After China began cracking down on the black market for debit and phone cards used in online fraud and other criminal activities including money laundering in October 2020, money launderers increasingly turned to cryptocurrency.
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.