China weighs AML legislation; Hong Kong considers licensing scheme

Legislative change is in the air in China. Mainland lawmakers are considering a revised anti-money laundering (AML) law to improve monitoring and analysis of money laundering risks in fintech companies. At the same time, Hong Kong’s securities regulator is exploring new licensing requirements for over-the-counter (OTC) digital asset services.

On September 9, Wang Xiang, spokesman for China’s Legislative Affairs Commission, announced possible revisions to the country’s AML legislation, saying it is necessary to address new challenges brought about by the development of technologies.

“The rapid development of new technologies and business forms has increased the difficulty of detecting and investigating money laundering activities,” local news outlet South China Morning Post (SCMP) quoted Wang as saying.

According to the Chinese government, 1,391 people were prosecuted for money laundering in the first half of 2024.

To counter this worrying trend, the draft revision contains provisions requiring the central bank, in cooperation with the competent authorities, to develop guidelines for monitoring emerging money laundering risks.

According to Wang, financial institutions would also be required to evaluate and address the money laundering risks posed by new business models.

The proposed amendments would also refine the definition of AML to include seven types of predicate offences: underlying crimes that form the basis for money laundering, such as drug trafficking, human trafficking, corruption, fraud or terrorist financing.

China does not recognize digital assets as legal tender and largely bans trading in these assets.

Last month, China’s Supreme Court ruled that “virtual assets” are potential methods for money laundering and tax evasion:

“Virtual assets, transactions, methods of exchange of financial assets, transfer and conversion of proceeds of crime can be considered as ways to conceal the source and nature of the proceeds of crime.”

The ruling also clarified that if the amount of laundered money exceeds 5 million yuan ($704,735) and there are multiple money laundering operations, or if it results in losses of more than 2.5 million yuan ($352,368), it is considered a “serious circumstance” and therefore should be punished more severely.

The new draft revision of the AML Law will undergo a second round of review during this week’s session of the Standing Committee of the National People’s Congress (NPC).

Meanwhile, new regulations are also being worked on in Hong Kong, the only Chinese territory where digital assets are legal.

Developments in Hong Kong

Hong Kong’s Securities and Futures Commission (SFC), one of the territory’s top financial regulators, has sought input from industry participants on whether to introduce a new licensing regime for over-the-counter digital asset services, which allow investors to buy or sell without relying on public exchanges.

Under the new arrangement, the SFC will work with the Customs and Excise Department (C&ED), a government agency responsible for protecting the Hong Kong Special Administrative Region from smuggling, to oversee companies offering OTC trading services for digital assets.

According to an SCMP report, the planned regulation and licensing of OTC services would initially be the sole domain of the C&ED, under a proposal made public in February.

In addition to the proposal for a new OTC licensing regime, the SFC has been consulting with companies in recent months on the introduction of a new licensing regime for digital asset custody services.

Citing “people familiar with the matter,” the SCMP reported that discussions over both licenses are at an early stage and are subject to change.

A statement from an SFC representative said: “To promote the sustainable and responsible development of the virtual assets industry in Hong Kong, the SFC is working closely with the government and other regulators in developing a robust, clear and consistent regulatory environment in Hong Kong.”

Since January 2020, the SFC has maintained an ‘Alert List’ of entities that have come to the attention of the regulator for not being licensed in Hong Kong but targeting Hong Kong investors.

In August, the “suspicious” trading platform ICE Global Professional Station was added to the list, following the addition of seven digital asset exchanges in July, bringing the total to 42. These unlicensed digital asset exchanges are suspected of engaging in fraudulent activities and endangering investor safety.

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