Why should the Web3 industry pay attention to the first major revision of the Anti-Money Laundering Law?

Source: Lawyer Shao Shiwei

The Anti-Money Laundering Law has been in effect for 18 years since it was implemented on January 1, 2007. From an international perspective, money laundering is becoming increasingly rampant, and transnational money laundering is becoming more frequent, which seriously threatens 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 are also constantly updating and evolving. Driven by many complex factors, the Anti-Money Laundering Law has undergone its first major revision.

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

According to the legislative plan, the draft amendment 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 Draft Amendment from this perspective.  

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

According to Article 60 of the Draft Amendment, when engaging in specific businesses, non-financial institutions shall refer to the relevant provisions of this Law on financial institutions to fulfill their anti-money laundering obligations and take corresponding anti-money laundering measures. This article adopts an enumeration and catch-all approach, listing real estate agencies, service providers whose services involve escrow of customer assets/asset accounts, precious metal traders, etc., and other institutions that need to fulfill their anti-money laundering obligations.

Interpretation by Lawyer Shao

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

From 2018 to 2019, FATF conducted a year-long evaluation of my country's anti-money laundering work. my country was not compliant in 6 of the 40 FATF recommendations, of which 3 involved specific non-financial industries, namely: specific non-financial industries and professions: customer due diligence, specific non-financial industries and professions: other measures, and supervision of specific non-financial industries and professions). Therefore, this revision makes up for the lack of this issue.

The Draft Amendment clarifies the scope of non-financial institutions with anti-money laundering obligations, which is the first issue that Web3 practitioners need to pay attention to. Because this determines whether the Anti-Money Laundering Law is "related to me" - that is: Do Web3 institutions and practitioners have the obligation to fulfill the Anti-Money Laundering Law?

my country's policies characterize virtual currency-related businesses as "illegal financial activities". For the localized application of blockchain technology in China, "NFT digital collections", it has also issued measures to prevent NFT-related financial risks. From this, it can be seen that the domestic financialization practice of Web3 is generally negative.

However, the understanding of blockchain technology and Web3-related applications by my country's regulatory authorities is also gradually improving. For example, in the "China Financial Stability Report (2023)" released by the People's Bank of China in December 2023, a rare large section of "Crypto Assets" was set up separately, and the term "virtual currency" was not used. It also proposed a principle of "same business, same risk, same supervision" similar to the US SEC. So in the long run, Web3 has unlimited possibilities and potential for future development in China. Then, for industries involving the Web3 field that require users to provide asset accounts and whose services include user transactions, Lawyer Shao believes that they need to fulfill their anti-money laundering obligations.

02 From "rule-based" to "risk-based"

In the "Draft Amendment", for example, Article 21, "allocate anti-money laundering regulatory resources according to risk conditions and take corresponding risk prevention and control measures"; Article 28, "financial institutions shall comply with relevant regulations when taking money laundering risk management measures, and shall not take management measures that are obviously inconsistent with risk conditions", are all specific manifestations of the "risk-based" principle.

"Customer Due Diligence" replaces "Customer Identity Identification"

Article 3 of the "Anti-Money Laundering Law" stipulates that financial institutions and specific non-financial institutions should establish and improve customer identity identification systems, but Article 4 of the "Draft Amendment" replaces "identification" with "due diligence", and Article 26 stipulates that "financial institutions shall establish a customer due diligence system in accordance with regulations and understand customer identities, transaction backgrounds and risk conditions through due diligence."

Article 28, paragraph 2, defines the scope of "money laundering management measures": "The money laundering risk management measures referred to in this Law include continuous monitoring and verification of customers and their transactions, restrictions on transaction methods, amounts or frequencies, restrictions on business types, refusal to handle business, termination of business relationships, etc."

Lawyer Shao's Interpretation

The 2012 FAFT Recommendations established a "risk-based" regulatory system, replacing the "rule-based" regulatory system in previous regulations. 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 assessments to improve the effectiveness of anti-money laundering work. This revision also implements the "risk-based" working principle.

