In its latest International Narcotics Control Strategy Report, the United States Department of State recommends for China to continue adapting anti-money laundering regime and financial regulations to address new and developing threats like virtual currencies such as Bitcoin.

The recommendation comes despite asserting that Chinese authorities have been investigating cases involving traditional money laundering schemes and identifying new money laundering methods that include illegal fundraising activity, cross-border telecommunications fraud and corruption in the banking, securities and transportation sectors.

Recommendations

As part of what it considers China’s AML deficiencies, the report says:

“Improvements should be made addressing the rights of bona fide third parties in seizure/confiscation actions…China should enhance coordination among its financial regulators and law enforcement bodies to better investigate and prosecute offenders. China’s Ministry of Public Security should continue

ongoing efforts to develop a better understanding of how AML tools can be used, in a transparent fashion, to support the investigation and prosecution of a wide range of criminal activity. China should also continue to adapt its AML regime and financial regulations to address new and developing threats like virtual currencies, such as bitcoin, that are being used to circumvent capital controls.”

The report, which seeks to highlight the most significant steps countries and jurisdictions categorized as “Major Money Laundering Countries” have taken to improve their anti-money laundering regimes, also notes that despite China continues to make improvements to its anti-money laundering legal and regulatory framework, gradually making progress toward meeting international standards, implementation and transparency remain lacking in the context of international cooperation.

It adds: “The government should ensure all courts are aware of and uniformly implement mandatory confiscation laws. In domestic cases, once an investigation is opened, all law enforcement entities and public prosecutors are authorized to take provisional measures to seize or freeze property in question to preserve the availability of the same for later confiscation upon conviction.”

Fighting money laundering

China, through the People’s Bank of China, has made some moves to curtail the use of Bitcoin for the illegal transfer and funds from within its borders a s demonstrated in the series of onsite checks its officials conducted to top exchanges in the early days of 2017. The timeline of PBoC’s moves and their impact on Bitcoin including the exchanges and price can be found here.

The idea was to stem capital outflow and to ensure that proper measures are in place for the operation of Bitcoin exchanges to be in conformity with the laws of the country. As a result, major Chinese exchanges including BTCC, OKCoin and Huobi suspended aspects of their activities to upgrade anti-money laundry systems – the suspension of activities is still in effect.

New market

Though it is not clear what could change when the major exchanges resume their full operation, the Bitcoin attention in China seems to have shifted to the over the counter market which has made trading on the world’s largest online Bitcoin marketplace to thrive. LocalBitcoins, which claims it has been blocked in China (now being accessed probably through VPNs), has recorded a jump in the record of trades on its platform especially since the exchanges started their partial operations. From a CNY5.4 million weekly trade volume in the week ending Feb. 11, it has reached CNY60 million weekly by the end of the week ending March 4.

While it highlights corruption, narcotics and human trafficking, smuggling, economic crimes, intellectual property theft, counterfeit goods, crimes against property, and tax evasion as the primary sources of criminal proceeds in China, the report also notes other means for which criminal proceeds are laundered. They include bulk cash smuggling; trade-based money laundering; manipulating invoices for services and the shipment of goods; purchasing valuable assets such as real estate and gold; investing illicit funds in lawful sectors; gambling; and exploiting formal and underground financial systems.

On US-China Joint efforts

The report notes: “China should cooperate with international law enforcement to investigate how indigenous Chinese underground financial systems, virtual currencies, and trade-based value transfer are used for illicit outbound transfers, and to receive inbound remittances and criminal proceeds,” adding that the development of China’s financial sector has required increased enforcement efforts to keep pace with the sophistication and reach of criminal networks.

However, it highlights that U.S. law enforcement agencies have noted that China has not cooperated sufficiently on financial investigations and does not provide adequate responses to requests for financial investigation information.

“In addition, China’s inability to enforce U.S. court orders or judgments obtained as a result of non-conviction-based forfeiture actions against China-based assets remains a significant barrier to enhanced U.S.-China cooperation in asset freezing and confiscation,” the report says. “In 2015, there were 1,540 money laundering prosecutions; conviction data is not available.”