National People's Congress Representative Fang Yan: Suggests Confiscated Funds Should First Compensate Stock Investors

In recent years, China has significantly strengthened its legal enforcement system against financial fraud and other illegal activities in the capital markets.

For example, the “Amendment (Eleven) to the Criminal Law of the People’s Republic of China” greatly increases penalties for crimes such as fraudulent issuance and false information disclosure; the Supreme People’s Procuratorate and five other departments jointly issued the “Opinions on Strictly Cracking Down on Securities Crimes in accordance with the Law and Safeguarding Financial Market Order,” which clearly requires strict, swift, and heavy investigation and punishment of financial fraud cases, explores joint punishment for multiple offenses, and holds all parties involved, including key individuals and third-party intermediaries, accountable along the entire chain.

The new Securities Law and related judicial interpretations have abolished the administrative pre-trial procedures for civil litigation, granting small and medium investors the right to directly sue, and actively promote the normalization of representative litigation, marking a major advancement in protecting investors’ litigation rights.

These measures provide powerful tools for a “zero tolerance” regulatory approach.

However, according to Fang Yan, a representative of the National People’s Congress, supervisor of the Shaanxi Lawyers Association, and director of Beijing Jincheng Tongda (Xi’an) Law Firm, “Under the new legal framework, the coordination among administrative regulation, criminal prosecution, and civil compensation systems still faces practical challenges, affecting the overall effectiveness of deterrence and punishment of fraud, as well as timely and adequate remedies for investors’ legitimate rights.”

Fang Yan points out that, in practice, the standards for transferring clues from securities regulatory agencies’ administrative investigations to criminal cases, and the rules for evidence conversion, remain unclear. While civil claims thresholds have been lowered, investors still face difficulties in providing evidence and executing compensation, with long cycles for rights protection and delayed realization of their rights.

Moreover, even if fraudsters are convicted or penalized administratively, the fines paid are deposited into the national treasury and are separate from civil compensation to victims. Currently, laws lack clear, operational procedures for prioritizing the use of illegal funds for civil compensation, risking situations where penalties are paid but victims are left uncompensated.

She recommends focusing on three pathways to improve efficiency: establishing a mechanism for early intervention by prosecutors supported by the China Securities Regulatory Commission (CSRC); promoting civil compensation through criminal asset recovery—establishing the principle of “criminal asset recovery and restitution first” and mutual recognition of factual findings; and ensuring civil evidence standards are compatible with criminal proof requirements by exploring “dual-direction evidence guidelines.”

During the Two Sessions, a reporter from Southern Weekend interviewed Fang Yan.

Where are the difficulties in protecting investors’ rights?

Southern Weekend: Compared to the past, has the difficulty and cost for investors to provide evidence and file lawsuits increased or decreased? In what aspects are costs reflected?

Fang Yan: Based on recent practical experience, the difficulty for investors to provide evidence has not decreased despite the removal of pre-trial procedures.

Previously, investors could rely on administrative penalty decisions as a “passport” to directly establish the existence of false statements. Now, without administrative recognition, investors must independently build a complete evidence chain, often starting from scratch—collecting announcements, media doubts, expert opinions, etc., which is time-consuming.

Overall litigation costs have not significantly decreased. Costs mainly include three aspects: first, professional support fees—most cases require hiring accountants, financial analysts, and even full legal teams; second, evidence collection costs—information queries, document copying, expert consultations; third, time costs—due to the lack of pre-recognition, case processing takes longer, increasing the time investors need to spend.

Southern Weekend: For ordinary investors, what are the main difficulties in independently proving the causal relationship between false statements and losses?

Fang Yan: First, information asymmetry—investors cannot access internal financial data, audit working papers, and other core evidence, making it difficult to prove the specific existence and content of false statements.

Second, market factors—financial fraud often intertwines with overall market trends and industry cycles, making it hard for investors to distinguish losses caused directly by fraud from those caused by systemic risks.

Third, high professional requirements—proving causality requires accounting and financial expertise, which ordinary investors generally lack.

Southern Weekend: How should courts handle the “burden of proof” for investors in practice?

