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11 Arrested for the First Money Laundering Case Using Digital Yuan

Richard Marley
November 04, 2021
3 minutes read
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Chinese security officials have arrested 11 suspects in the first Central Bank Digital Currency (CBDC) money laundering case.

China’s government agencies may want to review the security measures of Central Bank Digital Currency (CBDC) as Xinmi police together with the Anti-Fraud Center of the Zhengzhou Public Security Bureau arrested 11 criminals as they were suspected to use digital Yuan wallets for laundering money.

China’s local news agency “Jiemian” provided more details on CBDC’s first money laundering case. It stated, “This time, a case of telecommunications network fraud occurred in Xinmi City. Qu received an unfamiliar call saying that the items purchased online had quality problems and planned to compensate him at three times the price. Qu followed the other party’s instructions and was arrested. In the name of ‘identification verification,’ the other party requested multiple transfers, totaling more than 200,000 yuan, and then realized that he had been deceived.”

The activity was carried out by using a telecommunication network in Xinmi city. The Criminal Investigation Brigade of the Public Security Bureau said that numerous payments were made to one specified digital wallet.

Based on the Xinmi Police investigation, the government agencies alleged the criminal group used the digital Yuan to launder money by routing the capital to a cross-border scammer group located in Cambodia. According to the law enforcement authorities, the fraudsters sought to manipulate the CBDC digital wallets to overcome the risk of getting caught.

Even though trading cryptocurrency is banned by the Chinese government, the digital Yuan is usable across several Chinese cities. Till Oct. 2021, around 140 million Chinese locals had signed up on digital Yuan wallets.

Instead of using blockchain technology, the currency depends on virtual signatures and storage encryption for digital transaction security and to restrict double-spending. As digital Yuan can be traded privately, it has a high potential for financial crimes.

China’s Central Bank has frequently communicated concerns regarding the use of digital currency and stablecoins for illegitimate financial activities like money laundering. Back in June 2021, the country’s security agencies arrested more than 1,100 criminals on suspicion of laundering digital currencies.

Moreover, China’s law-enforcing authorities have to comprehensively analyze the flow of digital Yuan using data analytics. This will eventually limit the risk of money laundering cases.

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Crypto Industry Rejects New Rules to Report NFT and DeFi Transactions
The representatives of the Crypto industry have disapproved of reporting data about NFTs, DeFi transactions and retail payments at the recent OECD meeting.

The meeting organised in Paris on Monday by the Organisation for Economic Co-operation and Development (OECD) unveiled that the crypto industry representatives have rejected the attempts to make reports about the non-fungible tokens (NFTs), decentralized finance (DeFi) and retail payments to tax officials.

International tax authorities want to implement new rules in the existing financial sectors to deploy the foreign bitcoin (BTC) holdings to prevent them from hiding from revenue services.

According to the Common Reporting Standard (CRS), banks need to identify any account holders as per the existing rules who are tax residents in foreign countries and acquire details regarding them to ensure that they are not evading tax.

The industry has contradicted this statement as these requirements are a lot harder to fulfil as mostly NFTs price is not entirely known at a given time. Non-digital assets such as paintings are included in these current rules.

Speaking on the behalf of the lobby group the Chamber of Digital Commerce. a partner at law firm Steptoe & Johnson, Lisa Zarlenga said that only those crypto assets should be considered that are “actively traded on an established market.”

Zarlenga further stated that this may constitute determining whether the prices are accessible and published or not and would ultimately expose anything traded on a major exchange.

Exceeding further in dealing with the traditional banking assets could be a breach of the “technology neutrality” principle since it deals with digital assets more strictly, as made evident by Zarlenga “Just because they’re digital doesn’t mean they should be included.”

The OECD’s Philip Kerfs claimed, “A number of delegates found it a very difficult criterion to apply in practice for binary reporting”. Moreover, OECD thinks that merely applying existing anti-money laundering (AML) laws would put wallet providers in an impossible situation of whether or not to report a transaction.

Suggested Read: Crypto Bill Approved by the US Congress Set to Revamp Digital Asset Securities

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A Brief Insight into AML Regulations for the Art Market
While the banking sector faces increased scrutiny to prevent illicit financial flows, a significant amount of dirty money is still being laundered through the art market. Although financial regulators have strengthened anti-money laundering (AML) regulations in various countries, transactions in art and antiques remain an area of concern.

The US and UK are the two biggest markets for art and antiques where oligarchs and corrupt politicians spend their dirty money in order to gain legitimate funds. Considering the high volume of illicit activity through art purchases, financial regulators have repeatedly urged art dealers throughout the world to incorporate AML screening measures.

The Art Market and Money Laundering

Even though the majority of art purchases involve legitimate funds, numerous cases have shown that Russian billionaires and drug lords use the art market to obscure the origins of their illegally-obtained funds. Following such a purchase, the art or antique item is stored in hidden warehouses for a particular time and then put up for sale.

