Legislation is making progress
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This article is an original article of Mankun Law Firm and represents only the personal views of the author. It does not constitute legal consultation or legal advice on any specific matter. If the article is to be reproduced, please contact Mankun Law Firm staff: MankunLawFirm
On January 22, 2024, Premier Li Qiang chaired an executive meeting of the State Council, at which the Anti-Money Laundering Law of the People's Republic of China (Revised Draft) was discussed. According to the legislative plan, the revised draft is expected to be adopted in 2025.
According to the view of Wang Xin, a professor at Peking University Law School and an expert who participated in the discussion of the revised draft of the Anti-Money Laundering Law, China's understanding of the importance of anti-money laundering has undergone a "triple jump": from the narrowest initial understanding of maintaining the stability and reputation of financial institutions, to extending to maintaining financial security through the connection between money laundering and predicate offenses that generate economic benefits, and finally rising to the strategic height of maintaining overall national security.
To catch the ringleader first when catching thieves: for China's anti-money laundering cause, which has been elevated to the height of national security, the most urgent and most necessary issue to be resolved at the legal level at present is the money laundering problem involving virtual assets.
A slightly joking saying is that if an international criminal gang has not yet used virtual currency when laundering money, it is really somewhat behind the times. According to the report released by Zhifan Technology,"2022 Blockchain and Virtual Currency Crime Trend Research Report"the data shows that in terms of the number of cases, in 2022, cases of fraud and money laundering using virtual currency ranked first, accounting for 30.5% of the total number, far higher than other types.；In terms of the amount involved, fraud and money laundering cases ranked second, accounting for 22.5%. It can thus be seen that, whether in terms of number or amount involved, among coin-related criminal cases, fraud and money laundering account for the largest share.。
However, in the prevention and combating of virtual currency money laundering crimes, there are many problems that give friends in China's regulatory and judicial enforcement circles headaches. I call them the three major difficulties in China's virtual currency judicial practice:
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In recent years, the momentum of various types of funds derived from illegal and criminal activities seeking to be "laundered" through traditional money-laundering models has been effectively curbed. To evade crackdowns, criminals have turned to using the more covert and convenient "virtual currency" as a vehicle to achieve the "cleansing" of illegally obtained funds.
Virtual currencies, which have emerged on the basis of blockchain technology, possess such characteristics as decentralization, anonymity, global circulation, and algorithmic encryption that makes supervision difficult, and have come to serve as the primary payment and settlement channel in various criminal forms such as online gambling, telecom fraud, and online pyramid selling.
Criminals using virtual currency to launder money complete the process of purchasing from legal tender into virtual currency conversion, then selling the virtual currency to exchange it back into legal tender, passing through three stages of "placement, cleansing, and aggregation." First, illegal funds are injected into the channel to be cleansed; then mixed technical means such as mixers, cross-chain, and anonymity-enhanced coins are used to create complex transaction trails; finally, the laundered virtual currency is gathered at a certain address for withdrawal, exhibiting such characteristics as professionalization, intellectualization, covertness, and chain-based organization.
(1) Professionalization.With the popularization of technology and the influence of the large number of virtual currency "get-rich-quick" effects, various types of wallet apps, exchange apps, and browser wallet plug-ins have continuously emerged and become widespread. Using virtual currency to launder money for crimes such as gambling, telecom fraud, and drug trafficking has formed a type of criminal industry, in which corresponding professional teams can be found to complete each link, including rule design, currency issuance, platform setup, system operation, transaction circulation, and product promotion.
(2) Intellectualization.As the scale of money laundering using virtual currency has increasingly grown, the manual method of exchanging legal tender and virtual currency can no longer remotely satisfy criminals' money-laundering needs for large volumes, large amounts, and high frequency. Many criminals combine virtual currency money-laundering operations with blockchain smart contracts, using smart contracts to automatically match, exchange, and transfer between legal tender and virtual currency, thereby both increasing money-laundering efficiency and enhancing money-laundering security.
(3) Covertness.Transactions using virtual currency can escape the sight of existing financial supervision and are inherently highly covert. To evade crackdowns by public security organs, criminals abandon exchanges and instead use over-the-counter market services such as Tether acceptance and guarantees on overseas communication software to complete more covert offline same-platform transactions or anonymous guaranteed acceptance. At the same time, cross-chain and coin-mixing applications are becoming increasingly prevalent, using methods similar to fund pools to sever the fund chain between payers and payees.