Therefore, this also reminds Web3 platforms and service providers that they also need to fulfill corresponding compliance review obligations based on the specific services provided to users. In addition to conducting a static formal review of users (authentic documents and consistent identity), we must also adopt a "due diligence" work method, keep a dynamic focus on 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 status, source of funds and use.

For the Web3 industry, KYC, KYB, KYT and other means are needed to do a good job of anti-money laundering in commercial services.

KYC (Know Your Customer) is a formal review of customer identity authentication; KYB (Know Your Business) is a review of the legality and compliance of customer business activities, such as the legality of transactions, transaction purposes, source of funds, etc.; KYB and KYC are more suitable for the traditional financial field, but based on the decentralization and anonymity of blockchain, it becomes very necessary to monitor the data of on-chain transactions.

KYT (Know Your Transactions) is an anti-money laundering method more suitable for the Web3 industry. It can continuously track all addresses controlled by specific entities according to different anti-money laundering strategies, collect intelligence related to the source or destination of funds in real time, accurately identify high-risk activities, and curb illegal activities such as money laundering through on-chain data tracking and digital asset traceability technology.

03 Compliance exemption for directors, supervisors and senior executives

Compared with the Anti-Money Laundering Law, the Diligence Exemption Clause for Directors, Supervisors and Senior Executives is mentioned for the first time in the Draft Amendment. According to Article 53 of the Draft Amendment, "If the directors, supervisors, senior managers or other directly responsible persons of financial institutions can prove that they have taken anti-money laundering measures diligently and responsibly, they may not be punished."

Explanation by Lawyer Shao

In the field of criminal proceedings, the procuratorate can make a decision not to prosecute for qualified enterprises after they have completed the compliance rectification requirements. The compliance exemption clause for directors, supervisors and senior managers who are diligent and conscientious in Article 53 of the "Draft Amendment" can be regarded as the application of "criminal compliance and non-prosecution" in the field of anti-money laundering.

Holding the heavy to clarify the light, it is the due responsibility of financial institutions to assume comprehensive and complete anti-money laundering obligations. The "Anti-Money Laundering Law" and its hundreds of supporting regulatory documents are also mainly based on constraints on financial institutions. my country's legislation itself has not been in practice for regulating specific non-financial institutions for a long time, and experience has yet to be accumulated. In other words, due to the lack of practical anti-money laundering guidance rules, the relevant Web3 industry can only cross the river by feeling the stones as to whether the enterprise belongs to the category of "non-specific financial institutions" and if so, how to carry out anti-money laundering work. Therefore, due to the lack of regulatory legislation itself, if Web3 enterprises have fulfilled the general anti-money laundering due diligence obligations, but still have relevant consequences, they should not be subject to heavier legal responsibilities for the directors, supervisors and senior managers of the enterprise.

04 Cooperation of foreign financial institutions

Article 46 of the "Draft Amendment" stipulates that in the process of investigating money laundering and terrorist financing activities in accordance with the law, the relevant state organs may, in accordance with the principle of reciprocity or after consultation with the relevant countries, require foreign financial institutions that have opened agent bank accounts in China or have other close financial ties with my country to cooperate.

Lawyer Shao's Interpretation

Can Web3 projects go overseas to avoid domestic anti-money laundering obligations? This clause provides an answer. According to the principles of personal jurisdiction and protective jurisdiction in criminal jurisdiction, the competent authorities of my country can require agent bank accounts or foreign financial institutions in China to cooperate.

Another similar question, Do foreign Web3 projects need to comply with the anti-money laundering obligations of other countries? Take Binance, the world's largest cryptocurrency exchange, as an example. On April 30, 2024, Binance was fined $4.3 billion for being accused by the US government of violating the US anti-money laundering law. At the same time, founder Zhao Changpeng was sentenced to four months in prison by a local US court. The registered place of Binance Exchange is in Malta.

