Special Declaration: This article is an original work by Attorney Shao Shiwei. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For article reprints, legal consultations, or business exchanges, please add: sswls66
Over-the-counter (OTC) trading in the cryptocurrency sector, simply put, involves the simultaneous exchange of fiat currency for virtual assets. China does not prohibit trading activities between individuals.
Mainstream individual OTC merchants operate on major platforms such as exchanges and wallets, conducting transactions with users who trade cryptocurrencies. Although OTC merchants perform Know Your Customer (KYC) verification on users, the vast majority of merchants lack the capability to identify illicit funds. Furthermore, as merchants’ transaction volumes increase, encountering illicit funds becomes difficult to avoid. The previous arrest of Zhao Dong, a prominent figure in the cryptocurrency circle (founder of the digital currency financial platform RenrenBit and co-founder of Moji Weather), caused significant shock within the industry.
One of the common charges involved in the operations of OTC merchants is the crime of concealing or disguising criminal proceeds and the gains derived therefrom. This crime is stipulated in Article 312 of the Criminal Law of the People's Republic of China, which refers to acts of harboring, transferring, acquiring, selling on behalf of others, or concealing or disguising by other means, while knowing that such property constitutes criminal proceeds or gains derived therefrom. The penalty is fixed-term imprisonment of not more than three years, criminal detention, or public surveillance, and/or a fine; if the circumstances are serious, the penalty is fixed-term imprisonment of not less than three years but not more than seven years, and a fine.
Author of this article: Attorney Shao Shiwei
|
Reference Case[i]: The procuratorate alleged that at approximately 10:00 a.m. on October 24, 2019, Wang received a fraudulent phone call from a person claiming to be “Manager Zhou” using the phone number 152********. Wang transferred RMB 351,000 in cash to the specified account. At approximately 2:00 p.m. on the same day, Shan Mou 2 also received a fraudulent phone call from the same number 152********, resulting in Shan Mou 2 being defrauded of RMB 69,000 in cash. Subsequently, both victims reported the incident to the police. Upon investigation, the public security organs discovered that the victims' funds had been deposited into the bank account of the defendant, Zhou Pengnan. The defendant, Zhou Pengnan, registered accounts on the Huobi and OKEX platforms to engage in USDT-fiat currency trading. On October 24, 2019, the defendant Zhou Pengnan purchased USDT at an average price of approximately RMB 7.12 per unit and sold more than 600,000 USDT virtual assets to suspects involved in telecom fraud for cash-out purposes at a unit price of RMB 7.39 (a selling price significantly higher than the normal market price of USDT, which ranged from RMB 7.11 to 7.13). He illegally profited more than RMB 150,000. This Court holds that the defendant, Zhou Pengnan, failed to set registration duration requirements for buyers on the virtual asset trading platform and repeatedly conducted transactions with the counterparty at prices significantly higher than the market rate. He should have recognized that the source of the counterparty's funds was unclear and might constitute criminal proceeds, thereby facilitating the transfer of property by the counterparty. His actions constituted the crime of concealing or disguising criminal proceeds. The final judgment found the defendant Zhou Pengnan guilty of the crime of concealing or disguising criminal proceeds, sentencing him to six months of fixed-term imprisonment and imposing a fine of RMB 30,000. |
The standard for constituting this crime requires that the actor has subjective knowledge of the offense. Parties in criminal cases often defend themselves on the grounds of lacking such subjective knowledge. Therefore,How is “knowledge” determined in judicial practice regarding the phrase “knowing that it is criminal proceeds and the gains derived therefrom”?Two common viewpoints are as follows:
1. The actor’s bank card had previously been frozen
The reasoning for conviction by judicial authorities is as follows: A bank card is frozen due to involvement in illegal or criminal activities. The fact that the actor’s card was previously frozen indicates that the OTC merchant knew that their engaged activities were illegal or criminal. Continuing to engage in such transactional behavior despite this knowledge sufficiently proves that the OTC merchant meets the requirement of subjective knowledge in the constitution of the crime of concealing or disguising criminal proceeds, thus constituting this offense.
2. The actor frequently transferred funds to multiple bank accounts after receiving payments
Refer to Article 11 of the “Interpretation of the Supreme People's Court and the Supreme People's Procuratorate on Several Issues Concerning the Application of Law in Handling Criminal Cases Such as Illegal Use of Information Networks and Aiding Information Network Criminal Activities,” which states: “Where technical support or assistance is provided to others for the commission of crimes, if any of the following circumstances exist, it may be determined that the actorknewthat others were using information networks to commit crimes, unless there is evidence to the contrary: (3) The transaction price or method is obviously abnormal,”
Article 1 of the “Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Law in the Trial of Criminal Cases Such as Money Laundering” states that if any of the following circumstances exist, it may be determined that the defendantknewthat the property constituted criminal proceeds and gains, unless there is evidence proving that they truly did not know: “(5) Assisting others in depositing large amounts of cash into multiple bank accounts without justifiable reasons, or frequently transferring funds between different bank accounts,”
Regarding the above viewpoints, this attorney believes:
First, regarding previous bank card freezes: Public security organs may freeze accounts up to seven or eight levels deep, involving multiple upstream and downstream parties related to a specific transfer. Therefore, the freezing of an actor’s bank card only indicates that the relevant transaction records of the actor or their upstream and downstream parties were suspected of involving illegal or criminal activities. It does not mean that the actor themselves has committed a crime.
Second, if the fact that the actor’s bank card was previously frozen is not the same fact as the current allegation involving the crime of concealing or disguising criminal proceeds, it cannot be directly inferred that: because the actor knew the prior act was illegal, the subsequent act of continuing to engage in such business necessarily constitutes a crime.
Third, China does not prohibit over-the-counter trading activities between natural persons. According to the 2017 “Announcement on Preventing Risks Associated with Token Issuance and Financing” (hereinafter referred to as the “Announcement”), the prohibited activities are limited to Initial Coin Offerings (ICOs) and prohibit exchanges from engaging in businesses such as conversion services and information intermediary services.
Although the buying and selling activities of OTC merchants are not prohibited by Chinese law, and China acknowledges the property attributes of virtual assets, due to the decentralized and anonymous nature of virtual assets, they are easily exploited by criminals as tools for money laundering. OTC merchants need to fulfill their duty of prudent verification to the greatest extent possible during transactions
and retain corresponding evidence. Furthermore, transaction prices must align with market rates to demonstrate that they lacked “subjective knowledge” of the unlawful acts of others.
[i] (2020) Lu 1725 Xing Chu No. 114
