Hong Kong Crypto Assets Money Laundering Case Exposed: Southeast Asian Fraud Industry Infiltration and Regulatory Response

As an international financial center, Hong Kong's Crypto Assets economy has been thriving even before the official policies were introduced. Offline stores and virtual asset over-the-counter trading service providers (VAOTC) in the form of online groups, along with native and overseas virtual asset trading platforms, collectively provide investors with token exchange and deposit/withdrawal services, creating a unique market landscape.

However, the high anonymity and borderless nature of virtual assets under blockchain technology also facilitate illegal activities. A large number of crime-related Crypto Assets, especially stablecoins, have quietly entered the Hong Kong crypto ecosystem, bringing challenges such as financial contamination and legal and compliance risks to operators and ordinary investors.

Recently, the experience of a university student from mainland China helping someone to purchase USDT in Hong Kong has attracted attention. The student initially thought that trading virtual currencies in Hong Kong was legal, but later found that his bank card, WeChat, and Alipay were all frozen by the mainland police. It turned out that he accepted commissions on the Xianyu platform to help others buy "U" and receive a reward. The specific process was that the other party transferred RMB to his bank card in mainland China, he exchanged for Hong Kong dollars in cash in Hong Kong, then went to a Crypto Assets exchange to buy USDT, and transferred the virtual currency to a designated wallet address.

However, shortly after the transaction, the police informed him that he was suspected of fraud. In fact, this is a typical "card connection back to U" style of Money Laundering, closely related to organized crime networks in Southeast Asia.

Through on-chain data analysis, it was found that college students purchased 2396 USDT from designated exchange stores, and these funds subsequently flowed into addresses associated with certain guarantee platforms operating in Southeast Asia. These guarantee platforms have long provided services to organized crime industries in Southeast Asia, including illegal online gambling, black and gray industry activities, Money Laundering, fraud, and more.

This incident reveals the malicious actions of Southeast Asian fraud groups using Hong Kong Crypto Assets exchange shops for Money Laundering. The method is a common "card back to U" technique, where money launderers collect fiat currency proceeds from fraud victims, quickly exchange them for USDT in the over-the-counter trading market, then transfer them back to the blockchain address of the fraudsters and earn a commission from it.

Further investigation revealed that this Money Laundering incident is not an isolated case, but rather the tip of the iceberg of a highly industrialized large-scale Money Laundering gang. In less than three months, this one Money Laundering fleet has illegally cleaned over 310,000 US dollars in Hong Kong using the same methods. Considering the possibility of other undetected gangs, the actual scale of this type of industrialized Money Laundering activity illegally utilizing Hong Kong VAOTC could be even more enormous.

Currently, the Hong Kong Virtual Asset Over-the-Counter (VAOTC) industry is still in a stage of inadequate regulation, and many platforms have become important channels for fraud and Money Laundering due to the lack of effective compliance mechanisms. The Hong Kong Financial Services and the Treasury Bureau (FSTB) released a legislative consultation document regarding Over-the-Counter (OTC) services for virtual assets in February 2024, proposing to establish a licensing management system for OTC merchants through the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) to ensure that these companies meet compliance requirements such as Anti-Money Laundering (AML) and Know Your Customer (KYC).

With Hong Kong's impending regulatory policies for over-the-counter (OTC) trading of virtual assets, OTC service providers are facing unprecedented compliance pressures. VAOTC operators urgently need to systematically sort out customer due diligence (KYC) processes and money source review mechanisms (AML), thoroughly investigating potential illegal fund risks in their operations.

In order to actively respond to the upcoming OTC license system, industry participants should proactively understand the relevant compliance requirements, establish a sound internal risk control system, strengthen communication with regulatory agencies and industry self-regulatory organizations, and enhance transaction monitoring through technological means to promptly identify suspicious activities. At the same time, platforms should strictly refuse any association with funds suspected of involvement in black and gray markets, cutting off the possibility of illegal funds being laundered through OTC channels.

Overall, the upcoming OTC compliance policy in Hong Kong provides an important opportunity for the standardized development of the virtual asset over-the-counter trading industry. Operators within the industry should actively adapt to changes in the regulatory environment, continuously enhance their compliance levels, and thereby strengthen their competitiveness to achieve long-term stable growth in the thriving crypto economy market of Hong Kong.