Web3 Compliance Hotspot | Involving 170 Million Yuan, Hunan Police Bust Virtual Currency Money Laundering Ring—A Detailed Analysis of Money Laundering Defense, Prosecution, and Compliance!
TechFlow Selected TechFlow Selected
Web3 Compliance Hotspot | Involving 170 Million Yuan, Hunan Police Bust Virtual Currency Money Laundering Ring—A Detailed Analysis of Money Laundering Defense, Prosecution, and Compliance!
USDT In-Depth Analysis Edition!
Navigating Web3 tides with focused insightsOriginal author: Web3 Compliance Research Group, Attorney Zhang Yonghai
"The Web3 world is full of innovation and opportunities, but the widespread use of USDT has also brought unprecedented money laundering risks. The Hunan USDT money laundering case once again proves that regardless of technological evolution, regulators' determination and capability to combat money laundering crimes are continuously strengthening, and on-chain data tracking technologies are becoming increasingly mature."
In the past decade, we have collectively witnessed the rise of the Web3 era built upon blockchain technology. While this revolutionary technological wave reshapes financial paradigms, it has inevitably become a new breeding ground for complex financial crimes. The anonymity, ease of cross-border circulation, and decentralized nature of virtual assets have made them important tools in modern money laundering activities. Among these, stablecoins represented by USDT (Tether) have, due to their unique characteristics, become the "hard currency" for global illicit fund flows.
Recently, the public security authorities in Hunan cracked a money laundering case involving nearly 170 million yuan worth of USDT, sounding another alarm: using stablecoins to launder funds for overseas online gambling, telecom fraud, and other criminal gangs has evolved into a highly professionalized and covert black-and-gray industrial chain. This article aims to systematically review the origins and legal framework of money laundering offenses, deeply analyze Web3-era money laundering models and cases centered on USDT, and focus on corresponding criminal defense points and risk prevention strategies.
I. Tracing the Origins: The Evolution of Money Laundering Crimes and Challenges Posed by Web3
The term "money laundering" originated in early 20th-century America, where organized crime groups used cash-intensive laundromats to mix illegal proceeds with legitimate business income. This metaphor precisely captures the core purpose of money laundering: to sever the connection between funds and their illegal sources, cloaking them in a veneer of legitimacy.
The internationally recognized money laundering process typically consists of three stages:
-
Placement Stage: Injecting criminal proceeds into the financial system or economic activities. In the Web3 era, this usually involves converting illicit funds into virtual assets such as USDT via OTC (over-the-counter) transactions.
-
Layering Stage: Obscuring the original source of funds through complex, multi-layered transactions. This is where Web3 technologies发挥 their "advantages," including rapid on-chain transfers, use of mixing services, and cross-chain bridges.
-
Integration Stage: Reintroducing the "cleaned" funds back to the controller in a seemingly legitimate form. For example, converting virtual assets into fiat overseas and purchasing real estate, NFT artworks, or declaring investment gains.
Unique challenges in the Web3 era: The rise of stablecoins (USDT). Unlike Bitcoin (BTC) or Ethereum (ETH), stablecoins like USDT are pegged to fiat currencies (typically the U.S. dollar), significantly mitigating the volatility risks inherent in cryptocurrencies. This makes USDT an ideal tool for value storage, large-scale transfers, and settlements in illegal activities. The emergence of USDT enables money laundering operations to maintain stable asset values while benefiting from the cross-border convenience and traceability challenges offered by blockchain technology.
II. China's Legal Framework and Judicial Interpretations: An Increasingly Tightening Legal Net
In China’s criminal law system, charges related to proceeds from virtual asset crimes mainly center around three provisions. Understanding the distinctions among them is crucial for Web3 practitioners:
(1) Article 191 of the Criminal Law: Money Laundering Crime
This is the core offense. A key element is the specificity of the upstream crime. The perpetrator must "knowingly" handle proceeds or profits derived from one of the following seven specific categories of crime:
Drug-related crimes, organized crime syndicates, terrorist activities, smuggling, corruption and bribery, disruption of financial management order, and financial fraud.
