There is an interesting case in the UK where a woman, Wen Jian, is accused of helping an alleged Chinese fraudster, Qian Zhimin, laundering the proceeds of a $6.3B fraud scheme using Bitcoin. Qian is accused of defrauding nearly 130,000 investors in China with fraudulent wealth management schemes. Qian converted the scheme’s proceeds into Bitcoin in China and fled to the UK under a fake identity. While in the UK, Qian is accused of using Wen Jian as a front to convert Bitcoin into cash, property, jewelry, and other high-value items. Wen is not charged with participating in the fraud; the question is whether she knew or suspected the bitcoin was the proceeds of a crime.
This case highlights one of the challenges in working with crypto assets. Suppose an individual approaches a crypto asset service provider, such as an exchange, hedge fund, or custodian, with a false identity and a wallet address with existing crypto assets. How can the service provider validate the provenance of the crypto? If the wallet is not previously associated with fraudulent behavior and the fake identity can pass the CDD process, the provider may accept tainted assets into their ecosystem.
Clients who enter the system with pre-existing crypto assets need additional scrutiny because the providers don’t have the layer of protection provided by the banking system, which admittedly has many of its challenges that would have already conducted some level of CDD on the individual or business before accepting the funds.
Crypto asset service providers need sophisticated capabilities to validate entities and wallets to protect them from bad actors looking to exploit the features of the ecosystem to launder criminal proceeds.
