New court rulings help quantify the scale of Tether-based money laundering in China

China’s efforts to “cleanse” the internet of illegal money-making schemes are shedding light on the extent to which Tether’s dollar-pegged stablecoin is being used to launder money via over-the-counter (OTC) merchants at popular crypto exchanges.

Since November, at least 91 people have been convicted of knowingly laundering illegal proceeds using crypto OTC trading desks. The cases involved at least $30 million worth of Tether (USDT), according to recently published Chinese court rulings.

The Block reported in November that Chinese courts had convicted over 100 people in 33 criminal cases that were generally related to various frauds that involved cryptocurrencies. But just 17 of those individuals were convicted of “concealing and hiding criminal proceeds” by knowingly facilitating the laundering of illegal proceeds via USDT.

The majority of those cases involved crypto indirectly; the convictions were for other crimes including Ponzi schemes, different kinds of investment scams and telecommunications fraud.

Since then, 91 additional individuals have been sentenced to serve behind bars for the explicit crime of knowingly “concealing and hiding criminal proceeds” using USDT, according to 29 rulings published by local courts in 12 Chinese provinces. 

Not every ruling includes the specific amount of money that was laundered. But based on The Block’s analysis of those that did elaborate, the total value in question is at least $30 million. The amount helps quantify the extent to which crypto money laundering has contaminated the pool of yuan circulating among Chinese crypto OTC merchants — and the risk that innocent traders might get ensnared in law enforcement’s broad effort to crack down on internet crime. 

Recently, Chinese law enforcement has been ramping up its so-called “internet cleansing movement” aimed at eliminating online criminal activities. As part of that effort, law enforcement officials have intensified their scrutiny of crypto OTC desks.

That’s sparked fear among OTC merchants and users that they might unwittingly receive yuan tainted by money laundering and then have their bank accounts frozen.

This is due to the role that OTC desks play in China's crypto market. Since 2017, when the People’s Bank of China began prohibiting crypto exchanges from offering fiat-to-crypto trading pairs, Chinese users have not been allowed to deposit yuan in the exchanges’ custodian bank accounts. That means they have to go through OTC merchants to purchase crypto, using yuan. When they need to cash out, they have to return to an OTC desk to exchange their crypto for yuan.

Based on the information in the recent rulings, convicts in these new cases were typically approached by criminal ringleaders of fraud schemes such as crypto Ponzi schemes and cross-border gambling operations. 

The process then typically unfolds as follows: First, they provide their bank or AliPay accounts to these ringleaders in order to receive illegal proceeds in Chinese yuan in return. Then, they buy equivalent amounts in USDT from OTC merchants on Huobi or OKEx, the two most widely used crypto exchanges by China-based users.

In 22 of the new rulings, the courts specified that the convicts bought USDT from OTC merchants on Huobi, whereas OKEx was mentioned in only 6 rulings. 

After that, they typically either transfer the USDT directly to the masterminds’ designated crypto wallets or resell the USDT through OTC desks again to receive clean yuan, and then wire the money back. By doing that, they usually got a percentage cut of the transactions.

Local courts sided with prosecutors' argument that since these individuals made profits by helping move large amounts of money around, they must have been aware that they were complicit in money laundering schemes. 

The OTC merchants who sell USDT to these convicts receive contaminated Chinese yuan in return — hence the risk that they might then transfer the money to other innocent Chinese traders who were simply looking to cash out of their Tether positions. Unsurprisingly, this has had a chilling effect on the whole OTC crypto market in China.