The freezing of exchange accounts is mainly due to involvement in judicial cases or triggering platform risk control. The former is primarily due to regulatory enforcement agencies issuing freezing documents to exchanges for cooperation in case investigations, and exchanges merely fulfill their cooperation obligations, conducting procedural reviews of the freeze. However, the fundamental reason for risk control freezing is that users triggered various risk control rules established by the platform.

Many users with frozen accounts often post online claiming they were unjustly frozen by a certain exchange. However, the reality is that users triggered the platform's risk control measures, and exchanges executing risk control processes will require users to provide KYC materials, proof of funds, and other documents. Users question why the platform does not directly inform them of the specific reasons for the freeze.

Risk control rules are the core secrets of exchanges, concerning the security of user assets worth billions of dollars, issues related to anti-money laundering on the platform, etc. If vulnerabilities in risk control are exploited, it can easily lead to asset losses or regulatory penalties for the platform.

Anti-money laundering is a common reason for exchanges to freeze accounts, especially when users engage in non-real-name KYC transactions through OTC, with unusually high-risk on-chain deposits and withdrawals. Today, we will analyze why non-real-name KYC user accounts are prone to being frozen from the perspective of exchanges' anti-money laundering efforts.

Domestic and international regulations on anti-money laundering for virtual currencies.

Founded in 1989, the Financial Action Task Force (FATF) is an intergovernmental organization that has been committed to coordinating global efforts to combat money laundering and terrorist financing, and developing international anti-money laundering standards to ensure that countries can effectively trace illegal funds related to drug trafficking, illegal arms trading, cyber fraud, and other crimes.

In recent years, the use of virtual currencies for money laundering has become the preferred method for transnational criminal organizations. The FATF has issued several global standards related to anti-money laundering legislation involving virtual currencies from 2014 to the present.

The FATF's criteria for determining virtual assets (VA) is a digital representation of value that differs from fiat currencies and securities covered in other FATF recommendations, and can be digitally traded or transferred and used for payment or investment purposes.

Individuals or legal entities providing any of the following services are recognized by the FATF as Virtual Asset Service Providers (VASP).

1. Exchange between virtual assets and fiat currencies;

2. Exchange between one or more forms of virtual assets;

3. Transfer/movement of virtual assets;

4. Control and custody services for virtual assets;

5. Participation in and provision of financial services related to the issuance and sale of virtual assets.

Essentially, this covers exchanges, wallets, project parties, and virtual currency fiat deposit and withdrawal service providers. These entities recognized as VASP must adopt the same anti-money laundering measures as financial institutions, such as Customer Due Diligence (CDD), record-keeping, and Suspicious Transaction Reporting (STR).

Compared to traditional financial institutions, where users must conduct customer due diligence for transactions exceeding 15,000 USD or EUR, the recommended threshold for VASP to implement CDD is 1,000 USD or EUR, meaning that anti-money laundering standards for virtual currencies are stricter.

If a VASP fails to fulfill its anti-money laundering compliance obligations, it will bear administrative responsibilities such as suspension, restriction, or revocation of its entity license or registration, as well as civil and criminal liabilities. Directors and executives of the VASP will also bear personal liability.

This explains why exchanges conduct anti-money laundering risk investigations on non-real-name KYC users and associated accounts with high-risk, anomalous deposits and withdrawals, requiring detailed KYC materials and proof of asset sources. These are the anti-money laundering obligations that exchanges must fulfill.

Although mainland China comprehensively banned domestic virtual currency exchanges and project token financing behaviors after September 4, 2017, the People's Bank of China and five ministries issued a notification (hereinafter referred to as the "notification") in December 2013, clearly requiring its branches to legally include institutions that establish and provide Bitcoin registration, trading, and other services under anti-money laundering supervision, urging them to strengthen anti-money laundering monitoring.

Websites providing Bitcoin registration, trading, and other services must fulfill their anti-money laundering obligations, identify user identities, and require users to register with real names, including their names, ID card numbers, and other information. All financial institutions, payment institutions, and websites providing Bitcoin registration and trading services must immediately report any suspicious transactions related to Bitcoin and other virtual goods to China's Anti-Money Laundering Monitoring and Analysis Center and cooperate with the People's Bank of China's anti-money laundering investigation activities. If they discover clues related to the use of Bitcoin for fraud, gambling, money laundering, or other criminal activities, they should promptly report to the public security organs.

Case analysis of the legal consequences of exchanges failing to fulfill anti-money laundering obligations.

Case introduction:

Step 1: The suspect registers an exchange account using someone else's identity information.

