Reading the allegations from the US Department of Justice, what lies ahead for Binance?

Analyzing the US Department of Justice's Allegations What's Next for Binance?

The multi-billion dollar fine is a wake-up call to the Crypto industry by the US government.

Compiled & written by: Karen, Foresight News

The regulatory storm has hit the world’s largest exchange, Binance, and its founder, Changpeng Zhao. Changpeng Zhao announced his resignation as CEO of Binance in the early hours of today, with Richard Teng, former Global Regional Market Head at Binance, taking over as CEO.

As Deputy Attorney General Lisa O. Monaco puts it, putting profits above compliance is not the path to riches, but rather the path to federal prosecution.

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The 32-page federal complaint against Binance and Changpeng Zhao includes charges related to money laundering, conducting unlicensed money transmission business, and violating sanctions. This includes extensive allegations against Binance for targeting US customers under the instruction of Changpeng Zhao, while failing to comply with US anti-money laundering and know-your-customer laws, and providing services to sanctioned countries such as Iran.

In fact, according to legal documents filed in the US District Court for the Western District of Washington in Seattle, on November 14, the defendants (Binance, Changpeng Zhao) entered into a plea agreement with the US and kept it confidential. A guilty plea hearing for Changpeng Zhao was held first, followed by a guilty plea hearing for Binance.

Under the plea agreement for Changpeng Zhao, he has agreed to pay a $50 million fine and has also agreed not to speak out directly or through present or future lawyers, agents or other representatives. According to CoinDesk, Binance founder and former CEO Changpeng Zhao has been released on a $175 million personal recognizance bond, and a sentencing hearing is scheduled for February 23, 2024 at 9:00 AM Pacific Time (February 24, 2024 at 1:00 AM Beijing Time). Bloomberg reports that Changpeng Zhao faces a maximum of 10 years in prison, but according to the plea agreement, the expected sentence will not exceed 18 months. The US Department of Justice has not yet decided how long his imprisonment will be.

Under the plea agreement for Binance, the defendant has accepted Changpeng Zhao’s resignation and prohibited him from participating in the operation or management of Binance now or in the future. This prohibition takes effect from the date of the guilty plea. As part of the plea agreement, Binance has also agreed to retain an independent compliance monitor for three years and to correct and enhance its anti-money laundering and sanctions compliance program. After the term of the plea agreement expires, the CEO and Chief Compliance Officer of Binance will certify that Binance has fulfilled its disclosure obligations and compliance commitments under the plea agreement.

What are the charges by the Department of Justice?

On the early morning of November 22nd, Beijing time, US Attorney General Merrick B. Garland personally delivered a speech on the resolution action, announcing that Binance and Changpeng Zhao have pleaded guilty to federal charges in a $4 billion resolution.

Binance admitted to involvement in money laundering, unauthorized fund transfers, and violations of sanctions measures. They agreed to admit to charges of willful violation of the Bank Secrecy Act, willful failure to register as a money transmitter, and willful violation of the International Emergency Economic Powers Act.

Changpeng Zhao also admitted to failing to maintain an effective anti-money laundering (AML) program, violating the Bank Secrecy Act, and resigned from his position as CEO of Binance. As part of the plea agreement, Binance agreed to forfeit $2,510,650,588 and pay a criminal fine of $1,805,475,575, making the total penalty $4,316,126,163.

The criminal fine was reduced by 20% due to Binance’s cooperation. The forfeited amount comes from over $1.6 billion in fees collected from US users (to be paid within 6 months of Binance’s sentencing) and the admitted transaction amount of $898,618,825 (to be paid within 30 days of Binance’s sentencing). The latter portion of the fees represents transactions intentionally facilitated by Binance, totaling over $898 million, between US users and residents of Iran.

The Department of Justice believes that Binance’s guilty plea is part of a coordinated resolution with the Financial Crimes Enforcement Network (FinCEN), Office of Foreign Assets Control (OFAC), and the Commodity Futures Trading Commission (CFTC).

The Department of Justice has filed serious charges of willful violation of the Bank Secrecy Act against Changpeng Zhao, as well as violations of federal laws related to anti-money laundering and terrorism financing by financial institutions.

The Department of Justice believes that since August 2017, when Changpeng Zhao founded Binance, he and other Binance executives have deliberately profited from the US market without implementing the requirements of US law. Changpeng Zhao and Binance have attracted and built a large customer base in the United States.

The Department of Justice pointed out that after nearly two years of Binance’s establishment, Changpeng Zhao informed senior management that the US market accounted for 20% to 30% of the company’s potential revenue. Providing services to these US customers meant that Binance was a US financial institution. US financial institutions must comply with US laws. Changpeng Zhao and other senior management of Binance understood this. They knew that US law required the company to register with the Treasury Department as a money services business, and they knew that US law required them to implement effective anti-money laundering programs, but they did not do so. Instead, they believed that complying with US laws would stifle their efforts to increase Binance’s profits, market share, and trading volume, and facilitate billions of dollars in unregulated cryptocurrency transactions. Binance also intentionally facilitated transactions worth hundreds of millions of dollars between US users and users subject to US sanctions. Criminals around the world have used Binance to transfer stolen funds and other ill-gotten gains. Binance put profits above the safety of the American people.