Key Development: Criminalization of "Self-Laundering." After the 2021 Amendment (XI) to the Criminal Law, individuals who commit any of the above seven crimes and subsequently launder their own criminal proceeds (e.g., converting illegally raised funds into USDT and transferring them) will be separately convicted of money laundering and face cumulative punishment.
(2) Article 312 of the Criminal Law: Concealing or Hiding Proceeds of Crime and Their Gains (Concealment Crime)
This charge applies when the upstream crime does not fall within the above seven categories. In judicial practice, if funds originate from online gambling, ordinary fraud (non-financial fraud), pyramid schemes, or adult live streaming, even if the individual performs "cleansing" acts such as exchanging for USDT, they are typically prosecuted under the concealment crime. This is currently the most common charge in cases involving USDT fund transfers.
(3) Article 287-2 of the Criminal Law: Assisting Information Network Criminal Activities (AIACA Crime)
In USDT "money muling" operations, if the perpetrator generally knows the counterparty may be committing cybercrimes, and the circumstances are relatively minor (e.g., low transaction volume, lower-level "card farmers" or junior OTC service providers), they may be charged with AIACA.
(4) Core of Judicial Interpretation: Determination of Subjective "Knowledge"
The central challenge in establishing these charges lies in proving the perpetrator's subjective "knowledge." Judicial interpretations allow inference of subjective knowledge based on objective behavior, which profoundly impacts USDT-related cases:
-
Abnormal Transaction Prices: For instance, in the Hunan case, buying USDT at a premium of 0.8 yuan above market price. Such明显 deviations from market rates are often treated as "money laundering service fees," serving as strong evidence of "knowledge."
-
Abnormal Transaction Methods: Frequent communication via overseas encrypted messaging apps (e.g., Telegram), requests to use new addresses or wallets not controlled by the user for payments, refusal to undergo KYC verification.
-
Abnormal Fund Sources: Complex and fragmented sources of incoming funds, or funds moving quickly in and out without lingering.
III. Money Laundering Models in the Web3 Era and the Central Role of USDT
Money laundering activities in the Web3 space are often hybrids of traditional methods and emerging technologies, with USDT playing a pivotal role.
(1) The Dominant Position of USDT: Why It Has Become the Preferred Tool for Money Laundering?
Among numerous cryptocurrencies, USDT (Tether) has become the preferred medium for money laundering primarily due to the following key reasons:
-
Value Stability (Core Advantage): Pegged to the U.S. dollar, with minimal price fluctuations. Money laundering processes take time, and criminals do not want their illicit funds devalued during cleansing due to cryptocurrency price drops. USDT provides a perfect hedging instrument.
-
High Liquidity and Wide Acceptance: As the most traded stablecoin globally, USDT enjoys high acceptance across exchanges, OTC markets, darknets, and illegal gambling platforms, offering strong convertibility—essentially acting as "digital dollars."
-
Cross-Border Convenience and Low Cost: Compared to traditional international wire transfers or underground banks, transferring USDT over blockchain networks is fast, inexpensive, and不受 limitations of traditional financial institutions’ operating hours and geographical boundaries.
-
Multi-Chain Deployment and Proliferation of TRC20: USDT is issued across multiple public blockchains. Particularly, USDT on the Tron network (TRC20-USDT), due to its extremely low transaction fees and high efficiency, is highly favored by money laundering groups.
(2) OTC Transactions and "Money Muling" Platforms: Primary Channels for USDT Money Laundering
Over-the-counter (OTC) trading, especially among so-called "U merchants," serves as the main channel for fiat-to-USDT conversion and is a hotspot for money laundering. Criminal gangs build "money muling" platforms to rapidly convert illicit proceeds into USDT using numerous dispersed accounts.
Case Deep Dive: The Hunan 170 Million Yuan USDT Money Laundering Case
This case clearly illustrates the chain of using USDT to launder funds for cross-border crimes, exemplifying a typical model combining traditional "money muling" with virtual currencies:
Upstream Crime: Overseas online gambling and telecom fraud gangs ("funding masters").
