Attorney Shao Shiwei | Why Should the Web3 Industry Pay Close Attention to the First Major Amendment of the Anti-Money Laundering Law?

Expansion of the Scope of Entities Subject to Anti-Money Laundering Obligations Among Designated Non-Financial Institutions

According to Article 60 of the Draft Revision, non-financial institutions engaged in specified businesses shall perform anti-money laundering obligations and take corresponding anti-money laundering measures by reference to the relevant provisions applicable to financial institutions under this Law. This article adopts a method of enumeration combined with a catch-all clause, listing real estate agents, service providers whose services involve the custody of client assets or asset accounts, precious metals dealers, and other institutions required to fulfill anti-money laundering obligations.

From 2018 to 2019, the Financial Action Task Force (FATF) conducted a year-long assessment of China’s anti-money laundering work. In the FATF’s compliance assessment against its 40 Recommendations, six items were found non-compliant, three of which pertained to designated non-financial businesses and professions, namely: designated non-financial businesses and professions: customer due diligence; designated non-financial businesses and professions: other measures; and supervision of designated non-financial businesses and professions. Accordingly, this revision addresses the gaps identified in these areas.

The Draft Amendments clarify the scope of non-financial institutions subject to anti-money laundering obligations, which is the primary issue Web3 practitioners should note.This determination resolves whether the Anti-Money Laundering Law is “relevant to us”—that is, whether Web3 entities and practitioners are obligated to comply with the Anti-Money Laundering Law.

Chinese policy characterizes virtual currency-related activities as “illegal financial activities.” Regulatory authorities have also issued warnings regarding financial risks associated with NFTs (non-fungible tokens), reflecting the domestic approach to the localized application of blockchain technology through “NFT digital collectibles.” This indicates thatthe overall domestic stance toward the financialized practical applications of Web3 is negative.

Nevertheless, Chinese regulatory authorities’ understanding of blockchain technology and Web3-related applications is gradually improving. For instance, in the China Financial Stability Report (2023) released by the People’s Bank of China in December 2023, a substantial section was unusually dedicated exclusively tocrypto assets, avoiding the previously common term “virtual currencies,” andproposing principles akin to those of the U.S. Securities and Exchange Commission (SEC), such as “same business, same risk, same regulation.”Therefore, in the long term, the future development of Web3 in China holds significant potential and possibilities. In this regard, Attorney Shao opines that Web3 sectors requiring users to provide asset accounts or involving user transactions within their services must fulfill anti-money laundering obligations.

From “Rules-Based” to “Risk-Based”

The Draft Amendments embody the “risk-based” principle. For example, Article 21 provides that “anti-money laundering supervisory resources shall be allocated according to risk conditions, and corresponding risk prevention and control measures shall be adopted”; Article 28 stipulates that “financial institutions’ adoption of money laundering risk management measures shall comply with relevant provisions and shall not adopt management measures that are clearly inconsistent with the risk conditions.”

"Customer due diligence" replaces "customer identification"

Article 3 of the Anti-Money Laundering Law stipulates that financial institutions and designated non-financial institutions shall establish and improve customer identification systems. However, Article 4 of the Revised Draft replaces "identification" with "due diligence," and Article 26 provides that "financial institutions shall establish customer due diligence systems in accordance with regulations, and understand customer identities, transaction backgrounds, and risk profiles through due diligence."

Paragraph 2 of Article 28 defines the scope of "anti-money laundering management measures": "The anti-money laundering risk management measures referred to in this Law include continuous monitoring and verification of customers and their transactions, restricting transaction methods, amounts, or frequencies, restricting business types, refusing to conduct business, terminating business relationships, etc."

The 2012 FATF Recommendations established a "risk-based" regulatory regime, replacing the previous "rule-based" regulatory regime. In brief, the concept of "risk-based" requires anti-money laundering entities to adopt differentiated anti-money laundering measures for different risk areas through scientific assessment, thereby improving the effectiveness of anti-money laundering work. This revision likewise implements the "risk-based" working principle.

