Behind the AAX exchange burst: How can cryptocurrencies become "black gloves" of money laundering?

Author: Lawyer Xu Qian, Mankun Blockchain

According to NetEase Qingliu Studio, Wang Shuiming, who was arrested in Singapore's largest money laundering case, has been arrested in Montenegro or extraditioned to China. Wang Shuiming's partner Su Weiyi was confirmed to be the mastermind of the Hong Kong cryptocurrency platform scam AAX. In July 2024, Su Weiyi was arrested by Hong Kong police.

AAX Platform Events

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

On November 15, 2022, the AAX Exchange issued a statement stating that its platform needs to be maintained and that in addition to suspending withdrawals, derivatives will be automatically liquidated. Since then, AAX has stopped operating the platform and social media updates. An anti-money laundering analysis platform conducted in-depth research on the on-chain activities of the AAX exchange wallet and found that all 25,100 ETHs have been transferred, some of the ETHs have been exchanged for USDT , and then funds are transferred to different blockchains through the Cross Bridge cross-chain bridge. According to some media reports, the founder of the exchange holds the private keys for user funds and the exchange wallet access rights.

 *Pictures are from Beosin KYT Anti-Money Laundering Platform 

Wang Shuiming's arrest seems to be involved in Singapore's largest money laundering case. So why has cryptocurrencies frequently become "money laundering" tools?

Why has cryptocurrencies become money laundering tools?

The reason why cryptocurrencies are used as money laundering tools is inseparable from their technology (decentralization, anonymity), on-chain tools (currency mixers, cross-chain bridges) and value (can be exchanged from fiat currency, purchasing power).

**(I) Technical characteristics such as decentralization and anonymity

provide convenience for money laundering**

Cryptocurrencies usually do not rely on the management of central banks or government agencies, but maintain transaction records through distributed networks. This decentralized feature eliminates the intervention of third parties, especially government agencies, making cryptocurrency transactions and circulation more convenient and flexible. But this also weakens the regulation of traditional financial institutions and facilitates money laundering activities.

Although on-chain transactions are publicly verifiable, cryptocurrency flow is completed through the wallet address without binding the real identity. If cryptocurrencies are obtained through non-KYC channels (such as over-the-counter transactions, cold wallet transfers, etc.), it is difficult to track the holders of cryptocurrencies. This anonymity characteristic makes the identities of both parties to the transaction difficult to track, providing money launderers with natural hidden conditions.

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

Coin mixers (such as Tornado Cash, Blender.io, etc.) mix user funds and redistribute them to cut off the source of funds. Cross-chain bridges (such as Axelar) transfer assets to different blockchains for asset transfer and exchange, such as transferring from one loosely regulated blockchain network to another network and using privacy protocols (such as Aztec) to hide transaction details, forming multiple anonymity barriers, thus evading supervision and law enforcement. These tools make money laundering more easily concealed.

**(III) Cryptocurrencies have the ability to exchange with legal

currency**

Some countries and regions recognize cryptocurrencies as legal payment tools, and there is currently no unified standard for regulation around the world. This allows cryptocurrencies to be traded freely across borders without the approval of third-party agencies. This allows cryptocurrencies to be transferred from one country to another at will (cross-border cash out), avoiding foreign exchange controls and exchange rate risks. Cryptocurrencies have the ability to exchange with fiat currencies, which makes it easy to convert cryptocurrencies into fiat currencies, thereby enabling whitewashing and legalizing funds.

Cryptocurrencies are easily exploited by money launderers due to their unique technical characteristics and operating mechanisms. In order to prevent and combat criminal activities, measures such as improving users' risk awareness, strengthening technical identification and prevention capabilities, and strengthening international cooperation and supervision are needed.

**The difference between money laundering, helping letters, and

concealing crimes**

In cryptocurrency transactions, if the perpetrator provides a wallet address to assist in transferring money, how to distinguish between helping the credit and concealing the offence of criminal proceeds? If real estate is purchased through cryptocurrency obtained from illegally, does it constitute the crime of money laundering? Such behaviors often cause the following controversy because they involve multiple constituent elements of the crime at the same time: At which stage of the crime chain (before/after completion)? What is the level of awareness of upstream crime (to summarize and know clearly/to know specifically)? Does the nature of funds belong to the income from specific upstream crimes (such as the seven categories of money laundering crimes)? From the perspective of my country's criminal law system, all three crimes are the handling of criminal proceeds. We can distinguish them from the following dimensions:

**How cryptocurrency service providers prevent legal risks suspected of

money laundering**

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

The real-name system requires that customers be validly authenticated, including but not limited to verification of their identity documents, contact information, transaction purposes and other information. Anonymous accounts are prohibited and privacy currency transactions are restricted. Implement enhanced due diligence on high-risk customers (such as large-scale transactions, cross-border transactions) and retain complete records.

(II) Transaction monitoring and reporting

Establish a real-time transaction monitoring system, such as integrating on-chain data (block browser API), off-chain data (user KYC information), third-party risk databases (such as Chainalysis, Elliptic) and other information; deploy multi-dimensional risk models such as abnormal detection (such as frequent splitting and transfers, etc.); hierarchical early warning and triggering disposal (such as automatic account freezing, manual review, suspicious reports, etc.), audit and report (retaining complete operation logs, regularly making compliance reports, etc.).

**(III) Strengthen internal compliance management and external

cooperation and exchanges**

Establish compliance systems, formulate an internal anti-money laundering control system, and clarify job responsibilities and operational processes. Establish an independent compliance department to ensure the effective implementation of risk management measures and strengthen internal supervision. Regularly conduct anti-money laundering laws and regulations training for employees to improve and strengthen their anti-money laundering awareness.

Actively comply with and cooperate with the anti-money laundering requirements of regulatory departments and law enforcement agencies, establish a regular communication mechanism, assist in data retrieval, account restrictions, etc.

Conclusion

Usually, cryptocurrency money laundering may be through currency mixing services, false transactions, layered transfers, OTC over-the-counter transactions, forged identities, etc. Money laundering will disrupt the financial order and encourage criminal activities such as fraud and embezzlement. It not only harms the interests of users and affects the reputation of the cryptocurrency industry, but may also involve national security issues. Whether it is a single user or a cryptocurrency service provider, they need to raise their risk awareness, fulfill KYC and AML obligations, monitor suspicious transactions, cooperate with regulators, and maintain transaction security through technical means, tools, etc.