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Forensics & Investigation
Cryptocurrency / Dark Web / Deep Web

China, Crackdown on Cryptocurrency Crime

Updated: Apr 29, 2020

The amount of chemicals and additional ingredients to produce drugs exported from China to the United States is expanding. At the same time, U.S. law enforcement officials notice a significant increase in cryptocurrency channels in China are being used by transnational organized crime groups and Mexican drug cartels to launder money. The U.S. Drug Enforcement Agency (DEA) and the U.S. Department of Homeland Security (DHS) observed Asian money brokers being used to facilitating money laundering activities in the purchase of goods to manufacture drugs for street sales. One of the primary money laundering channels is the Chinese Underground Banking Systems (CUBS). CUBS is using cryptocurrency as a tool to launder money for drug traffickers and help Chinese nationals more substantial amounts of money outside of the country, exceeding the $50,000 annual amount allowable in the United States. To get around traceability and detection, cryptocurrency transactions are conducted through Chinese brokers. They rely on foreign exchanges that are known to have laced Know-Your-Customer (KYC) and Anti-Money Laundering (AML) policies. However, with few exceptions such as cryptocurrencies Monero and Zcash that claim to offer greater anonymity, cryptocurrency transactions are transparent and publicly viewable and traceable on the respective public ledger called the blockchain. Investigators specially trained on cryptocurrency tracing can analyze the blockchain, discovery patterns, or clusters, of transactions, and ultimately trace transactions to criminal acts and real identities. Law enforcement in China has been able to crack down on money laundering and other criminal acts using cryptocurrency. In 2017 China explicitly banned any financing or exchange activities between fiat money and “coin substitution.” China is working on substituting the cryptocurrency market with state-led projects and crypto fiats, a cryptocurrency that the Chinese government declares to be legal tender. The Chinese government is also working to reduce money laundering risks associated with bitcoin and is increasing oversight of cryptocurrency-related websites. China’s largest micro lobbying service Weibo banned Binance and Tron, leading cryptocurrency exchanges, from its platform. Beijing’s regulator put out a warning against illegal exchange operations. In recent months, at least five transactions in China have ceased operations or stopped servicing local users. The Shanghai headquarters of the People’s Bank of China (PBoC) also announced that it will crack down on cryptocurrency exchanges and “adopt monitoring measures such as interviews, inspections, and bans on the monitored entities involved in virtual currency activities to resolve related risks promptly.” Finally, the city of Shenzhen is also launching investigations into 39 cryptocurrency exchanges to unearth illegal activities using cryptocurrency. China’s central bank is planning to launch its own digital currency in the next 12 to 18 months to crack down on criminal activities using cryptocurrency, to maintain control, and to be seen as leaders in adopting blockchain. Such a move is, perhaps, a signal to the United States to do the same if they want to crack down on crimes that leverage the ease of use and anonymity of cryptocurrencies such as money laundering, drug trafficking, and other illegal activities.

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