Accordingly, this also indicates that Web3 platforms and service providers must fulfill corresponding compliance review obligations based on the specific services provided to users. It is not sufficient to merely conduct static formal reviews of users (verifying the authenticity of documents and ensuring consistency between the person and the ID); rather, they must adopt a "due diligence" approach, maintaining dynamic oversight of users, comprehensively analyzing the actual controllers and ultimate beneficial owners of customer assets, and reviewing the consistency of customer transaction activities with their identity background, business needs, risk profile, source of funds, and intended use.

For the Web3 industry, effective anti-money laundering efforts in commercial services require the adoption of measures such as KYC, KYB, and KYT.

KYC (Know Your Customer) constitutes a formal review of customer identity verification; KYB (Know Your Business) involves reviewing the legality and compliance of customer business activities, such as the legitimacy of transactions, transaction purposes, and sources of funds, among others. While KYB and KYC measures are more suited to the traditional financial sector, given the decentralized and anonymous nature of blockchain, monitoring data for on-chain transactions becomes particularly necessary.

KYT (Know Your Transactions) isan anti-money laundering measure better suited to the Web3 industry, as it can continuously track all addresses controlled by specific entities according to different anti-money laundering strategies, collect intelligence related to the source or destination of funds in real time, accurately identify high-risk activities, and curb illegal activities such as money laundering through on-chain data tracking and digital asset tracing technologies.

Compliance-based exemption from penalties for directors, supervisors, and senior executives who perform their duties with due diligence

Compared with the Anti-Money Laundering Law, the Revised Draft introduces for the first time a provision exempting directors, supervisors, and senior executives from penalties if they have exercised due diligence. According to Article 53 of the Revised Draft, 'directors, supervisors, senior management personnel, or other directly responsible personnel of financial institutions who can prove that they have exercised due diligence in adopting anti-money laundering measures may be exempted from penalties.'

In the field of criminal litigation, procuratorates may decide not to prosecute enterprises that meet certain conditions after they have completed compliance rectification requirements. The provision in Article 53 of the Amendment Draft regarding exemption from penalties for directors, supervisors, and senior executives who have performed their duties with due diligence can be regarded asthe application of non-prosecution based on criminal compliance in the field of anti-money laundering.

By analogy from the heavier to the lighter, bearing comprehensive and sound anti-money laundering obligations is the inherent duty of financial institutions themselves. The Anti-Money Laundering Law and its hundreds of supporting regulatory documents primarily impose constraints on financial institutions. China’s legislative practice regarding the supervision of specific non-financial institutions has not been long-standing, and experience remains to be accumulated. In other words, due to the lack of practically operable anti-money laundering guidance rules, Web3 industries can only proceed by trial and error in determining whether their enterprises fall within the category of 'specific non-financial institutions' and, if so, how to carry out anti-money laundering work. Therefore, given the absence of regulatory legislation, where relevant consequences still arise despite Web3 enterprises having fulfilled general anti-money laundering duty of care,heavier legal liability should not be imposed on the enterprise’s directors, supervisors, senior executives, and other personnel.

Cooperation by Overseas Financial Institutions

Article 46 of the Revised Draft stipulates that, in the course of legally investigating money laundering and terrorist financing activities, relevant state authorities may, in accordance with the principle of reciprocity or upon consensus with the relevant countries, require overseas financial institutions that have opened correspondent bank accounts within China or maintain other close financial ties with China to provide cooperation.

Concluding Remarks

With respect to the Amendment Draft, Wang Xin, a professor at Peking University Law School and an expert who participated in discussions on the draft amendments to the Anti-Money Laundering Law, stated that “the Anti-Money Laundering Law covers a broad scope, and it is difficult for the Amendment Draft to address every aspect comprehensively; it can only frameworkly reflect the most urgent content.” Accordingly, the Amendment Draft does not provide further specific regulations on anti-money laundering supervision for the Web3 industry. Another practical reason is that, as an emerging sector, Web3 is still subject to ongoing legislative exploration in various countries.