Moreover, art can also be pledged as collateral in order to get loans in the form of legitimate cash. The Covid-19 outbreak gave rise to online art auctions that have had a serious effect on the traditional art market. According to a report, the global online-only auction sales, including the three biggest auction houses, Sotheby’s, Christie’s, and Phillips, crossed the $1 billion mark for the first time in the last year.

Online art purchases contribute to a large number of transactions that are completely unmonitored and also involve a number of intermediaries like advisors, art dealers, and auction houses. Considering these visible issues and loopholes in art dealings, financial regulators have come up with amendments to AML regulations that apply to the art market as well as antiquities dealers.

Updates to US Regulations for the Art Industry

In the US, financial institutions and other businesses need to comply with the regulations provided by the Anti-Money Laundering Act of 2020 (AMLA 2020). The AMLA updated the definition of “financial institution” to include “a person engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities.” According to the new definition, art and antiquities dealers, as well as those involved in art deals fall under the scope of the AMLA.

The AMLA obliges antiquities dealers to implement sufficient methods for anti-money laundering/combating the financing of terrorism (AML/CFT). Corrupt entities and oligarchs that intend to launder money are provided with a certain level of anonymity because of the system involving intermediaries like agents and brokers. With updates in regulations, it is clear that AML compliance will be ensured in the US art market sooner or later.

The US Senate authorised the Senate Permanent Subcommittee on Investigations in July 2020 to identify the reasons why the US policies of AML sanctions are undermined in the art industry. The consequent efforts showed that the art market is the biggest unregulated market in the US. A study also revealed that there is a lack of AML measures in the major auction houses in the country. Those that do implement AML screening are doing it voluntarily and normally consider the client’s representative as the person to make the transaction. In most cases, the auction house does not require proof of identity from individuals or the UBO (ultimate beneficial owner) information from businesses. The Senate investigation determines that art dealers do not have AML controls as the current regulations do not oblige them to do so.

Canada’s Regulations for the Art Market

The Financial Action Task Force (FATF) issued its Mutual Evaluation Report for Canada in 2016, which highlighted that art dealers and auction houses are highly vulnerable to financial crimes like money laundering and terrorist financing. Arts and antiquities, as well as luxury cars and yachts, are the most commonly used medium by Russian oligarchs amid sanctions following the Russia-Ukraine conflict. Furthermore, in 2018, the Standing Committee on Finance of Canada’s House of Commons released a report named ‘Confronting Money Laundering and Terrorist Financing: Moving Canada Forward’. The report comprised 32 recommendations related to updates and amendments to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

The report also states that precious metals and stones dealers were obliged to follow AML regulations in Canada (when the report was published). However, this was not the case for high-value art or luxury goods dealers. The report also listed a set of measures that would ideally contribute to a better AML/CFT regime in the country. It was suggested in the report that “Federal, provincial, and territorial governments should collaborate to close the loophole regarding the transaction of sales between parties who are not subject to PCMLTFA reporting requirements, which creates vulnerability for money laundering to occur.”

The EU’s 5th AMLD

The EU’s Fifth AMLD (Anti-Money Laundering Directive) broadens the scope of AML regulations to include art traders, intermediaries in art dealings, art handlers at freeports, and those who make transactions through freeports when values exceed EUR 10,000. Moreover, the 5th AMLD also includes transactions in other high-value items like arms, precious metals, antiquities, and artifacts. As smaller transactions that are linked to each other can collectively go beyond the threshold that is set by AML requirements, all payments are now subject to transaction monitoring. Enhanced due diligence is required in high-risk cases and involves requiring a photo as well as ID document from individuals and the sources of money from businesses.

The Fifth AMLD also obliges art dealers and the relevant entities to disclose the ultimate beneficial ownership information of businesses, trusts, and foundations. The directive defines the term “obliged entity” as credit and financial institutions and regulated service providers operating outside the financial sector. It also lists freeports under “obliged entities”. The regulation allows EU member states to implement the rules obliging businesses that deal in countries with inadequate AML/CFT measures to perform enhanced due diligence and transaction monitoring on a regular basis.

What Shufti Pro Offers

Enhanced due diligence (EDD) and Anti-Money Laundering (AML) screening are the keys to combating money laundering in the art market. Art dealers must adopt the risk-based approach and employ AML checks to ensure that illegal money has not been used for purchasing artwork. Moreover, ongoing AML and transaction monitoring can assist organisations in maintaining an updated risk profile of every buyer making compliance with the regulations easier. AML screening checks the background of buyers against several sanction lists and PEPs.

Shufti Pro’s AML Screening solution allows your art dealership to validate every buyer and ensure that dirty money is not used for transactions. Furthermore, our ongoing transaction monitoring allows businesses to keep a check on every transaction being conducted by the customers.

Want to learn more about AML Screening for the Art Industry?

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11 Arrested for the First Money Laundering Case Using Digital Yuan

The Art Market and Money Laundering

Updates to US Regulations for the Art Industry

Canada’s Regulations for the Art Market

The EU’s 5th AMLD

What Shufti Pro Offers

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