Fraudulently Obtaining a Loan or an Ordinary Loan Dispute? Three Lines Every Borrower Must Understand

A flawed loan application can be a civil dispute, a conviction for fraudulently obtaining a loan, or even loan fraud. This article examines the three elements — deceptive means, significant loss, and intent to permanently deprive — and maps the criminal risk line for corporate borrowers.

1. Does a “dressed-up” balance sheet automatically mean a crime?

“The bank found that our financial statements had been adjusted — does that automatically make it a crime of fraudulently obtaining a loan?” This is one of the questions I am asked most often. The answer is no. What the criminal law punishes is not an imperfect application file, but the obtaining of funds from a financial institution by deceptive means that causes significant loss. The Criminal Law Amendment (XI), effective 1 March 2021, made an important change to Article 175-1 of the Criminal Law: it deleted the phrase “or other serious circumstances” and narrowed the threshold for criminal liability to situations where “significant loss is caused to a bank or other financial institution.” The direction of that amendment is clear: conduct that causes no actual loss should, so far as possible, be returned to civil and administrative channels. Understanding this is the first step in assessing a company’s criminal exposure when raising finance.

2. The three core elements of the offence

Article 175-1 of the Criminal Law provides that whoever obtains from a bank or other financial institution a loan, acceptance of a bill, letter of credit, letter of guarantee or the like by deceptive means, thereby causing significant loss to the institution, is to be sentenced to fixed-term imprisonment of not more than three years or criminal detention, and is also or alternatively to be fined; where especially significant loss is caused, the sentence is fixed-term imprisonment of not less than three years and not more than seven years, and a fine. Where a unit commits the offence, the unit is fined and the persons directly in charge and other persons directly responsible are punished in accordance with the same provision. The elements therefore break down into three layers: first, deceptive means — for example, inventing a loan purpose, supplying false financial statements, forging purchase and sale contracts or VAT invoices, inflating the appraised value of collateral, or pledging the same asset twice; second, obtaining the loan, bill acceptance, letter of credit or guarantee as a result of those means; third, significant loss to the financial institution. All three are required, and they must be linked by causation. As to quantum, the current filing and prosecution standard generally starts at direct economic loss of RMB 500,000, although the latest judicial interpretation and filing standards should always be checked.

3. The line against loan fraud: intent to permanently deprive

The offence of fraudulently obtaining a loan and the offence of loan fraud (Article 193) overlap heavily in their objective conduct: both involve obtaining credit through false materials. Yet the sentencing gap is enormous — a maximum of seven years for the former, and up to life imprisonment where the amount is especially huge for the latter. Only one thing separates them: intent to permanently deprive. Loan fraud requires that the borrower never intended to repay. Typical markers include inventing non-existent funding sources or investment projects, using forged title documents as security, pledging the same collateral beyond its value and then absconding with the proceeds, or using the money for gambling and dissipation or transferring and concealing it outright. Conversely, where the enterprise had a genuine business, the borrower was a real entity, the materials were embellished but the underlying transactions existed, the funds went into operations, and the borrower engaged actively on repayment or had already repaid part of the loan, intent to permanently deprive is normally absent and loan fraud should not be found. In practice this subjective element is inferred almost entirely from the flow of funds, repayment records and post-default conduct — which is precisely where the defence has the most room.

4. The line against a civil loan dispute: loss and causation

The more frequent dispute is whether this is a crime at all, or simply a contract dispute between a bank and its borrower. The answer turns on causation between the deception and the loss, and on how the loss is substantively measured. First, did the bank actually rely on the deception? If the credit officer already knew the materials were inaccurate, or an insider colluded with the borrower, or the bank tacitly tolerated “packaging” to meet its lending quota, the reliance element is in doubt. Second, does the loss really exist? The shortfall after disposing of collateral, the valuation applied to property transferred in satisfaction of debt, amounts already repaid, and the treatment of interest and penalty interest all bear directly on the loss figure. Where collateral was adequate and the loan was ultimately recovered in full, “significant loss” is difficult to establish. Third, is this merely a rollover? Where an enterprise renews a facility to keep its cash flow alive and reuses the old file, and the bank knew this without any new exposure being created, whether a fresh loss occurred requires substantive review rather than an arithmetic exercise. It should be noted that even absent criminal liability, false materials can still trigger rescission, acceleration of the loan and regulatory sanctions.

5. Five defence angles in practice

In my own practice, these cases are usually defended along five lines. First, a substantive review of the alleged deception: inflating turnover and inventing a fictitious counterparty are not legally equivalent — the former may be commercial presentation, the latter is classic deception. Second, whether the institution actually relied: the credit file, pre-lending investigation report and approval records should be obtained to establish what the bank knew about the defects and whether it conducted any independent verification. Third, precise quantification of loss: collateral appraisals and disposal prices, repayment records and debt-for-property agreements should be checked item by item, unreasonable loss findings compressed, and any intervening cause between the deception and the loss identified. Fourth, negating intent to permanently deprive: documents showing use of funds, tax records, payroll and subsequent repayments can demonstrate that the money went into operations rather than personal dissipation. Fifth, unit liability and the scope of responsible persons: where the decision was made by the entity and the benefit accrued to it, unit crime should be found, and the boundary between persons directly in charge and other directly responsible persons strictly examined so that ordinary clerical staff are not swept in. The mirror-image offence of illegally granting loans also matters: bank staff who lend with knowledge of falsity may themselves commit a crime, which directly affects how the borrower’s deception and its causal force are assessed.

6. Compliance advice for companies and entrepreneurs

For companies and their founders, the key is not to make the statements look impressive, but to make the financing process survive hindsight review years later. First, financial data may be presented favourably, but transactions must not be invented and contracts and invoices must not be forged — that is the line that cannot be crossed. Second, the use of funds must match the application; diverting working-capital loans into real estate or the securities market is a common trigger in practice. Third, collateral must be genuine, sufficient and unencumbered by double pledging; inflated appraisals and repeated pledges are the practices most readily characterised as deceptive. Fourth, in bill acceptance, letter of credit and guarantee business the underlying trade must be real; financing supported by fraudulently issued VAT invoices typically violates several provisions at once. Fifth, when repayment difficulties arise, the correct response is to approach the bank about extension, restructuring or additional security — not to disappear, transfer assets, or keep rolling old debt into new, which is precisely the strongest evidence of intent to permanently deprive.

7. Conclusion

The legislative history of this offence reflects a clear policy orientation: criminal law should be restrained, and civil disputes should be resolved civilly. But that restraint presupposes that the borrower has not turned deception into a financing tool. For entrepreneurs, every “technical adjustment” made at the point of borrowing may become evidence in a courtroom years later. Getting three things right — the genuine use of the funds, the genuineness of the security, and a genuine attitude toward repayment — is worth more than any explanation offered after the fact.

※ This article is general legal information, not legal advice on any specific matter. For your individual case, please consult a lawyer.