Money Laundering Channel (Four-Tier Model):
First Tier (Placement): Illicit funds transferred into domestic "straw man" accounts.
Second Tier (Initiation of Layering): "Muling teams" quickly split and transfer funds through multiple layers to secondary cards.
Third Tier (Physical Disconnection): "Cash couriers" withdraw cash at night. The goal is to completely sever the traceable path within the online banking system.
Fourth Tier (Conversion and Integration): "Backpackers" deliver cash to underground banks or large OTC dealers. This is the critical step: after receiving cash, OTC dealers immediately release equivalent USDT to wallet addresses designated by overseas "funding masters." Thus, RMB illicit funds within China are successfully transformed into digital assets abroad.
In this case, the gang bought USDT at a premium of 0.8 yuan above market price. This significant markup reflects the "risk premium" for money laundering services and serves as a key basis for determining subjective malice.
(3) Specific Money Laundering Models Derived from USDT
1. "Payment Processor" Model: Extremely common in cross-border gambling or illegal payment platforms. Platforms rely on specialized "payment processors" to handle deposits and withdrawals. Processors receive users’ fiat (often containing substantial black-market funds), convert it into USDT, and pay it to the platform; they also help convert the platform’s USDT earnings back into fiat.
2. Integration of USDT with Underground Banks ("Digital Matching"): Traditional underground banks are rapidly "digitizing." They directly use USDT as a cross-border settlement tool. Domestic clients hand over RMB to the bank, which then directly pays USDT to a designated offshore address, and vice versa, achieving physical disconnection and cross-border movement of funds.
-
Money laundering via "slow top-up": As mentioned in the material, some platforms offer "top-up discounts" (e.g., paying 80 to get 100 in phone credit). Users’ legitimate funds go to money laundering intermediaries, who use matched illicit funds to recharge users. Unknowingly, users become part of the money laundering chain.
-
A USDT variant of Trade-Based Money Laundering (TBML): Criminals fabricate international trade contracts and use USDT to pay for goods, enabling cross-border fund transfers.
(4) Emerging Money Laundering Channels
-
DeFi and Cross-Chain Bridges: Using liquidity pools in decentralized finance (DeFi) protocols to rapidly swap assets; transferring USDT across different blockchain networks via cross-chain bridges to increase traceability difficulty.
-
Mixers and Privacy Coins: Using mixers to obfuscate transaction records, or converting USDT into privacy coins (e.g., Monero) to hide transaction information.
3. NFT Money Laundering: Inflating prices through self-purchasing, or transferring funds by purchasing low-value NFTs at inflated prices.
IV. Defense Strategies: Key Points in Criminal Defense for Web3 Money Laundering Cases
For practitioners accused of money laundering or related crimes via USDT, the core of criminal defense lies in breaking the prosecution’s evidentiary chain, particularly regarding subjective intent and technical evidence.
(1) Core Battlefield: Challenging "Subjective Knowledge"
Given the particularities of USDT transactions, defense strategies should focus on demonstrating the defendant’s lack of awareness of the funds’ illegal origin and that their actions align with normal OTC commercial logic.
-
Argument of Reasonable Business Conduct:
Explaining Price Fluctuations: In response to allegations of "buying high/selling low," provide evidence showing the reasonableness of supply-demand dynamics, liquidity premiums, or risk premiums for specific services (e.g., large cash transactions), refuting the prosecution’s simplistic equation of price differences to "money laundering fees."
Normalization of Transaction Patterns: Demonstrate that communication via encrypted apps and frequent transactions are industry norms in OTC, rather than deliberate attempts to evade regulation.
-
Proof of Due Diligence (KYC Defense): Present evidence that the defendant conducted reasonable KYC before transactions (e.g., requiring real-name verification, bank statements, signing a "Legitimate Source of Funds Commitment Letter"), proving they exercised due care and did not deliberately ignore red flags.
-
Technical Awareness Defense: Assess the defendant’s level of technical understanding, arguing whether they had the ability to recognize sophisticated money laundering techniques or were unable to verify fund origins due to information asymmetry.
