More Sides to the Coin

In one of six cases involving money laundering released by the Supreme People’s Procuratorate of China and People’s Bank of China (PBoC) on March 19, Chen Li (pseudonym) was accused of transferring more than 900,000 yuan (US$139,140) in illicit funds to her husband, who had fled to Australia in 2018 to escape charges of fraudulent fundraising. 　

When Chen was arrested, police were still uncertain how she did it. Chen confessed she had purchased Bitcoin from two cryptocurrency miners who sent Chen a digital key which her husband accessed abroad. 　

Yu Jianing, current rotating chairman of the Blockchain Professional Committee of China Communications Industry Association and president of Huobi University, a blockchain educational institute in China operated by the Hong Kong listed Huobi Group, told NewsChina that since 2020, activities such as fraud, extortion, gambling, money laundering and loansharking have increasingly involved cryptocurrency for its high degree of anonymity and convenience in cross-border transactions. 　

Although Chinese authorities prohibit the purchase and sale of cryptocurrencies, policies vary by country and region, which enable the anonymous exchange of legal tender for crypto in China to continue. 　

According to a cryptocurrency laundering report published by PeckShield, a blockchain security company in China, in January 2020, the value of virtual currency flowing across Chinese borders totaled US$17.5 billion, an increase of 51 percent on 2019. The trend continues to surge, creating a big challenge for China’s anti-laundering mechanisms, experts say. 　

PeckShield told NewsChina that as blockchain technology attracts public attention, more investment scams have emerged. According to statistics from PeckShield, the number of fraud cases involving cryptocurrency increased rapidly between 2017 and 2020. In 2017 there were only three cases, but in 2019 there were 20. In 2020, there were 151 cases involving total losses of 3.13 billion yuan (US$484m). 　

“The increase is directly related to the surging value of Bitcoin,” said Yu Zhixiang, head of the technology department at OKLink, a blockchain technology provider. He said that as the value of Bitcoin rises, more people want to jump on the bandwagon, and casual traders without sufficient knowledge make for easy prey. 　

Yu Jianing noted that criminals turned to virtual currency for its anonymity, ease of global transfer and untraceability. 　

This has made virtual currency a haven for money laundering. In Chen Li’s case, she and her husband chose virtual currency to avoid foreign exchange controls. Chen’s husband, who was accused of embezzling funds through a money management platform using virtual currency, escaped to Australia with a debit card to an account containing 3 million yuan (US$463,800). However, there were yearly withdrawal limits on the account. So he asked Chen to buy Bitcoin that he could exchange for Australian dollars, said Zhu Qijia, a public prosecutor in Shanghai’s Pudong New Area who is handling the case. 　

Liu Juanjuan, chief justice hearing the case, told NewsChina that despite the new technologies involved, prosecutors build cases the same way as with traditional money laundering – by focusing on the processes used. But she said that crypto makes it more difficult to trace the flow of money and transfers are more likely to happen beyond Chinese jurisdiction. 　

When monitoring for money laundering, it is routine to follow the flow of capital on bank statements. But in this case, Chen sent the money from her account to the Bitcoin miners. Their financial records have no direct link to Chen’s husband. 　

There are third-party platforms that specialize in laundering money through cryptocurrency. In a February 2020 case handled by Peng Qijin, a police officer in Baiyun District, Guangzhou, Guangdong Province, the suspect bought 1 million yuan (US$154,600) in USDT, a type of cryptocurrency, from a trader surnamed Zhang on a crypto platform. Zhang transferred the money to dozens of financial and payment accounts to avoid having the assets frozen by police. The process took just six minutes. Peng said that if they only tracked traditional bank accounts, they would have never discovered that Zhang had sent the sum to designated accounts after laundering it with USDT. 　

The designated accounts in this case, as police later discovered, did not belong to the suspect, but to registered agents from thirdparty payment platforms that facilitate illegal or semi-legal financial activities. These agents fence the money using their personal accounts, on which they earn commissions. 　

Yan Lixin, executive director of the antimoney laundering research center at Fudan University in Shanghai, said cryptocurrency, which is independent of financial institutions, makes it harder to trace the flow of capital than centralized currencies. Real-time crypto transactions mean that laundering can happen within a matter of seconds anywhere in the world. Regulatory authorities barely have enough time to respond or prevent the consequent losses or adverse impacts over time, Yan said. 　

