GuShiio.com Cryptocurrency money laundering paths and compliance responses
Author: Lawyer Xu Qian
According to Netease Qingliu Studio, Wang Shuiming, who was arrested in Singapore’s largest money laundering case, has been arrested in Montenegro or will be extradited to China. Wang Shuiming’s partner, Su Weiyi, was confirmed to be the mastermind of the Hong Kong cryptocurrency platform scam AAX. In July 2024, Su Weiyi was arrested by the Hong Kong police.
AAX Platform Events
Atom Asset (AAX) is one of Hong Kong’s largest cryptocurrency exchanges, with more than 2 million users. On November 13, 2022, just two days after cryptocurrency exchange FTX filed for bankruptcy, AAX also stopped withdrawing funds and cleared all social channels due to counterparty risk exposure. Initially, AAX attributed the freeze to security measures in response to suspected malicious attacks.
On November 15, 2022, the AAX Exchange issued a statement stating that its platform needs to be maintained and that in addition to suspending cash withdrawals, derivatives will be automatically cleared. Since then, AAX has stopped platform operations and social media updates. An anti-money laundering analysis platform has conducted in-depth research on the chain activities of AAX exchange wallets.It was found that all 25100 ETH pieces had been transferred and some ETH pieces were exchanged for USDT, and then transfers funds to different blockchains through the Cross Bridge cross-chain bridge. According to some media reports, the exchange founder holds user funds and private keys for access to the exchange wallets.
* Picture comes from Beosin KYT anti-money laundering platform
Wang Shuiming’s arrest seems to be the largest money laundering case involving Singapore, so why is cryptocurrency frequently a “money laundering” tool?
Why has cryptocurrency become a tool for money laundering?
The reason why cryptocurrency is used as a money laundering tool is inseparable from its technology (decentralization, anonymity), on-chain tools (currency mixers, cross-chain bridges) and value (exchangeable with legal currencies and purchasing power).
(1) Technical characteristics such as decentralization and anonymity facilitate money laundering
Cryptocurrencies typically do not rely on management by central banks or government agencies, but instead maintain transaction records through a distributed network. This decentralized feature excludes the intervention of third parties, especially government agencies, making cryptocurrency transactions and circulation more convenient and flexible. But it also weakens the supervision of traditional financial institutions and facilitates money laundering activities.
Although on-chain transactions are publicly verifiable, the transfer of cryptocurrency is completed through the wallet address without binding a real identity. If cryptocurrency is obtained through non-KYC channels (such as over-the-counter transactions, cold wallet transfers, etc.), it will be difficult to track the holder of the cryptocurrency. This anonymity makes it difficult to trace the identities of both parties to the transaction and provides natural concealment conditions for money launderers.
(2) Some on-chain tools help hide the source and flow direction of funds
Currency mixers (such as Tornado Cash, Blender.io, etc.) mix user funds and reallocate them, cutting off the source of funds. Cross-chain bridges (such as Axelar) transfer assets to different blockchains for asset transfer and exchange, such as moving from one loosely regulated blockchain network to another and using privacy protocols (such as Aztec) to hide transaction details, forming multiple anonymity barriers to evade tracking by regulatory and law enforcement agencies. These tools make money laundering easier to cover up.
(3) Cryptocurrencies have the ability to exchange with legal currencies
Some countries and regions recognize cryptocurrency as a legal payment tool, but currently, no unified standard has been formed for its supervision globally. This allows cryptocurrencies to be freely traded across borders without the need for approval from third-party agencies. This allows cryptocurrencies to be transferred from one country to another at will (cross-border cashing out), avoiding foreign exchange controls and exchange rate risks. Cryptocurrency has the ability to exchange with legal tender, which allows cryptocurrency to be easily exchanged into legal tender, thereby realizing whitewashing and legalization of funds.
Cryptocurrencies can be easily used by money launderers due to their unique technical characteristics and operating mechanisms. In order to prevent and combat criminal activities, measures such as improving user risk awareness, strengthening technical identification and prevention capabilities, and strengthening international cooperation and supervision are needed.
The difference between money laundering, letter facilitation, and concealment
In cryptocurrency transactions, if the perpetrator provides a wallet address to assist in the transfer, how to distinguish the crime of aiding and concealing the crime? Does purchasing real estate through illegally obtained cryptocurrency constitute a crime of money laundering? Because such acts involve multiple constituent elements of crimes at the same time, they often cause the following disputes: At which stage in the criminal chain did the act occur (before/after completion)? What is the level of awareness of the predicate crime (general knowledge/specific knowledge)? Does the nature of the funds belong to the proceeds of a specific predicate crime (such as the seven categories of limitations for money laundering crimes)? From the perspective of my country’s criminal law system, all three crimes belong to the treatment of proceeds of crime, which we can distinguish from the following dimensions:
How can cryptocurrency service providers prevent the legal risks of suspected money laundering
(1) Strictly fulfill customer identification (KYC) and anti-money laundering (AML) obligations
The real-name system requires effective identity verification of customers, including but not limited to verification of identity documents, contact information, transaction purposes and other information. Anonymous accounts are prohibited and private currency transactions are restricted. Implement enhanced due diligence on high-risk customers (such as large-value transactions and cross-border transactions) and keep complete records.
(2) Transaction monitoring and reporting
Establish a real-time transaction monitoring system, such as integrating on-chain data (block browser API), off-chain data (user KYC information), third-party risk databases (such as Chainalysis, Elliptic) and other information; deploying multi-dimensional risk models such as exception detection (such as abnormal transactions such as frequent split transfers, etc.); hierarchical early warning and trigger disposal (such as automatic freezing of accounts, manual review, suspicious reporting, etc.), audit and reporting (retaining complete operation logs, regular production of compliance reports, etc.).
(3) Strengthen internal compliance management and external cooperation and exchanges
Establish a compliance system, formulate an anti-money laundering internal control system, and clarify job responsibilities and operating procedures. Establish an independent compliance department to ensure the effective implementation of risk management measures and strengthen internal supervision. Regularly train employees on anti-money laundering laws and regulations to enhance and strengthen employees ‘awareness of anti-money laundering.
Actively comply with and cooperate with the anti-money laundering requirements of regulatory authorities and law enforcement agencies, establish regular communication mechanisms, assist in data retrieval, account restrictions, etc.
conclusion
Generally, cryptocurrency money laundering may be carried out through mixed currency services, false transactions, tiered transfers, OTC over-the-counter transactions, forged identities, etc. Money laundering undermines financial order and promotes criminal activities such as fraud, corruption, etc. It not only harms the interests of users and affects the reputation of the cryptocurrency industry, but may also involve national security issues. Both individual users and cryptocurrency service providers need to raise risk awareness, fulfill KYC and AML obligations, monitor suspicious transactions, cooperate with regulators, and maintain transaction security through technical means and tools.
