Since the implementation of the "Anti-Money Laundering Law" on January 1, 2007, it has been 18 years. From an international perspective, money laundering activities are increasingly rampant, and cross-border money laundering activities are becoming more frequent, seriously threatening the international financial order and the economic security of various countries. From a domestic perspective, with the rapid development of the financial market and the continuous progress of technological innovation, the means and methods of money laundering activities are also constantly being updated and evolving. Under the impetus of various complex factors, the "Anti-Money Laundering Law" has ushered in its first major revision.

On April 23, 2024, the "People's Republic of China Anti-Money Laundering Law (Revised Draft)" (hereinafter referred to as the "Revised Draft") was submitted for review at the 9th meeting of the 14th NPC Standing Committee. The issue of virtual asset money laundering is also one of the important backgrounds for this revision.

According to the legislative plan, the revised draft is expected to be passed in 2025. What possible impact will the revision of the "Anti-Money Laundering Law" have on the Web3 industry? This article interprets the "Revised Draft" from this perspective.

By Shao Shiwei, Lawyer

01. Expansion of the scope of anti-money laundering obligations for specific non-financial institutions

According to Article 60 of the "Revised Draft," when non-financial institutions engage in specific businesses, they should perform anti-money laundering obligations and take corresponding anti-money laundering measures in accordance with the relevant provisions of this law for financial institutions. This article adopts a listing and fallback approach, listing real estate intermediaries, service providers involved in custodial client assets/accounts, precious metal traders, and other institutions that need to fulfill anti-money laundering obligations.

Lawyer Shao's interpretation

The Financial Action Task Force (FATF) is the most authoritative intergovernmental international organization for anti-money laundering and counter-terrorist financing. China became a formal member of the organization in 2007. In 2012, the FATF revised and issued new international standards, the "FATF Recommendations on Combating Money Laundering, Terrorist Financing, and Proliferation Financing," and based on this, conducted mutual evaluations of all members from 2014 to 2022, aiming to comprehensively assess the compliance and effectiveness of members' anti-money laundering work.

From 2018 to 2019, the FATF conducted a year-long assessment of China's anti-money laundering work. China had 6 non-compliant items in the compliance assessment of the 40 recommendations of the FATF, 3 of which were related to specific non-financial industries, namely: specific non-financial industries and professions: customer due diligence, specific non-financial industries and professions: other measures, and regulation of specific non-financial industries and professions. Therefore, this revision has addressed the deficiencies related to this issue.

The "Revised Draft" clearly defines the scope of non-financial institutions with anti-money laundering obligations, which is the first issue that Web3 practitioners need to pay attention to. This determines whether the "Anti-Money Laundering Law" is "relevant to me" for Web3 institutions and practitioners.

China's policies have classified virtual currency-related businesses as "illegal financial activities," and have also issued warnings regarding the financial risks related to NFT digital collections in the domestic application of blockchain technology. This overall negative attitude towards the financialization of Web3 practices in China is evident.

However, China's regulatory authorities are gradually improving their understanding of blockchain technology and Web3-related applications. For example, in the "China Financial Stability Report (2023)" released by the People's Bank of China in December 2023, a separate section on "cryptographic assets" was established, and the term "virtual currency" was not used. It also proposed a principle similar to the SEC in the United States, "same business, same risk, same regulation." Therefore, in the long run, Web3's future development in China still has unlimited possibilities and potential. Therefore, Lawyer Shao believes that for industries in the Web3 domain that involve users providing asset accounts and services that include user transaction categories, they need to fulfill anti-money laundering obligations.

02. Transition from "rule-based" to "risk-based"

In the "Revised Draft," for example, Article 21 states, "Allocate anti-money laundering regulatory resources according to the risk situation and take corresponding risk prevention and control measures," and Article 28 states, "Financial institutions' anti-money laundering risk management measures shall comply with relevant regulations and shall not adopt management measures that are significantly inconsistent with the risk situation," both of which are specific manifestations of the "risk-based" principle.

"Customer Due Diligence" replaces "Customer Identification"

Article 3 of the "Anti-Money Laundering Law" stipulates that financial institutions and specific non-financial institutions should establish a sound customer identification system, but Article 4 of the "Revised Draft" replaces "identification" with "due diligence," and Article 26 stipulates that "financial institutions shall establish a customer due diligence system in accordance with regulations to understand the customer's identity, transaction background, and risk situation."