In the context of globalization, the importance of anti-money laundering is self-evident. It is not only related to the sound operation of the financial system, but also an indispensable part of ensuring national security. Because of this, regulatory authorities in various countries around the world attach great importance to anti-money laundering. At the same time, for criminal offenses, the criminal jurisdiction of various countries also has a certain extraterritorial extension. Therefore, for Web3 practitioners, when engaging in business activities in any country, they need to pay special attention to anti-money laundering.

05 Concern about new money laundering risks

Article 21 of the Draft Amendment states that “the administrative department responsible for anti-money laundering under the State Council shall, together with relevant state organs, conduct national and industry money laundering risk assessments, timely monitor new money laundering risks, allocate anti-money laundering regulatory resources according to risk conditions, and take corresponding risk prevention and control measures.”

Anti-money laundering obligations of the public

The anti-money laundering obligations of “entities and individuals” are only mentioned twice in the Anti-Money Laundering Law, but are mentioned as many as 7 times in the Draft Amendment, mainly involving: not engaging in/facilitating money laundering activities, cooperating with the due diligence obligations of financial institutions, reporting money laundering activities, and the obligation to take special anti-money laundering preventive measures for relevant lists.

Lawyer Shao's Interpretation

Yan Lixin, Executive Director of the China Anti-Money Laundering Research Center of Fudan University, said, "The most important, most urgent, and most necessary issue to be resolved at the legal level is the money laundering problem involving virtual assets," and "the use of cryptocurrencies and virtual assets for money laundering has gradually become a mainstream trend."

As early as 2013, the People's Bank of China and five other ministries and commissions issued the "Notice on Preventing Bitcoin Risks", which mentioned that Bitcoin "does not have the same legal status as currency, and cannot and should not be circulated and used as currency in the market"; in 2021, ten ministries and commissions issued the "Notice on Further Preventing and Dealing with Virtual Currency Trading Speculation Risks", which reiterated the above view and stated that "virtual currency-related business activities are illegal financial activities." But the reality is that criminals are increasingly using virtual currencies to launder money and use virtual currencies as a medium for illegal exchange through "foreign exchange counter-trading."

Combined with the concerns about new money laundering risks in the "Draft Amendment" and the public's anti-money laundering cooperation obligations, it can be predicted that the country will strengthen the crackdown and punishment of virtual currency transactions in the future. Although there are no relevant laws and policies that prohibit virtual currency transactions between individuals, under the background of the revision of the "Anti-Money Laundering Law", the subjects of OTC transactions may be subject to a heavier duty of care, for example, the difficulty of unfreezing bank cards caused by transactions may become increasingly greater; whether the transaction subject should know or know that it is a money laundering crime, the burden of proof of the judicial organs may be appropriately reduced in practice.

Written in the end

In response to the draft amendment, Wang Xin, a professor at the Law School of Peking University and an expert who participated in the discussion of the draft amendment to the Anti-Money Laundering Law, said, "The Anti-Money Laundering Law involves a wide range of aspects, and it is difficult to cover all aspects in the draft amendment. We can only reflect the most urgent content in a framework first." Therefore, the "Draft Amendment" failed to make more clear provisions for anti-money laundering supervision in the Web3 industry. Another practical reason is that as an emerging industry, the Web3 field is also being explored by legislation in various countries.

Everything has two sides, and the Web3 field is no exception. While it has brought unprecedented opportunities for financial innovation and the digital economy, it has also provided new channels for illegal activities such as money laundering. The lack of supervision will hinder the healthy development of the Web3 industry to a certain extent, but the development speed of the industry will inevitably precede that of supervision. Therefore, in order for the industry to develop continuously, healthily and stably, Web3 practitioners must attach great importance to anti-money laundering work and actively fulfill relevant anti-money laundering obligations.

How will Web3 develop in China in the future? No one can predict it. However, only compliance can bring a future.