(4) Chain-based organization.Virtual currency wallets, as an important link in virtual currency transactions, are gradually exhibiting such characteristics as industrialization of the criminal chain, professionalization of criminal functions, and corporatization of criminal gangs. Some criminal gangs, for the purpose of publicity and promotion, collude with specialized gangs that develop and operate virtual currency wallets, adding virtual currency wallets to case-related apps such as online gambling, pyramid selling, and telecom fraud, so that users can directly enter the case-related apps through the virtual currency wallets, and can also directly conduct virtual currency transactions and withdrawals through the embedded virtual currency wallets, forming a huge industrial chain with a clear structure, detailed division of labor, and interlocking links.
In July 2022, the Joint Service Center of the Economic Crime Investigation Corps of the Public Security Department of the Inner Mongolia Autonomous Region issued to the Horqin Branch of the Tongliao Municipal Public Security Bureau an early warning from the Hohhot Branch of the People's Bank of China: abnormal bank card fund flows were discovered in respect of criminal suspect Shi Mouyuan, suspected of money-laundering-type crimes. Investigation found that, since May 2021, this criminal gang had used the overseas chat software "Telegram" to connect and develop downstream personnel, and would involve suspectedFunds from crimes such as online pyramid schemes, fraud and gamblingare converted into the virtual digital currency Tether (USDT)through the TRON chain (USDT-TRC20) and the Ethereum chain (USDT-TRC20),using the numerous unlawful persons it recruitedto register anonymous blockchain account addresses，and exchange the funds into RMB for payment to the financiers of the upstream criminal syndicate,thereby extracting illicit benefits. It is reported that the criminal syndicate laundered as much as RMB 12 billion through virtual currency transactions.
The second difficulty: investigation during the course of the conduct is difficult
At present, Chinese law does not clearly provide for the legality of individuals holding, trading in and producing virtual currency. Where criminals use the virtual currency wallets of individuals or groups in the domestic crypto community to move funds, there is no difference from ordinary buying and selling of virtual currency, and it is difficult to establish the criminal intent of the persons involved in the relevant virtual currency transactions.
First, verifying identities is difficult.The anonymity of virtual currency makes it very difficult to link an individual's virtual currency wallet address to the user's identity, and for exchanges, the same registration information can generate a wide variety of wallet addresses. Moreover, a wallet address can be transferred to another person for use simply by sharing the private key. In the virtual currency transaction process, some wallet addresses are "fund pools" used jointly by multiple criminal suspects, making it even more difficult to link them to a specific user. In addition, as public security organs have intensified their enforcement efforts in recent years, criminal suspects have become increasingly aware of counter-surveillance, communicating not only through niche or overseas chat software such as Telegram and WhatsApp but also by renting overseas servers, further increasing the difficulty for public security organs to locate and investigate persons and to obtain evidence.
Second, tracing and obtaining evidence is difficult.The virtual currency trading environment is intricate and complex, permitting a mix-and-match of various trading forms such as coin-to-coin trading, coin mixing, cross-chain transactions, and decentralized trading. Once on-chain transactions have been obfuscated and transferred multiple times, tracing and verifying the funds becomes exceptionally difficult. Since the announcement issued by ten ministries and commissions on September 24, 2021, domestic virtual currency exchanges have all withdrawn from operating in the domestic market. Therefore, at present, obtaining relevant evidence from virtual currency exchanges and virtual wallet operators requires registration via email or dedicated websites before the evidence can be retrieved. Because the exchanges are located overseas and are not subject to the regulation and constraints of mainland Chinese law, difficulties exist when public security law enforcement authorities seek evidence from the relevant virtual currency exchanges, including excessively strict review, long evidence-retrieval cycles, and obstructed evidence-retrieval channels.
The difficulty is not limited to investigating and prosecuting criminal suspects; in the course of handling cases, there is also frequent collateral harm to persons associated with the funds involved in the case.
In reality, it is common for judicial authorities to simply "seal off" or "freeze" bank accounts suspected of involvement in unlawful criminal conduct such as money laundering, and cases in which accounts have been wrongly sealed or frozen yet there is no avenue for appeal are likewise not uncommon; the relevant parties lack the necessary right to be informed, appeal channels, and correction and remedy mechanisms. For example, during the 2020 "card-freezing" campaign, the bank accounts of tens of thousands of merchants in a certain locality were frozen, causing extremely adverse effects on the local government's reputation. To address the crisis, the local government took the lead in temporarily establishing a "Bank Account Freezing Assistance Center," which sorted and registered information on the frozen merchant accounts and dispatched more than 40 working groups to various parts of the country to communicate and coordinate matters concerning the unfreezing of bank cards.
