Can a taolu loan be recognised on sight?

On 10 November 2019 the Weibo account of Pear Video carried a trending story headed "Student having an abortion caught by a taolu loan: quoted 1,350, charged 23,000; the pressure nearly brought on depression". Xiao Li, who had become pregnant unexpectedly, searched on Baidu and found Xi'an Liren Hospital for the procedure. She said the quotation sent by the hospital's service staff was RMB 1,350, that on arrival she spent RMB 2,000 on tests, and that at the doctor's prompting she borrowed more than RMB 20,000 to pay for the operation, spending RMB 23,000 in all. Xiao Li said her monthly living allowance was only about RMB 1,000 and that repaying the money was a heavy strain. The hospital's response was that her boyfriend should repay it.

The report set off intense discussion of taolu lending. Such schemes have multiplied in recent years, continually changing their names and their form, and now even an abortion has been caught by one. They are hard to guard against, which makes public legal education on the subject all the more important.

What is taolu lending?

Taolu lending is a collective description of unlawful and criminal activity in which, with the intent of illegal possession, a victim is induced, deceived or coerced into signing a "loan" agreement, or a disguised loan, mortgage or guarantee agreement, and a false debt is manufactured by inflating the loan amount, deliberately creating a default, arbitrarily finding a default, or destroying or concealing evidence of repayment, after which the victim's property is seized unlawfully through litigation, arbitration or notarisation, or by violence, threats or other means.

In short, taolu lending is a low threshold plus high interest plus unlawful collection, and it is a new form of criminal conduct.

The legal framework

Cases of taolu lending are a new type of case, raising many questions of application of law and difficult to handle. The origin and source of taolu lending is private lending at extortionate rates; in substance it uses every means and device to dress extortionate lending in lawful clothing. Being new, it was initially the subject of no settled view in legal circles as to how the criminal law should regulate it, and the practice grew worse, progressively damaging the ecology of private finance, of industry, of society and of the rule of law. The Shanghai High People's Court took the lead in studying the difficult and contested questions of law that arise, and in August 2017 issued to the courts of the municipality its Notice on Strengthening Trial Work and Lawfully Punishing the Offence of Taolu Lending, requiring a full appreciation of the social harm of the practice, a careful grasp of its main features, an accurate characterisation of its nature, a correct determination of the sums involved, and strict punishment according to law.

On 28 August 2017 the Shanghai High People's Court held a press conference at which Huang Xiangqing, a vice-president of the court, reported on four criminal cases involving taolu lending in Shanghai. That day the Baoshan, Jing'an and Fengxian courts passed sentence in the four cases at the same time, imposing terms of between sixteen and two years on seventeen defendants, fines ranging from RMB 340,000 to RMB 40,000, and orders that the defendants compensate the victims' economic losses. The court dealt severely with the ringleaders, instigators, planners and active participants: of the seventeen defendants, three principal offenders received more than ten years, the heaviest being sixteen years.

On 16 January 2018 the Supreme People's Court, the Supreme People's Procuratorate, the Ministry of Public Security and the Ministry of Justice published the Guiding Opinions on Several Issues concerning the Handling of Criminal Cases Involving Underworld Forces, Article 20 of which provides expressly that where, with the intent of illegal possession and under the guise of private lending, a person unlawfully seizes another's property by "inflating the debt", "signing a false loan agreement", "creating bank records of fund transfers", "arbitrarily finding a default", "settling one loan with another" or "sham litigation", or forces a debt into existence or enforces it by violence or threats, the case is to be investigated, prosecuted and tried on the specific facts as fraud, forced transaction, extortion, robbery, sham litigation or another such charge.

In April 2019 the same four bodies jointly issued the Opinions on Several Issues concerning the Handling of Criminal Cases of Taolu Lending, which set out how the offence is to be identified. To suppress unlawful and criminal conduct in private lending further, the same four bodies then jointly made the Opinions on Several Issues concerning the Handling of Criminal Cases of Illegal Lending, in force from 21 October 2019.

The common methods and steps of taolu lending

Under those instruments, the common methods and steps of taolu lending include, but are not limited to, the following.

(1) Creating the appearance of private lending. Suspects and defendants advertise under the name of a "micro-credit company", "investment company", "consultancy", "guarantee company" or "online lending platform", holding out low interest, no security, no guarantee and fast disbursement as inducements, and then use false reasons such as a "deposit" or "industry practice" to lead the victim, acting under a misapprehension, to sign a loan agreement or related agreement for an inflated sum. Some also press the victim to sign such an agreement on the ground that an earlier loan was in default.

(2) Manufacturing false evidence of payment, such as bank records of funds moving. The suspect transfers funds to the victim's account in the inflated amount stated in the agreement, creating a bank record showing that the whole loan was paid over, and then recovers all or part of the money by various means, so that the victim has not in fact received, or has not received in full, the sum shown in the agreement and the bank record.

(3) Deliberately creating a default, or arbitrarily finding one. Suspects commonly set default traps or create obstacles to repayment so as to bring about a default, or simply declare one, and then insist that the victim repay the false debt.

(4) Maliciously building up the amount owed. Where the victim cannot repay, some suspects arrange for a company they control, or a designated affiliate or associate, to repay the "loan" for the victim, and then have the victim sign a further agreement for a larger inflated sum, so that the "debt" is repeatedly increased by "settling one loan with another" and "borrowing to repay a loan".

(5) "Collecting the debt" by turns with soft and hard tactics. Where the victim does not repay the inflated "loan", the suspect demands the "debt" from the victim, or from persons connected with the victim, through litigation, arbitration or notarisation, or by violence, threats or other means.

The practice has also spawned many new methods. Beyond the familiar small-sum harassment, violent debt collection and settlement, mortgage of residential property, and notarised general powers of attorney or loans, there are schemes built on P2P service fees, bridging loans against pledged or pawned assets, credit card cash-out, fraudulent online and micro-loans, advance funds to redeem a mortgaged home, uncollateralised campus loans, and inducement to gamble. How can taolu lending be avoided?

(1) Borrow only from properly established and licensed institutions. Platforms on the internet that claim "no security", "no guarantee" or "low interest" must be scrutinised with care, because any of them may be running a taolu scheme.

(2) Read the loan agreement carefully before signing. Watch for one-sided terms such as a discount on the cash actually received, high default interest and interest compounding on interest. Do not leave important terms blank: any blank space should be filled in or struck through, so as to leave no opening for forgery, alteration or insertion. Where a promise is given orally but will not be written into the contract, refuse to sign.

(3) Taolu lending is trap upon trap and device upon device. Spending within one's means and choosing rationally are the best protection. A person who has already been caught should report it to the police at once, cut the loss and have the courage to do so, and should take care to guard against and to gather evidence of violent intimidation, harassment and other collection tactics. The law is the weapon to use; do not sink deeper into the scheme for fear of extricating oneself.