“Cryptocurrency is a vector for illicit money. Platforms that provide illegal payment services are a fast track, while overseas messaging apps serve as a safety buffer. Illicit money circulates quickly this way,” said Peng, adding that police are far from being able to promptly identify those involved. Peng suggested that time and energy is devoted to studying these new means of laundering and figuring out ways to combat it. 　

Statistics from PeckShield show that from January to October 2020, between 89,400 and 166,900 Bitcoins were transferred from China a month. In November and December 2020, the number increased to 231,700 and 254,100. 　

Crypto trading platforms that play a core part in this process are caught in the middle. Yu Zhixiang told NewsChina that exchange platforms have since adopted “know your customer” (KYC) policies that involve strict user verification measures, a cornerstone of security for traditional financial institutions. 　

Some platforms require users they deem high risk to wait an extra 24 hours to receive a payment. This increases difficulty for those desperate to make transfers and launder capital. For large sums, some platforms also have added manual reviews. 　

A tracking system for digital currency on blockchain has been proposed by exchange platforms and blockchain security firms over the past two years. Sky Eye on The Chain, an on-chain data analysis tool released by OK-Link in September 2020, can detect virtual currency addresses connected to fraud and other crimes and monitor their activity. It can also be used to track the capital flow in a particular industry and all address involved. Police already use similar tracking tools in working fraud and laundering cases. 　

Yu Zhixiang said that police can easily track suspects as long as the exchange platform has adhered to KYC requirements. But if capital moves to a new account with little transaction history, it is hard to trace its owner because of the anonymity blockchain provides. 　

For cross-border crimes, the situation is even more complicated. In the fraud case handled by Peng Qijin and his colleagues in February 2020, seven agents were arrested. However, police could not pursue the platform’s employees that facilitated the laundering because they were in the Philippines. 　

Yu Jianing told NewsChina that criminals can rent server space in semi-regulated or unregulated countries to run crypto trading websites, provide crypto wallet services or carry out criminal activities online. In these situations, anti-money laundering efforts, financial supervision and international judicial assistance have no effect. 　

Shi Yan’an, director of the Research Center for Criminal Justice at the Renmin University of China, told NewsChina that a mechanism for international cooperation targeting cross-border money laundering is necessary. At present, international legal bodies such as the UN Convention against Corruption and the UN Convention against Transnational Organized Crime have regulations on international cooperation to fight money laundering. 　

“China should make the most of multilateral cooperation and enhance information exchange, particularly with law enforcement and financial departments in other countries, and strengthen cooperation in overseas asset recovery,” Shi said. 　

Tightening regulations on virtual currency and exchange platforms is essential to combat money laundering, interviewed experts said. Many suggested that virtual currency platforms construct anti-laundering mechanisms and cooperate with supervision authorities. However, there is no clear regulation in China as to what kind of rules these platforms should follow, Shi said. 

　

In some ways, digital currency exchanges are beyond the supervision system. In 2017, China shut down all digital currency exchanges within its borders. But as overseas digital currency exchanges (with servers located abroad) remain available to Chinese users, limiting domestic exchange has not stopped the market. 　

Zhao Binghao, an associate professor of economic law at Renmin University, said that authorities need new regulatory policies suited for China. He added that the current supervision of virtual currencies led by the PBoC has failed to keep pace with financial innovations using blockchain, the core technology of cryptocurrency. The anti-laundering bureau under the PBoC only supervises institutions with payment licenses and is not in a position to coordinate with police, customs and other authorities. 　

Shi suggested that a money laundering PBoC spin-off could serve as an independent department under the State Council, which would empower it to supervise virtual currency exchange platforms. “There is a lack of legal grounds and means to prevent, monitor or stop virtual currency laundering,” Yan said. 　

More challenges are on the way. Zhao said that since last year, some virtual currency platforms have decentralized with P2P exchanges and avoid KYC authentication. “This augers challenges for which supervisory bodies worldwide are far from being prepared for,” Zhao said.