The third difficulty: difficulty of post-event disposal
Although the draft amendment to the Anti-Money Laundering Law has incorporated the prevention of virtual asset money laundering, there is a lack of operational norms for matters such as the subsequent sealing, freezing, deduction, and confiscation of virtual asset money laundering crimes, which readily gives rise to chaos.
According to prior industry research by the Mankun lawyer team, whether in the investigation stage where public security unilaterally obtains written authorization from a criminal suspect, or in the confiscation and disposal of virtual currency after a case is concluded through court trial, there commonly existprocedural illegality, non-specific provisions, and inconsistent enforcement methodsand other problems.
There are three common methods for disposing of virtual currency as follows:
Method One: After obtaining authorization from the criminal suspect or after judicial adjudication, the public security organ commissions a specialized technology company on the market to carry out the disposal. The disposal agent company, without undergoing a judicial appraisal process, opens an account at a virtual currency exchange and sells directly to OTC merchants on the virtual currency exchange by way of over-the-counter trading; the OTC merchants pay RMB to the disposal agent company, and the disposal agent company, after deducting its service fee (the price is negotiable, and the price range is quite exaggerated), pays it to the account of the local finance department designated by the judicial organ. Of course, considering that large-amount on-exchange transactions readily drive the price down, this method is suitable for small-amount judicial disposal or for cases in which the judicial organ does not impose high requirements on the number of disposal days.
Method Two: After the public security organ and the disposal agent company sign a contract, the public security organ pays a small amount of virtual currency to verify the wallet, and then the disposal agent company, in places such as Yiwu and Shenzhen, finds some buyers possessing large amounts of cash; the disposal agent company, after deducting its service fee, hands over or deposits the cash to the local finance department designated by the judicial organ, and after the public security organ confirms receipt of the funds, it then transfers to the coin-receiving address provided by the disposal agent company. These companies that can produce large amounts of cash within a short period are often closely connected with underground banks.
Method Three: After the public security organ and the disposal agent company sign a contract, the disposal agent company cooperates with domestic and foreign trade companies and, through the model of fictitious export trade, an overseas company remits payment under the contract, which is settled and converted into RMB through the State Administration of Foreign Exchange of the People's Bank of China and paid to the disposal agent company. The disposal agent company, after deducting its service fee, pays it to the account of the local finance department designated by the judicial organ, and the judicial organ, after confirming the receipt of each payment, successively pays the corresponding amount of virtual currency to the wallet account designated by the disposal agent company.
To reduce the judiciary's concerns about compliance and legality, crypto asset disposal companies currently generally become involved from the outset of case investigation, assisting public security authorities in analysis and assessment based on on-chain crypto asset transaction analysis; however, to protect their own interests, they usually enter into a crypto asset disposal service fee contract with the public security authority that engages them. This enables an end-to-end service from investigative analysis and assessment through to later-stage disposal, helping public security authorities save substantial investigative resources and effort.
As competition in this business has intensified, an increasing number of disposal companies have begun to emphasize compliance as their main selling point; however, as to the current standards and levels of compliance in the industry, the impression of our Mankun team is as follows:It exists, but it is not quite sufficient.
At present, the more common compliance efforts of disposal companies in the industry cover the following aspects:
1. Obtaining written authorization from public security authorities
After reaching an intention to cooperate with the judicial authority responsible for disposal, the disposal agent will request that the public security authority issue a relevant statement of circumstances or letter of authorization authorizing it to carry out asset disposal of the virtual assets involved in the case; if the case is at the investigation stage, there will also be a signed authorization from the criminal suspect. At the same time as obtaining the letter of authorization, the disposal agent will sign a cooperation agreement with the public security department stipulating necessary matters such as the transaction volume, pricing basis, and deadline for completion of disposal; generally speaking, the wording of the contract and authorization is relatively concise, and the relevant legal risks are usually agreed to be borne by the disposal agent, showing considerable consideration for the relevant colleagues in the judicial department.
