The truth behind the AAX exchange scandal: How Crypto Assets became the "black gloves" of Money Laundering?

The author of this article: Lawyer Xu Qian

According to a report by Netease Qingliu Studio, Wang Shuoming, who is involved in the largest money laundering case in Singapore, has been arrested in Montenegro and may be extradited to China. Wang Shuoming's partner Su Weiyi has been 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 Incident

Atom Asset (AAX) is one of the largest cryptocurrency exchanges in Hong Kong, with over 2 million users. On November 13, 2022, just two days after cryptocurrency exchange FTX filed for bankruptcy, AAX also stopped withdrawals and cleared all social channels due to counterparty risk exposure. Initially, AAX attributed the freeze to security measures against suspected malicious attacks.

On November 15, 2022, AAX Exchange issued a statement stating that its platform needs maintenance. In addition to suspending withdrawals, automatic liquidation will be carried out for derivatives. Subsequently, AAX ceased platform operations and social media updates. An anti-money laundering analysis platform conducted in-depth research on the on-chain activities of AAX Exchange wallets and discovered that all 25,100 ETH had been transferred, with some ETH exchanged for USDT, and then funds were transferred to different blockchains via Cross Bridge. Some media reports suggest that the founder of the exchange holds the private keys to user funds and access to the exchange wallet.

*The image is from the Beosin KYT anti-money laundering platform

It seems that the arrest of Wang Shuoming this time is related to Singapore's largest money laundering case, so why do cryptocurrencies frequently become a "money laundering" tool?

Why do cryptocurrencies become tools for money laundering?

The fact that cryptocurrencies are used as a money laundering tool is inseparable from their technology (decentralization, anonymity), on-chain tools (mixers, cross-chain bridges), and value (exchangeable with fiat currency, purchasing power).

(1) The technological characteristics of decentralization and anonymity provide convenience for money laundering

Cryptocurrencies typically do not rely on the management of central banks or government institutions, but maintain transaction records through a distributed network. This decentralized nature eliminates third parties, especially government intervention, making cryptocurrency transactions more convenient and flexible. However, it also weakens the regulation of traditional financial institutions, providing convenience for money laundering activities.

Although on-chain transactions are publicly traceable, cryptocurrency circulation is completed through wallet addresses without the need to bind real identities. If cryptocurrencies are obtained through non-KYC channels (such as over-the-counter trading, transferring from cold wallets, etc.), it is difficult to track the holders of cryptocurrencies. This anonymity feature makes it difficult to trace the identities of both parties in the transaction, providing a natural covert condition for money launderers.

(2) Some on-chain tools help to hide the source and flow of funds

Mixers like Tornado Cash, Blender.io, etc., redistribute user funds after mixing them, cutting off the money trail. Cross-chain bridges like Axelar transfer assets to different blockchains for asset transfer and exchange, such as moving from a less regulated blockchain network to another network and then using privacy protocols like Aztec to hide transaction details, forming multiple layers of anonymity barriers, thus evading tracking by regulatory and law enforcement agencies. These tools make it easier to conceal money laundering.

(III) Cryptocurrencies have the ability to exchange with fiat currencies

Some countries and regions recognize cryptocurrency as a legal payment tool, and there is currently no unified standard for its regulation worldwide. This allows cryptocurrency to be freely traded across borders without the approval of third-party institutions. Cryptocurrency can be freely transferred from one country to another (cross-border cash out), avoiding foreign exchange controls and exchange rate risks. Cryptocurrency has the ability to exchange with fiat currency, allowing it to be easily converted into fiat currency, thus achieving the laundering and legalization of funds.

Cryptocurrencies are easily exploited by money launderers due to their unique technical characteristics and operational mechanisms. To prevent and combat criminal activities, measures such as raising user risk awareness, strengthening technical identification and prevention capabilities, and enhancing international cooperation and regulatory efforts are needed.

The Difference Between Money Laundering, Aiding and Abetting, and Concealing Crimes

In cryptocurrency transactions, how to distinguish between the crime of aiding and abetting and the crime of concealing criminal proceeds when the perpetrator provides a wallet address to assist in the transfer? If illegally obtained cryptocurrency is used to purchase real estate, does it constitute money laundering? Such behaviors often involve multiple criminal elements and may trigger disputes: at which stage of the criminal chain did the behavior occur (before/after the completion of the crime)? What is the level of awareness of the upstream crime (general knowledge/specific knowledge)? Does the nature of the funds belong to specific proceeds of the upstream crime (such as the seven categories of money laundering crimes)? From the perspective of China's criminal law system, all three crimes involve the handling of criminal proceeds, which can be distinguished from the following dimensions:

How do cryptocurrency service providers guard against suspected money laundering legal risks

(1) Strictly fulfill customer identification (KYC) and anti-money laundering (AML) obligations

Real-name authentication requires effective identity verification of customers, including but not limited to verification of identity documents, contact information, transaction purposes, etc. Anonymous accounts are prohibited, and privacy coin transactions are restricted. Enhanced due diligence is carried out on high-risk customers (such as large transactions, cross-border transactions), and complete records are retained.

(2) Trade Monitoring and Reporting

Establish a real-time trading monitoring system, such as integrating on-chain data (block explorer API), off-chain data (user KYC information), third-party risk databases (such as Chainalysis, Elliptic), etc.; deploy multi-dimensional risk models such as anomaly detection (e.g., frequent splitting transfers, abnormal transactions, etc.); hierarchical warnings and triggering responses (such as automatic account freezing, manual review, suspicious reports, etc.), audit and reporting (retain complete operation logs, regularly produce compliance reports, etc.).

(3) Strengthen internal compliance management and external cooperation and communication

Establish compliance system, formulate internal anti-money laundering control system, clarify job responsibilities and operating procedures. Set up an independent compliance department to ensure effective implementation of risk management measures and enhance internal supervision. Regularly train employees on anti-money laundering laws and regulations to enhance and strengthen their anti-money laundering awareness.

Actively comply with and cooperate with regulatory authorities and law enforcement agencies' anti-money laundering requirements, establish regular communication mechanisms, assist in data retrieval, account restrictions, etc.

Conclusion

Cryptocurrency money laundering is usually carried out through mixing services, fake transactions, layering transfers, OTC off-exchange transactions, and identity forgery. Money laundering disrupts financial order, fosters criminal activities such as fraud and corruption, not only harming the interests of users and affecting the reputation of the cryptocurrency industry, but also potentially involving 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, tools, etc.