(2) Charge Differentiation Strategy: Money Laundering vs. Concealment/AIACA
Since penalties for money laundering (Article 191) are generally heavier than those for concealment (Article 312) or AIACA (Article 287-2), distinguishing charges is critical.
-
Challenging Upstream Crime Classification: If the prosecution cannot prove the upstream crime belongs to one of the seven statutory serious crimes, or cannot prove the defendant knew the funds came from these seven types, efforts should be made to reclassify the charge as concealment.
-
Reducing Level of Intent and Role Significance: If it can be shown that the defendant only had general awareness of criminal activity and played a minor role in the entire USDT exchange chain, the charge should be reduced to AIACA or treated as an accomplice.
(3) Review and Refutation of Technical Evidence
USDT cases heavily rely on electronic evidence, particularly blockchain on-chain data analysis reports.
-
Legality and Completeness of Evidence: Examine whether the extraction and preservation of electronic data followed proper procedures and whether private keys to wallets were obtained legally.
-
Scientific Validity of On-Chain Analysis Reports: Introduce expert assistants to question the methodology (e.g., address clustering analysis, risk scoring models) and certainty of conclusions in third-party blockchain analysis reports relied upon by prosecutors. Special attention should be paid to the accuracy of tracking USDT across different chains (e.g., ERC-20, TRC-20).
-
Challenging Fund Identity and "Contamination": USDT is highly fungible. It is important to challenge the "fund contamination" theory—that after multiple transfers and commingling, whether the final recipient can still be deemed to have received the original illicit funds, and whether they could subjectively have known, constitutes a key defense point.
V. Compliance First: Risk Prevention Recommendations for Web3 Practitioners
In an era of stringent regulation, compliance is the foundation for survival for Web3 enterprises and individuals, especially those handling large volumes of USDT.
(1) Risk Prevention for Individuals and OTC Merchants ("U Merchants")
-
Avoid "money muling"; protect accounts—never rent or lend personal bank cards or USDT wallet addresses, avoiding becoming a "tool person" or "money mule."
-
Beware of abnormal transactions and "slow top-up" traps: Avoid transactions that significantly deviate from market prices. Be cautious of USDT transfer activities conducted under the guise of "slow top-ups," order brushing, or proxy payments.
-
Strict Implementation of KYC and KYT (Know Your Transaction/Token):
U merchants must conduct strict real-name verification of counterparties and require reasonable explanations of fund sources.
Establish a financial risk control model (e.g., reject non-matching name transfers).
Perform preliminary risk screening (KYT) on USDT addresses receiving funds to avoid directly accepting funds from high-risk addresses.
(2) Compliance for Web3 Projects and Virtual Asset Service Providers (VASPs)
1. Establish robust AML/CFT systems: Follow international standards (e.g., FATF recommendations) to develop anti-money laundering internal control systems commensurate with business risks.
2. Enhance the use of on-chain analysis tools: Utilize professional RegTech tools to perform real-time risk screening of counterparty addresses, identifying links to darknets, sanctioned entities, or mixers, and intercept contaminated USDT.
3. Focus on data compliance and privacy protection: When collecting customer information, strictly comply with data protection regulations. Explore privacy-enhancing technologies (PETs), such as federated learning or secure multi-party computation mentioned in FATF reports, to conduct risk analysis while protecting privacy.
4. Implement the "Travel Rule": Monitor global regulatory trends and ensure accurate transmission of sender and receiver information during virtual asset transfers.
VI. Conclusion
The Web3 world is full of innovation and opportunities, but the widespread use of USDT has also brought unprecedented money laundering risks. The Hunan USDT money laundering case once again proves that regardless of technological evolution, regulators' determination and capability to combat money laundering crimes are continuously strengthening, and on-chain data tracking technologies are becoming increasingly mature.
For participants in the Web3 space, understanding legal boundaries, establishing compliance frameworks, and steering clear of illegal financial activities are essential for sustainable development. Innovation is not a crime, but using innovation to commit crimes will surely be severely punished by law. When facing legal risks, seeking assistance from lawyers with deep expertise in criminal law and technical knowledge, and accurately grasping defense points, is key to safeguarding one’s legitimate rights and interests.
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