Article 28, paragraph 2, makes provisions for the scope of "anti-money laundering management measures": "The so-called anti-money laundering risk management measures in this law include continuous monitoring, verification of customers and their transaction situations, restriction of transaction methods, amounts, or frequencies, restriction of business types, refusal to conduct business, and termination of business relationships."

Lawyer Shao's interpretation

In 2012, the "FATF Recommendations" established a "risk-based" regulatory system, replacing the previous "rule-based" regulatory system. In short, the concept of "risk-based" requires anti-money laundering entities to adopt differentiated anti-money laundering measures for different risk areas through scientific assessment to enhance the effectiveness of anti-money laundering work. This revision also adheres to the principle of "risk-based" work.

Therefore, this also indicates that Web3 platforms and service providers need to fulfill corresponding compliance review obligations based on the specific services provided to users. They need to not only conduct static formal reviews of users (authenticity of documents, consistency of identities) but also adopt a "due diligence" approach to dynamically monitor users, comprehensively analyze the actual controllers and ultimate beneficiaries of customer assets, and review the consistency of customer transaction activities with their identity background, business needs, risk situations, fund sources, and uses.

For the Web3 industry, effective anti-money laundering work in commercial services requires the use of KYC, KYB, KYT, and other means.

KYC (Know Your Customer) involves formal verification of customer identities; KYB (Know Your Business) involves the examination of the legality and compliance of customer business activities, such as the legality of transactions, transaction purposes, fund sources, and more. While KYB and KYC methods are more suitable for the traditional financial sector, the decentralized and anonymous nature of blockchain makes it necessary to monitor on-chain transactions.

KYT (Know Your Transactions) is a more suitable anti-money laundering measure for the Web3 industry. It can continuously track all addresses controlled by specific entities, collect real-time intelligence related to fund sources or destinations, accurately identify high-risk activities, and curb money laundering and other illegal activities through on-chain data tracking and digital asset tracing technology.

03. Compliance immunity for diligent and responsible directors and senior management

Compared to the "Anti-Money Laundering Law," the "Revised Draft" for the first time mentions the provision for immunity for directors, supervisors, senior management, or other directly responsible personnel who can prove that they have diligently taken anti-money laundering measures. According to Article 53 of the "Revised Draft," "Directors, supervisors, senior management, or other directly responsible personnel of financial institutions who can prove that they have diligently taken anti-money laundering measures may not be punished."

Lawyer Shao's interpretation

In the field of criminal litigation, the procuratorate can make a decision not to prosecute companies that meet the compliance rectification requirements. The provision in Article 53 of the "Revised Draft" regarding the immunity for diligent and responsible directors and senior management can be viewed as the application of non-prosecution for criminal compliance in the field of anti-money laundering.

Lifting the heavy to make the light clear, bearing comprehensive and perfect anti-money laundering obligations is the inherent responsibility of financial institutions. The "Anti-Money Laundering Law" and its hundreds of supporting regulatory documents primarily constrain financial institutions. China's legislation itself has not had a long history of regulating specific non-financial institutions, and experience in this area is still being accumulated. In other words, due to the lack of practical anti-money laundering guidelines, the relevant Web3 industry can only feel its way forward in determining whether the enterprise falls under the category of "non-specific financial institutions" and how to carry out anti-money laundering work. Therefore, due to the absence of regulatory legislation, if Web3 enterprises have fulfilled general anti-money laundering obligations and still produce related consequences, the legal responsibility of the company's directors, supervisors, and senior management should not be heavily penalized.

04. Cooperation of Overseas Financial Institutions

Article 46 of the "Revised Draft" stipulates that relevant national authorities, in the process of investigating money laundering and terrorist financing activities in accordance with the law, can request cooperation from overseas financial institutions that have close financial ties with China, based on the principle of reciprocity or through consultation with relevant countries, to open representative accounts in China or provide other forms of cooperation.

Lawyer Shao's interpretation

Can Web3 projects going abroad avoid anti-money laundering obligations in China? This provision provides an answer. According to the principles of personal jurisdiction and protective jurisdiction in criminal jurisdiction, Chinese authorities have the right to request cooperation from representative accounts in China or overseas financial institutions.

