Behind the AAX Exchange Crash: How Did Cryptocurrency Become a Money Laundering "Black Glove"?
Author: Lawyer Xu Qian, Mankun Blockchain
According to reports from NetEase Qingliu Studio, Wang Shuiming, who was arrested in connection with Singapore's largest money laundering case, has been captured in Montenegro and may be extradited back to China. Wang Shuiming's partner, Su Weiyi, has been confirmed as the mastermind behind the Hong Kong cryptocurrency platform scam AAX, which led to Su Weiyi's arrest by Hong Kong police in July 2024.
AAX Platform Incident
Atom Asset (AAX) is one of the largest cryptocurrency exchanges in Hong Kong, once boasting over 2 million users. On November 13, 2022, just two days after the cryptocurrency exchange FTX filed for bankruptcy, AAX also halted withdrawals due to exposure to counterparty risk and cleared all social channels. Initially, AAX attributed the freeze to security measures against suspected malicious attacks.
On November 15, 2022, AAX issued a statement indicating that its platform required maintenance, and in addition to suspending withdrawals, it would automatically liquidate derivatives. Subsequently, AAX ceased platform operations and updates on social media. An anti-money laundering analysis platform conducted an in-depth study of the on-chain activities of AAX exchange wallets and found that all 25,100 ETH had been transferred, with some ETH exchanged for USDT, and then the funds were moved to different blockchains via the Cross Bridge, with some media reporting that the exchange's founder held the private keys to user funds and exchange wallet access.
*Image source: Beosin KYT Anti-Money Laundering Platform
The arrest of Wang Shuiming seems to be related to Singapore's largest money laundering case. So why do cryptocurrencies frequently become tools for "money laundering"?
Why Do Cryptocurrencies Become Tools for Money Laundering?
The use of cryptocurrencies as tools for money laundering is closely related to their technology (decentralization, anonymity), on-chain tools (mixers, cross-chain bridges), and value (exchangeable for fiat currency, purchasing power).
(1) Technical Features like Decentralization and Anonymity Facilitate Money Laundering
Cryptocurrencies typically do not rely on central banks or government institutions for management but maintain transaction records through a distributed network. This decentralized characteristic eliminates third-party involvement, especially that of government agencies, making cryptocurrency transactions more convenient and flexible. However, this also weakens the regulatory oversight of traditional financial institutions, facilitating money laundering activities.
Although on-chain transactions are publicly traceable, the circulation of cryptocurrencies is completed through wallet addresses without the need to bind to real identities. If cryptocurrencies are obtained through non-KYC channels (such as over-the-counter trading, cold wallet transfers, etc.), it becomes difficult to trace the holders of the cryptocurrencies. This anonymity feature makes it challenging to track the identities of both parties in a transaction, providing natural concealment conditions for money launderers.
(2) Some On-Chain Tools Help Conceal the Source and Flow of Funds
Mixers (such as Tornado Cash, Blender.io, etc.) mix user funds and redistribute them, cutting off the source of funds. Cross-chain bridges (such as Axelar) transfer assets to different blockchains for asset transfer and exchange, for example, moving from a loosely regulated blockchain network to another network and then using privacy protocols (such as Aztec) to hide transaction details, creating multiple layers of anonymity to evade regulatory and law enforcement tracking. These tools make it easier to conceal money laundering activities.
(3) Cryptocurrencies Have the Ability to Exchange with Fiat Currency
Some countries and regions recognize cryptocurrencies as legitimate payment tools, and there is currently no unified regulatory standard globally. This allows cryptocurrencies to be traded freely across borders without the approval of third-party institutions. This enables cryptocurrencies to be easily transferred from one country to another (cross-border cashing), bypassing foreign exchange controls and exchange rate risks. The ability to exchange cryptocurrencies for fiat currency makes it easy to launder and legitimize funds.
Due to their unique technical characteristics and operational mechanisms, cryptocurrencies can be easily exploited by money launderers. To prevent and combat criminal activities, it is necessary to enhance user risk awareness, strengthen technical identification and prevention capabilities, and increase international cooperation and regulatory efforts.
Distinction Between Money Laundering, Aiding and Abetting, and Concealment Crimes
In cryptocurrency transactions, when a person provides a wallet address to assist in a transfer, how can one distinguish between aiding and abetting and concealing the proceeds of crime? If real estate is purchased with illegally obtained cryptocurrencies, does it constitute money laundering? Such behaviors often involve the elements of multiple crimes, leading to the following controversies: At which stage of the criminal chain does the act occur (before/after completion)? What is the level of awareness of the upstream crime (general knowledge/specific knowledge)? Does the nature of the funds belong to specific upstream criminal proceeds (such as the seven categories limited in money laundering crimes)? From the perspective of China's criminal law system, all three crimes involve the handling of criminal proceeds, and we can distinguish them from the following dimensions:
How Cryptocurrency Service Providers Can Prevent Legal Risks Related to Money Laundering
(1) Strictly Fulfill Customer Identity Verification (KYC) and Anti-Money Laundering (AML) Obligations
Real-name system requirements mandate effective identity verification of customers, including but not limited to verifying identification documents, contact information, and transaction purposes. Anonymous accounts are prohibited, and privacy coin transactions are restricted. Enhanced due diligence should be implemented for high-risk customers (such as large transactions, cross-border transactions), and complete records should be retained.
(2) Transaction Monitoring and Reporting
Establish a real-time transaction monitoring system, integrating on-chain data (blockchain explorer API), off-chain data (user KYC information), and third-party risk databases (such as Chainalysis, Elliptic); deploy multi-dimensional risk models for anomaly detection (such as frequent split transactions); implement tiered alerts and trigger responses (such as automatic account freezes, manual reviews, suspicious reports), and conduct audits and reporting (retain complete operation logs, regularly produce compliance reports).
(3) Strengthen Internal Compliance Management and External Cooperation and Communication
Establish compliance systems, formulate internal control systems for anti-money laundering, and clarify job responsibilities and operational processes. Set up an independent compliance department to ensure effective execution of risk management measures and strengthen internal supervision. Regularly train employees on anti-money laundering laws and regulations to enhance and reinforce their awareness of anti-money laundering.
Actively comply with and cooperate with the anti-money laundering requirements of regulatory authorities and law enforcement agencies, establishing regular communication mechanisms, assisting in data retrieval, and account restrictions.
Conclusion
Typically, money laundering with cryptocurrencies may occur through mixing services, false transactions, layered transfers, OTC trading, and identity forgery. Money laundering undermines financial order and fosters criminal activities such as fraud and embezzlement, harming not only user interests and affecting the reputation of the cryptocurrency industry but also potentially involving national security issues. Both individual users and cryptocurrency service providers need to enhance risk awareness, fulfill KYC and AML obligations, monitor suspicious transactions, cooperate with regulators, and maintain transaction security through technological means and tools.