Fang Yan: If investors can prove they traded in the involved stocks and that false statements existed, a preliminary presumption can be made that their losses are causally related to the fraud, shifting the burden of proof to the defendant.

At the same time, courts should actively guide the defendant companies and intermediaries to disclose relevant financial information, and, if necessary, request evidence or involve experts to assist in making professional judgments.

What are the suggestions for normalization mechanisms and standardization?

Southern Weekend: You mentioned the need to “establish a regular mechanism for prosecutors to intervene early and guide investigations when CSRC detects major suspected criminal clues.” What should this ideal mechanism include?

Fang Yan: In an ideal scenario, this mechanism should include four core components:

1. Clue reporting system—once the CSRC’s investigation department uncovers major suspected criminal clues, it should promptly notify the corresponding prosecutors to initiate early intervention.

2. Joint assessment mechanism—led by prosecutors, involving the CSRC, public security, auditing agencies, etc., to evaluate the criminal case value of the clues.

3. Evidence guidance—after early intervention, prosecutors should provide the CSRC with evidence collection guidelines, clarifying the evidence standards needed for criminal prosecution.

4. Procedural coordination—defining the connection points between administrative investigations and criminal investigations, including evidence transfer methods and information sharing scope, to ensure seamless procedures.

Southern Weekend: What important roles can the establishment of such a regular mechanism play in investor rights protection?

Fang Yan: It helps to secure evidence in accordance with criminal standards at an early stage, providing strong support for subsequent civil compensation; secondly, after criminal filing, key facts can be quickly established, enabling civil compensation lawsuits to proceed rapidly, significantly shortening rights protection cycles; finally, efficient coordination between criminal and administrative procedures enhances deterrence against fraudsters, indirectly improving market integrity and reducing investor losses.

Southern Weekend: You also suggested that, given the removal of pre-trial procedures for civil claims, the Supreme People’s Procuratorate and the CSRC jointly develop and issue “Evidence Guidelines for Financial Fraud Cases,” listing the evidence materials and proof standards required for criminal prosecution and civil infringement claims. Why are such standardized documents in a vacuum, and what are the main difficulties?

Fang Yan: First, inter-departmental coordination is challenging—evidence guidelines involve criminal, civil, and administrative evidence rules, requiring joint formulation by the Supreme Court, Supreme People’s Procuratorate, Ministry of Public Security, and CSRC, which is costly and time-consuming.

Second, standards differ—criminal procedures demand “beyond reasonable doubt,” civil procedures require “high probability,” and administrative procedures emphasize “preferable evidence.” Harmonizing these standards while respecting their respective features is technically complex.

Third, practical experience is limited—judicial practice in financial fraud cases in China is still developing, with insufficient case accumulation to extract universal rules. Premature issuance of guidelines may lead to disconnection from actual practice and reduce their usefulness.

Southern Weekend: You proposed clarifying in judicial interpretations that, in criminal cases of financial fraud, the illegal gains and fines recovered should be prioritized for compensation to investors. Is there currently a feasible system design to prioritize the use of recovered illegal funds for civil compensation?

Fang Yan: Currently, China’s criminal fines and administrative penalties are deposited into the national treasury, separate from civil compensation paths, lacking a “priority for restitution” mechanism. Although Article 64 of the Criminal Law states that “illegal gains shall be recovered or ordered to be returned,” in practice, restitution often targets only criminal victims, not all harmed investors, leading to situations where penalties are paid but victims remain uncompensated.

Southern Weekend: Could similar systems, like the “Fair Fund” in overseas markets, be implemented in China?

Fang Yan: Drawing on the U.S. “Fair Fund” system, where fines and illegal gains collected through securities enforcement are pooled to compensate harmed investors, has potential in China.

On one hand, the new Securities Law explicitly allows “investor protection agencies to sue on behalf of investors,” providing a legal basis for collective claims.

On the other hand, China has already explored similar mechanisms in certain areas, such as the Securities Investor Protection Fund.

It is recommended that judicial interpretations clarify that, in criminal cases of financial fraud, the illegal gains and fines recovered should be prioritized for compensating investors’ losses.

Southern Weekend Reporter: Mei Ling

Editor: Gu Ce