In June 2014, suspects Huang and Xu conspired to earn rewards by helping fraudsters launder money, and met suspect Xiao. Thereafter, to implement money laundering criminal activities, suspect Huang spent 2,600.00 yuan online to purchase copies of Jiang and Lin's ID cards and a corresponding set of bank cards and phone cards. Suspect Xu registered an account on Trading Platform B using the ID copies, phone number, and bank card purchased by Huang.

Step 2: The suspect uses a proxy account to purchase Bitcoin on the exchange to transfer the fraudulently obtained funds.

After the suspect Xiao defrauded Company A of 12 million yuan using QQ, Xu provided Xiao with Jiang's Agricultural Bank card number. After 5 million yuan was transferred to Jiang's Agricultural Bank card, Xu contacted customer service of Trading Platform B through QQ under the name 'wuge' to request a recharge. The customer service provided Xu with Peng's bank card account number. Xu transferred 2 million yuan from Jiang's bank card to Peng's account in two transactions and requested a recharge to Lin's account through QQ.

Platform customer service found that the recharging party and the receiving party were not the same person and that the amount was relatively large, so they requested photos of the front and back of the ID card. The other party requested to send a copy first. The suspect Xu sent a photocopy of Lin's ID card to customer service in photo form. The customer service only verified that the photocopy matched the information registered by Lin and did not insist that 'wuge' send photos of the front and back of the ID card and a photo holding the ID card. Without further confirmation that the operator of this transaction and the registered customer were the same person, the platform customer service approved 'Jiang' to recharge 2 million yuan to 'Lin's account.

The suspect Xu used Lin's name to obtain recharge funds, then used Lin's account on Trading Platform B to purchase approximately 553.0346 Bitcoin worth about 2 million yuan in 34 transactions. While buying Bitcoin, the suspect Xu simultaneously operated this account to withdraw funds. He withdrew all 553.0346 Bitcoin in four transactions and transferred them to the Bitcoin wallet registered under the suspect Xu's name. Later, the Bitcoin was sold at an underground bank in Macau. The cash obtained was squandered by the two suspects and used to pay off debts, and it has become impossible to recover. The police have recovered 1,568,923.00 yuan that cannot be reclaimed. Subsequently, Company A sued Trading Platform B and the payment account holder Peng in court for compensation for property losses.

The second-instance court found that after suspect Xiao fraudulently obtained 12 million yuan from Company A using QQ, suspects Huang and Xu used Trading Platform B to purchase Bitcoin to transfer the proceeds of crime. Therefore, Trading Platform B is not at fault for the funds lost by Company A. However, Trading Platform B failed to effectively fulfill its legal anti-money laundering obligations, such as client identity verification and suspicious transaction reporting, as stipulated in the notification regarding the prevention of Bitcoin risks, namely, it did not verify Lin's identity before allowing account recharges and ignored the abnormal transaction situation of Lin's account.

Therefore, the illegal activities of Trading Platform B objectively provided favorable conditions for criminal behavior. Its indifferent attitude somewhat facilitated the criminals in transferring the proceeds of crime, leading to the victims' funds being squandered and irretrievable. In this regard, Le Kuda Company bears fault and should bear 40% of the compensation responsibility for the losses that Company A cannot recover.

Legal analysis:

This case belongs to the early period when exchanges provided virtual currency trading services domestically. The platform failed to conduct risk control reviews of abnormal transactions for non-real-name user information registration as required, which constituted a fault and ultimately led to suspects using the exchange to purchase Bitcoin for money laundering, causing the defrauded company to be unable to recover part of its losses. At that time, the suspects not only used B to purchase BTC to transfer the proceeds of fraud but also used BTC for money laundering simultaneously across multiple exchanges, indicating that the anti-money laundering risk control measures of virtual currency exchanges at that time were far less strict than they are now, giving criminal groups considerable operational space.

Additionally, last year a leading exchange was fined heavily by the United States for failing to implement effective anti-money laundering measures, which allowed terrorist organizations such as Hamas and Al-Qaeda, as well as fraud and dark web criminal organizations, to launder money using virtual currencies, violating U.S. anti-money laundering and sanctions regulations. The CEO was sentenced to four months in prison.

These cases show that regulatory requirements for anti-money laundering at virtual currency exchanges have been increasing year by year. To fulfill their anti-money laundering obligations and cooperate with regulatory authorities in combating money laundering crimes involving virtual currencies, exchanges have established a comprehensive set of strict on-chain and off-chain risk control rules over the years.

Therefore, virtual currency investors must strictly adhere to platform regulations when registering and using exchanges. If their accounts are frozen due to risk control measures, they should truthfully submit the required proof materials and cooperate with the platform to end the investigation and unfreeze the accounts as soon as possible.