On November 21, 2023, the Commodity Futures Trading Commission (CFTC), the Department of Treasury’s Finance Crimes Enforcement Network (FinCEN), its Office of Foreign Assets Control (OFAC), and the Department of Justice (DOJ) all settled charges against Binance, the world’s largest cryptocurrency exchange, and its Chief Operating Officer, Changpeng Zhao (CZ). The settlement concerned a variety of charges brought against the company between 2017 and 2023.
The following editorial was written by guest authors Wyatt Noble and Michael Handelsman for Kelman.Law
As part of a $4.3 billion settlement, CZ stepped down and pled guilty to violating US anti-money laundering (AML) laws. Prosecutors described the settlement as one of the largest corporate penalties in US history and CZ himself will pay $50 million.
WHAT BINANCE AND CZ DID WRONG ACCORDING TO EACH AGENCY:
CFTC Settlement
Binance broke AML laws when it failed to report more than 100,000 suspicious transactions with terrorist groups such as Hamas, al Qaeda, and the Islamic State of Iraq and Syria. Additionally, Binance never reported transactions with websites that sell child sexual abuse materials. Further, authorities say Binance was one of the largest recipients of ransomware proceeds. Beyond mere non-compliance, authorities claim that Binance also feigned compliance with relevant laws.
The CFTC asserted that between 2017 and 2023, Binance, among other things, illegally offered and executed commodity derivatives transactions to and for US customers and accepted funds from them without requiring identity verification before trading on the platform. Further, the CFTC asserted that Binance implemented a business strategy of willful noncompliance with the Commodities Exchange Act (CEA).
As part of this business strategy, Binance took steps to retain US customers while knowing that offering commodity derivatives to US customers subjected them to the CEA and CFTC regulations. Additionally, the CFTC charged Binance and CZ with violation of CFTC Regulation 1.6, which prohibits activities conducted outside the US to willfully evade or attempt to evade the CEA, by intentionally sabotaging and subverting the platform’s superficial compliance controls, including controls designed to restrict the participation of US persons.
Under the CFTC’s proposed consent order: Binance will be disgorged of $1.35 billion of ill-gotten gains and pay a $1.35 billion civil monetary penalty to the CFTC; CZ will pay a $150 million civil penalty to the CFTC; and Binance and CZ are enjoined from willfully evading the CEA, acting as an unregistered FCM, operating an illegal digital asset derivatives exchange, and failing to have adequate KYC compliance controls, among other activities.
FinCEN Settlement
FinCEN’s settlement with Binance resulted in a $3.4 billion civil penalty, largely as a result of Binance’s violations of the Bank Secrecy Act (BSA). Between 2017 and 2023 FinCEN asserts that Binance failed to register as a money services business (MSB) and lacked an effective AML compliance program. The consent order directs Binance to hire an independent compliance monitor, stop serving US customers, conduct a suspicious activity report (SAR) lookback review, and undergo an AML program review. Additionally, $150 million of the $3.4 billion civil penalty is suspended pending Binance’s fulfillment of these requirements.
OFAC Settlement
Binance also settled with OFAC and in so doing acknowledged its violation of sanctions prohibitions. Binance’s violations involved facilitating virtual currency trades between people in the US and people in sanctioned jurisdictions such as Iran, Syria, North Korea, the Crimea Region of Ukraine, Cuba, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic.
In a press release, OFAC detailed that Binance deliberately subverted its sanctions compliance controls by directing users to virtual private networks (VPNs), enabling users to bypass geofencing controls. Further, OFAC contends that Binance knowingly allowed trades between people in the US and sanctioned jurisdictions even though it understood the risks.
Under the OFAC settlement agreement, Binance is set to pay a civil penalty of $968,618,825, has implemented a sanctions compliance program, and will maintain sanctions compliance measures designed to minimize the risk of similar conduct for at least five years following the settlement’s execution.
DOJ Plea Agreement
In a plea agreement with the DOJ, Binance and CZ pled guilty and agreed to pay more than $4 billion to settle the DOJ’s investigation. The charges included violations of the BSA for not implementing an AML program reasonably designed to prevent the Binance platform from being used to facilitate money laundering, failure to register as a money transmitting business, and breaches of the International Emergency Economic Powers Act (IEEPA). Additionally, CZ himself pled guilty to failing to maintain an effective AML program under the BSA.
According to a DOJ press release, Binance agreed to: forfeit $2,510,650,588, pay a criminal fine of $1,805,475,571, retain an independent compliance monitor for three years, and enhance its AML and sanctions compliance programs.
WHAT HAPPENS TO CZ NOW?
On November 27, US District Judge Richard Jones in Seattle said CZ must stay in the US for now, until Judge Jones considers whether he should remain through his sentencing hearing in February, or if he should be allowed to return to the United Arab Emirates, where he is a citizen. In the wake of these settlements, some people speculated that he may flee to the UAE. This would prove problematic for US prosecutors because the US and UAE do not have an extradition treaty. However, CZ appears prepared to face the music and candidly posted on X (formerly Twitter) that he “made mistakes,” and “must take responsibility.” CZ faces a maximum prison sentence of 18 months and has agreed not to appeal any sentence up to that length. Despite all these charges, CZ will retain his majority stake in Binance.
WHERE’S THE SEC?
The Securities Exchange Commission (SEC) was notably absent from the DOJ’s press conference that broke the news on November 21. However, that’s not necessarily good news, as these settlements and plea deals won’t affect the SEC case against Binance.
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Source: Bitcoin
