Miner, being arrested by the Shenzhen Procuratorate for embezzlement of duty, among others.

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In criminal cases involving executives in the cryptocurrency circle, embezzlement of duty is often one of the common charges. Today, let’s talk about the crime of embezzlement of duty in the Criminal Law. The modus operandi of the crime of embezzlement of duty is that company personnel use their positions to misappropriate the company’s property for personal gain. This article will discuss several typical situations in the cryptocurrency circle.

01 Common Situations of Embezzlement of Duty in the Cryptocurrency Circle

Situation 1: Disputes among partners, shareholders “taking the money and running”

I have previously received inquiries about a certain NFT digital collectible platform. Due to internal management chaos and uneven profit distribution, the major shareholder absconded with the company’s funds and cut off contact. As a result, the minor shareholders were criminally detained on charges of fraud, allegedly because the major shareholder used the company’s funds to repay personal loans. There have also been rumors circulating on the internet that the former COO of Salary Wallet’s ICO project is suspected of embezzlement of duty.

The subject of the crime of embezzlement of duty is a special subject, namely “employees of companies, enterprises, or other units.” For example, in the case of a digital collectible platform, there is generally a corresponding registered company in China. If employees of the relevant company are suspected of embezzlement of duty, they are subject to the regulations of China’s Criminal Law. However, ICO projects, as token crowdfunding projects, often do not have a legal corporate form of organization. Instead, they are loose alliances, which do not meet the requirements for the characteristics of the criminal subject of this crime. If there are situations where partners “take the money and run” that harm the interests of the team, other means of rights protection need to be adopted.

Situation 2: Senior R&D personnel of the company use technical means to steal the company’s virtual currency

The professional background of blockchain technical personnel is more industry-oriented. In such cases, technical personnel gain company system management permissions by means such as tampering with company code and modifying computer software programs, and transfer all the company’s virtual currencies to their own accounts.

A programmer at a company in Shenzhen stole the company’s virtual currency by tampering with the code and transferred it to a personal address. Later, the centralized tokens were exchanged for on-chain tokens, and then exchanged for USDT and stored in their BSC Binance Chain wallet. Finally, they cashed out on Binance Exchange and made a profit of nearly one million. The perpetrator was convicted of embezzlement and sentenced to 2 years’ imprisonment[2].

The characterization of the perpetrator’s actions is a controversial issue in such cases. The charges involved in such cases often include theft, illegal acquisition/control of computer information system data, and embezzlement. Among these charges, embezzlement carries the highest penalty, so from a defense lawyer’s perspective, under the premise of proving the perpetrator’s guilt, arguing from the perspective of the perpetrator’s constituting embezzlement can help achieve a lower penalty.

Situation 3: Exploiting position for personal gain

Exploiting one’s position for personal gain often occurs among senior management personnel in companies who have convenient conditions due to their positions, such as CFOs, sales directors, HR directors, etc. The so-called “convenient conditions” include the convenience of supervising, managing, and handling the company’s assets. For example, a CFO may overstate expenses or falsely report purchase costs; an HR director may fabricate the salaries of employees who have already left the company, misappropriate employee wages, and illegally possess company property; a sales director may sell or give away company goods or fail to return the company’s funds after receiving payment.

He, as a maintenance engineer at a company in Shanghai, was responsible for managing and maintaining the company’s Bitcoin mining machines. In 2021, He took advantage of his position to manage and maintain the Bitcoin mining machines and sold the company’s M21S Bitcoin mining machines multiple times, making a profit of over 970,000 yuan. The prosecuting authority charged him with embezzlement and brought the case to court[3].

According to the Criminal Law, embezzlement only constitutes a crime if the amount is relatively large. If the amount involved exceeds 30,000 yuan, the punishment is imprisonment for up to 3 years; if the amount exceeds 1 million, the punishment is imprisonment for 3 to 10 years. In the aforementioned case, He’s crime amount was less than 1 million, and the prosecuting authority recommended a sentence of 2 years and 6 months of imprisonment.

02 Criminal Defense Strategies

If blockchain practitioners are suspected of embezzlement, defense strategies can be adopted from the perspectives of the criminal subject, characterization of the actions involved, and the amount involved in the case, depending on the specific circumstances of the case.

In addition, in practice, there are two difficult points to consider when determining whether this crime is established:

1. Whether the person “utilizes the convenience of their position”

To utilize the convenience of their position, the person needs to have certain authority and control, making it easy for them to handle certain matters or influence others to commit misappropriation. Whether they are formal employees, contract workers, or temporary workers, they can all be the subject of this offense.

However, if the person only takes advantage of the convenient conditions that come with their work and does not have the responsibility of supervising or safeguarding the company’s related property, it does not constitute this offense.

2. Whether the person “illegally appropriates the property of their own unit”

This is one of the important conditions for distinguishing whether the person has committed this offense or another crime (such as embezzlement). Whether the person has “the purpose of illegal possession” can be judged from the following perspectives in judicial practice:

(1) Transferring company property and fleeing with the funds;

(2) Attempting to cover up or destroy company accounts;

(3) Subjectively unwilling or objectively unable to repay;

(4) Squandering the property

As China continues to introduce relevant laws and regulations, it also continues to strengthen supervision over blockchain, virtual currency transactions, mining, NFT digital collectibles, and so on. Criminal defense should be based on an understanding of the characteristics of the cryptocurrency industry and relevant laws and regulations in order to provide effective defense and better protect the legitimate rights and interests of the parties involved.

References: [1] Analysis of self-theft by Bybit’s compensation officer: loopholes and improvements in financial management of blockchain companies https://mp.weixin.qq.com/s/qzaWXud0a3s-SykhDWLlRA [2] Virtual currency case | Guilty plea for 5 years, defense reduced to 2 years https://mp.weixin.qq.com/s/S527RvsfppP-M5icMyP98A

[3] Case number: Axian Judicial Prosecution [2021] No.29

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