Binance employees also knew and discussed that the company was serving thousands of users from sanctioned countries. They knew that facilitating transactions between US users and users from sanctioned countries would violate US law, but they still did it. Binance facilitated nearly $900 million in transactions between US and Iranian users, and also facilitated millions of dollars in transactions between US users and users from Syria, and the regions of Crimea, Donetsk, and Luhansk occupied by Russia.

Binance made it clear that they not only failed to comply with federal law, but also pretended to comply. In June 2019, Binance publicly announced that it would block US users from accessing Binance.com and launched a separate US exchange, Binance.US. However, at the same time, Binance continued to allow some of its most important and high-traffic US VIP users to remain on the unregistered Binance.com exchange. For example, Binance executives, including Changpeng Zhao, devised a plan to contact VIP customers and help them register a new account with an offshore entity and transfer their holdings to that account. Binance employees also called US VIP customers and encouraged them to provide information indicating that they were not in the US.

The Department of Justice also accuses Binance of failing to implement the core components of an effective anti-money laundering program, namely, Binance did not implement a comprehensive KYC protocol or systematically monitor transactions, nor did it submit suspicious activity reports (SARs) to FinCEN. In August 2021, Binance started requiring all users to provide KYC information, but allowed users who did not provide KYC to continue trading on the exchange until May 2022. From August 2017 to October 2022, US users, including VIPs, conducted trillions of dollars’ worth of transactions on Binance, generating over $1.6 billion in profits for Binance.

More than a year after publicly announcing the blocking of US users, the company’s internal monthly reports attributed 16% of its registered user base to the US. In the next monthly report, Binance removed the US label and reclassified US users as “UNKWN” (abbreviation for unknown). In October 2020, users marked as “UNKWN” accounted for approximately 17% of Binance’s registered user base.

What lies ahead for Binance?

Although Binance did not disclose its misconduct in a timely and voluntary manner, it received some praise for cooperating with the Department of Justice’s investigation and has taken steps to correct its compliance program. Therefore, the total amount of criminal penalties was reduced by 20% from the lower end of the applicable US sentencing guidelines’ fine range.

As part of today’s resolution, the US Department of Justice also imposed supervision and reporting requirements on Binance. Binance must submit suspicious activity reports as required by law, review historical transactions, and report suspicious activities to federal authorities. The Department of Justice stated that this will advance its criminal investigations into malicious cyber activities and terrorist financing activities, including the use of cryptocurrency exchanges to support organizations such as Hamas.

As part of the plea agreement, Binance also agreed to retain an independent compliance monitor for three years and to correct and strengthen its anti-money laundering and sanctions compliance program.

In addition, the U.S. Department of the Treasury stated in its settlement announcement with Binance that the Financial Crimes Enforcement Network (FinCEN), in addition to imposing a $3.4 billion civil penalty on Binance, will also implement a five-year regulatory action and require significant compliance commitments, including ensuring Binance’s complete withdrawal from the United States.

Binance’s newly appointed CEO, Richard Teng, also outlined three key focuses for future work:

1. Ensuring that users can have confidence in the company’s financial strength, security, and safeguards;

2. Collaborating with regulatory agencies to maintain high standards globally, promote innovation, and provide critical consumer protection;

3. Collaborating with partners to drive the growth and adoption of Web3.

Binance also issued a statement acknowledging responsibility for past criminal compliance violations and stating that this resolution allows the company to embark on a challenging but transformative chapter of learning and growth. Binance clarified that it has always firmly upheld the core values of user safety and that in the resolution with U.S. authorities, they did not accuse Binance of misappropriating any user funds or engaging in any market manipulation. Binance can continue to operate on behalf of its users not only for the next five years but also for the next fifty years or longer. Zhao Changpeng remains a major shareholder of Binance. Positioning for the next fifty years means striving to establish industry-leading standards to address these challenges, including areas of compliance, security, collaboration with law enforcement, and user transparency. Binance is now stronger than ever.

What message does the hefty fine convey?

Deputy Attorney General Lisa O. Monaco stated that today’s charges and guilty plea, along with the over $4 billion in fines, send a clear message to cryptocurrency and DeFi companies: if you serve U.S. customers, you must comply with U.S. law.

Assistant Attorney General Matthew G. Olsen of the Department of Justice’s National Security Division (NSD) also stated that this prosecution serves as a warning that companies that do not incorporate sanctions compliance into their services will face serious criminal penalties, and their senior executives will also face serious criminal penalties.

Jim Lee, Director of the Criminal Investigation Division of the Internal Revenue Service, stated that when you prioritize growth over compliance, you will eventually find yourself in trouble.

We have reason to believe that the over $4 billion hefty fine is a deterrent by the U.S. government against the crypto industry. This measure, which uses deterrence to promote regulation and punishment to promote compliance, is expected to drive the industry towards a more institutionalized and compliant direction. However, the cost of such development on the path forward is painful.

References:

https://blocking.net/celestia-ceo-five-core-value-propositions-of-celestia-social-layer.html

https://storage.courtlistener.com/recap/gov.uscourts.wawd.328551/gov.uscourts.wawd.328551.9.0.pdf

https://www.docdroid.net/qD0yX5c/binance-usa-pdf

https://www.justice.gov/live

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