2. Providing proof of the legality of funds
To prove its own sources of funds and disposal capability, the disposal agent will proactively provide deposit certificates from multiple banks, emphasizing the lawful and clean nature of its funds, and can match funds from different channels according to the different repayment ratio requirements for disposal set by the judicial department; generally speaking, the higher the level of proof of legality, the higher the cost of disposal.
3. Shell companies that move on after one job
To enhance their compliance standards, disposal agents usually establish in advance or control multiple shell companies with only one natural person as shareholder; such companies are often registered as technology companies, and their legal representatives and shareholders are arranged to be persons such as "eighty-year-old elderly people" or "cancer patients"; once a single crypto asset disposal transaction is completed, the corresponding company is deregistered, so as to avoid subsequent legal liability.
4. Seeking partners to cooperate in bidding
To satisfy the procedural requirements of the judicial authority, the disposal agent will proactively propose judicial disposal of crypto assets through forms such as "auction" and arrange for other third-party cooperating companies to participate in tendering; after winning the bid, a formal agreement is then signed; and because of the sensitivity of the matters involved, the relevant auction information is not published through normal government websites.
Currently, disposal companies in the industry are often merely general limited liability companies registered with the administration for industry and commerce, typically in the nature of technology companies. Their business scope may include blockchain-related technology development and consulting, but usually there will be no textual description of judicial appraisal or judicial disposal of virtual currency. Moreover, the company will not have any specific financial license or relevant operating qualifications, and there will be no substantive business actually being carried out under the company's name. In short, this company exists solely for the judicial disposal of virtual currency.
Based on our understanding of China's 924 policy, an ordinary private company registered in mainland China, without special operating qualification licensing, clearly engages in illegal activity when it conducts exchange and matchmaking services between virtual currency and RMB in China; such illegality will not be changed by authorization from grassroots public security or other judicial departments or by written contractual agreement between the parties. Therefore, for the large number of judicial disposal companies on the market, if their entire transaction method is examined, they in substance open up channels for the circulation and trading between virtual currency and RMB, which clearly violates the provisions of the 924 policy and is suspected of illegal business operations.
More importantly, for disposal companies, the virtual currency they obtain must ultimately have an exit. After obtaining virtual currency, disposal companies, based on security considerations, often use technical means to clean the addresses of the virtual currency involved in the case, for example, by using mixers to erase the on-chain addresses of the virtual currency, and then sell it in small batches to other domestic foreign trade merchants or high-net-worth buyers; or they realize the virtual currency overseas through gray channels, then realize it through "underground banks" or "false trade," apply to the foreign exchange administration for settlement of foreign exchange, and repatriate the funds to China. These operations are often suspected of violating the Anti-Money Laundering Law, foreign exchange administration laws and regulations, and carry extremely high criminal legal risk.
Virtual currency is still unfamiliar to the vast majority of judicial personnel. Most grassroots judicial staff often do not understand its market price and trading model. In the judicial disposal process, how much can one coin sell for? In what kind of venue should it be traded? These questions are usually not well understood. As state judicial personnel, being led into a trap by third-party disposal companies under the guise of compliance because they do not understand industry operations, and then being investigated by the discipline inspection and supervision commission at a later date, would be somewhat too surreal.
Conclusion
With the continuous rise and development of the blockchain industry, money laundering methods through virtual currency are also constantly being renewed, but no matter how the methods and means are updated, they are all illegal and criminal acts. With this amendment to the case filing provisions, the anti-money laundering regime related to virtual currency will also become increasingly complete, which can be described as a big step forward for the improvement of China's legal regime for virtual assets. For China's Web3 entrepreneurs, especially friends engaged in digital asset financial business, it is essential to understand this legislative trend and work progress and to make relevant preparations in advance, because only compliant entrepreneurship can go far!
References:
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Jiemian News: "Rule of Law Aspect | Cracking Down on Virtual Asset Money Laundering Crimes, China's Anti-Money Laundering Law Ushers in First Major Revision" https://www.jiemian.com/article/10753197.html
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"Big Reveal of Money Laundering in the Crypto Circle!": https://mp.weixin.qq.com/s/pDw-B8oeWtXF3-IzqmX9hQ
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"Chaos and Legal Risks in Judicial Disposal of Virtual Currency in China": https://mp.weixin.qq.com/s/_7uD7syipnWcyRSBY1fonA
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Blockchain Lawyer's Interpretation of the People's Bank of China's "China Financial Stability Report (2023)": https://mp.weixin.qq.com/s/fgP9TEt_ZtoCSpC5LJm-9Q
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