Another similar question is, do foreign Web3 projects need to comply with the anti-money laundering obligations of other countries? Taking Binance, the world's largest cryptocurrency exchange, as an example, on April 30, 2024, Binance was fined $4.3 billion by the U.S. government for violating U.S. anti-money laundering laws, and its founder, Zhao Changpeng, was sentenced to four months in prison by a local U.S. court. Binance's exchange is registered in Malta.

In the context of globalization, the importance of anti-money laundering work is self-evident. It not only concerns the sound operation of the financial system but is also an indispensable part of safeguarding national security. Therefore, regulatory authorities around the world have attached great importance to anti-money laundering work. At the same time, for criminal offenses, the criminal jurisdiction of each country also has a certain extraterritorial extension. Therefore, for Web3 practitioners, conducting business in any country requires special attention to anti-money laundering work.

05. Focus on New Money Laundering Risks

Article 21 of the "Revised Draft" mentions that the competent administrative department for anti-money laundering, together with relevant national authorities, will conduct national and industry-specific money laundering risk assessments, monitor new money laundering risks in a timely manner, allocate anti-money laundering regulatory resources based on the risk situation, and take corresponding risk prevention and control measures.

Public Anti-Money Laundering Obligations

The "Anti-Money Laundering Law" only mentions the anti-money laundering obligations of "entities and individuals" twice, but the "Revised Draft" mentions it seven times, mainly involving: not providing facilities for money laundering activities, cooperating with financial institutions' due diligence obligations, reporting money laundering activities, and having the obligation to take special anti-money laundering preventive measures against relevant lists.

Lawyer Shao's interpretation

Yan Lixin, Executive Director of the China Anti-Money Laundering Research Center at Fudan University, stated, "The most important, urgent, and necessary issue that needs to be addressed at the legal level is the issue of money laundering involving virtual assets." "The use of cryptocurrencies and virtual assets for money laundering is becoming a mainstream trend."

As early as 2013, the People's Bank of China and five other ministries issued a notice on "Preventing Bitcoin Risks," stating that Bitcoin "does not have the same legal status as currency and should not and cannot be used as a circulating currency in the market." In 2021, ten ministries issued a notice on "Further Preventing and Dealing with the Risks of Speculation in Virtual Currency Trading," reiterating the previous viewpoint and stating that "virtual currency-related business activities are illegal financial activities." However, the reality is that more and more criminals are using virtual currencies for money laundering and illegally exchanging currencies through "foreign exchange matching."

Combining the focus on new money laundering risks in the "Revised Draft" and the public's anti-money laundering cooperation obligations, it can be predicted that the country will strengthen its crackdown and punishment of virtual currency trading. Although there are currently no prohibitive regulations on individual-to-individual virtual currency transactions, under the background of the revision of the "Anti-Money Laundering Law," the subjects of OTC transactions may be subject to greater attention obligations. For example, the difficulty of unfreezing bank cards due to trading may increase; and in practice, the burden of proof for judicial authorities regarding whether the trading parties should have known or knowingly engaged in money laundering crimes may be appropriately reduced.

Conclusion

Regarding the "Revised Draft," Wang Xin, a professor at Peking University Law School and an expert who participated in the discussion on the revision of the anti-money laundering law, stated, "The Anti-Money Laundering Law involves a wide range of issues, and the revised draft cannot cover all aspects comprehensively. It can only outline the most urgent content first." Therefore, for the regulation of anti-money laundering in the Web3 industry, the "Revised Draft" has not made more specific provisions. Another practical reason is that the Web3 field is an emerging industry, and legislation in various countries is still being explored.

All things have two sides, and the Web3 field is no exception. While it brings unprecedented opportunities for financial innovation and the digital economy, it also provides new channels for illegal activities such as money laundering. The absence of regulation will to some extent hinder the healthy development of the Web3 industry, but the industry's development speed will inevitably precede regulation. Therefore, for the industry to continue to develop sustainably, healthily, and stably, Web3 practitioners must attach great importance to anti-money laundering work and actively fulfill relevant anti-money laundering obligations.

What will the future of Web3 development in China be like? No one can predict. But, only through compliance can there be a future.

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