Binance, the world’s largest crypto exchange, “miscalculated the cost of its corporate strategy of regulatory evasion”, US regulators have said, after the company agreed to pay a US$4.3 billion fine and accepted the first-ever monitorship for a crypto company.
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The US Department of Justice (DOJ), the Commodity Futures Trading Commission (CFTC), plus the US Treasury Department’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN), announced the coordinated settlements with Binance on 21 November.
As part of the settlement, one of the largest-ever levelled by US regulators, Binance pleaded guilty to federal criminal charges filed by the DOJ earlier this month, while its CEO Changpeng Zhao pleaded guilty to failing to maintain adequate anti-money laundering controls.
Zhao has now resigned as the company’s CEO – although he remains its majority shareholder – and has been succeeded by its global head of regional markets Richard Teng, formerly CEO of the Abu Dhabi Global Market’s Financial Services Regulatory Authority.
The orders total US$4.3 billion in fines against the company – including a criminal fine of US$1.8 billion and a US$2.5 billion forfeiture – and a further US$150 million against Zhao. The company also agreed to accept a five-year compliance monitorship from FinCEN – a first for a crypto company – and a three-year one from the DOJ.
In a first for the CFTC, the regulator also held the company’s chief compliance officer (CCO) Samuel Lim individually liable, fining him US$1.5 million in a separate consent order.
The DOJ said Binance received partial credit for taking steps to remediate its compliance programme and for cooperating with its investigation, even though it did not make a timely and voluntary disclosure of wrongdoing. It said the credit was only partial because Binance delayed producing relevant evidence, including recordings in which it said the company’s executives discussed US legal requirements.
Allegations
The DOJ said Binance had admitted to prioritising “growth and profits” over compliance with US law, including obligations to implement anti-money laundering controls and procedures, and to prevent transactions between US customers and those in sanctioned jurisdictions.
Although Binance promised to block US customers and instead launch a separate US exchange in 2019, the DOJ said Binance sought to keep hold of a “substantial number” of its US customers, with a particular focus on retaining valuable “VIP” customers.
Those customers helped provide the liquidity necessary to facilitate digital asset trading, the DOJ added.
It also alleged that Binance did not implement the necessary components for an effective AML programme, including comprehensive know-your-customer (KYC) protocols or processes to systematically monitor transactions.
It also said the company had never filed a suspicious activity report (SAR) with FinCEN, and until 2021 allowed users to open accounts and trade without submitting identifying information beyond an email address.
The DOJ quoted one of Binance’s employees saying, “we need a banner ‘is washing drug money too hard these days – come to Binance we got cake for you’.”
It said illicit actors used the exchange to obscure the source and ownership of cryptoassets, transfer illicit proceeds from ransomware, and move proceeds of darknet market transactions.
It said the company also “wilfully caused” over US$898 million in trades between users in the US and Iran, a US-sanctioned jurisdiction.
CFTC settlement
In Binance’s consent order with the CFTC, it agreed to disgorge US$1.35 billion of what the regulator termed “ill-gotten gains” – the approximate amount of trading fees the company is alleged to have collected from US customers, according to CFTC chairman Rostin Behnam.
It will also pay another US$1.35 billion as a monetary penalty. Zhao personally will also have to pay a US$150 million fine to the CFTC.
The CFTC order also permanently enjoins Zhao and Binance from wilfully evading the Commodity Exchange Act (CEA), acting as unregistered futures commodities merchants, operating an illegal digital asset derivatives exchange, and failing to have adequate KYC compliance controls.
To certify its compliance controls, Binance is required to certify that it will not allow “sub-accounts”.
Behnam said Binance’s activities “undermined the foundation of safe and sound financial markets by intentionally avoiding basic, fundamental obligations that apply to exchanges”.
Caroline Pham, a Republican CFTC commissioner, noted that the Binance settlements were notable as the first-ever charge of evasion under CFTC Rule 1.6(a), which concerns swaps activities outside the United States. “Today’s proposed resolution of the CFTC’s action against Zhao and his company makes clear that Binance miscalculated the cost of its corporate strategy of regulatory evasion,” said the CFTC’s director of enforcement Ian McGinley.
“Binance’s chief compliance officer’s remark, that Binance’s solicitation of US persons would implicate a chain of events including ‘CFTC = civil case = pay a fine and settle’, was a poor business decision,” McGinley added.
“Chief compliance officers should take note”
A separate CFTC consent order against Lim, Binance’s CCO, states that he aided and abetted the company’s alleged CEA violations, including illegally offering and executing commodity derivatives transactions to and for US customers, and accepting funds from them.
The order states that Lim “aided and abetted Binance’s many supervisory failures”, including the company’s alleged use of apps that automatically deleted communications about illegal conduct.
“We take seriously the role corporate gatekeepers play in maintaining integrity in the markets we regulate, including digital asset markets,” McGinley said.
“Chief compliance officers should take note of today’s proposed order: if your compliance programme is merely ‘for show’ and is intentionally ineffective, the CFTC will hold you accountable for facilitating illegal conduct.”
Pham noted that, while the SEC has imposed individual liability on CCOs in the past, the CFTC had never before pursued individual liability against a CCO to the same extent as it had against Lim.
“These charges emphasise the critical necessity of having a robust compliance programme that is adequately resourced with personnel that have the requisite character, expertise and experience,” Pham said.
“I support sending this strong message to the crypto asset sector, which has all too often demonstrated material weakness in both their compliance programmes and their risk management programmes.”
In a statement posted to its blog, Binance said the settlements “acknowledge our company’s responsibility for historical, criminal compliance violations, and allow our company to turn the page on a challenging yet transformative chapter of learning and growth”.
It acknowledged that when it launched the company “did not have the compliance controls adequate for the company that it was quickly becoming, and it should have”, and said it had worked over two years to restructure its organisation and personnel and upgrade its systems.
Binance’s statement also highlighted that the DOJ and regulators had not accused it of misappropriating funds or engaging in market manipulation.
Zhao tweeted that “it was not easy to let go emotionally” of Binance. “I made mistakes, and I must take responsibility. This is best for our community, for Binance, and for myself.”
Sentencing for Zhao is scheduled to take place on 23 February 2024.