Former SEC official: Why is the US Department of Justice reportedly filing criminal charges against Binance?

Why is the US Department of Justice reportedly charging Binance?

Author: John Reed Stark, former chief of the SEC’s internet enforcement division; translation by Blocking0xxz

Having worked at the SEC’s enforcement division for nearly 20 years and managed many joint prosecutions by the SEC and the Department of Justice, I can say with confidence that a series of indicators show that the US Department of Justice will file or has already filed criminal charges related to Binance.

Money laundering involves disguising financial assets so they can be used without detection for illegal activities that generated them. To me, the CFTC and SEC lawsuits against Binance read more like criminal indictments, rife with charges of fraud, deception, obstruction of justice, and money laundering.

CFTC’s Lawsuit

The US CFTC has filed a 76-page lawsuit against Binance, with charges against Zhao Changpeng and three entities that operate the Binance platform for multiple violations of CFTC regulations. The lawsuit also accuses Binance’s former chief compliance officer, Samuel Lim, of aiding and abetting Binance’s non-compliant behavior.

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Evidence provided by the CFTC indicates that Lim knew that some Binance customers “were here to do crime.” The CFTC alleges that Lim assured regulators of Binance’s compliance practices, but later admitted in internal messages to colleagues that it was a ruse. The CFTC also accuses Lim of helping clients evade compliance controls, including suggesting that users engage in potentially illegal activities to avoid being flagged.

The CFTC also accuses Binance of helping US VIP customers evade Binance’s compliance controls, including troubleshooting US customers identified by IP address, letting them know that their IP address was the only reason they could not use Binance’s larger global platform.

For example, in a July 2019 conversation about clients who should have been “restricted” from accessing the Binance platform, Lim said, “They can use [virtual private networks], but we shouldn’t tell them…it can’t come from us…but we can always notify our friends/third-party publishers (not under Binance’s umbrella) haha.” https://cftc.gov/media/8351/%20enfbinancecomplaint032723/download

The CFTC further alleges that Binance, Zhao, and Lim engaged in activities overseas aimed at avoiding CFTC oversight, such as instructing US and other clients on how to evade Binance’s compliance controls. https://www.cftc.gov/PressRoom/PressReleases/8680-23

SEC Emergency Asset Freeze Action

Like the CFTC, the SEC’s 136-page complaint alleges that certain Binance entities and Zhao commingled billions of dollars worth of customer assets and secretly moved them to another company controlled by Zhao to enrich themselves with billions of dollars, while putting investor assets at significant risk. https://www.sec.gov/news/press-release/2023-101

Some of the charges against Binance are echoed in the actions that caused FTX to be paralyzed, with SBF facing criminal charges for using customer deposits as his own personal piggy bank.

For example, the US Securities and Exchange Commission claims that bank accounts controlled by Merit Peak, a trading company controlled by Zhao, received more than $20 billion, including funds from the Binance platform and Binance.US platform. Merit Peak subsequently transferred “the vast majority of those funds” to an unknown entity, “which appears to be related to the purchase of Binance’s custom USD-pegged cryptocurrency token, BUSD.” https://nytimes.com/2023/06/05/business/sec-binance-charges.html

The SEC also charges Zhao with using his company Sigma Chain, which he owns, to artificially inflate the value of Binance through extensive market manipulation, sometimes targeting customers, and the crypto platform is sending billions of dollars of investor assets to another company controlled by Zhao called Merit Peak.

In addition, the US Securities and Exchange Commission alleges that Zhao allowed many high-value US customers to continue to access his main platform, Binance.com, despite publicly claiming that these customers were unable to access the Binance.com platform.

Like the CFTC’s action, the US Securities and Exchange Commission also charges Zhao with designing, implementing, and participating in a wide-ranging network of deception, conflicts of interest, non-disclosure, and intentional evasion of the law. Among other things, the US Securities and Exchange Commission claims that while Zhao and Binance publicly claimed that US customers were restricted to trading on Binance.com, in sharp contrast, Zhao and Binance subverted their own controls by secretly allowing high-value US customers to continue trading on the Binance.com trading platform.

As part of the SEC’s emergency motion, the SEC is seeking a series of extreme remedies, including ordering the freezing of assets controlled by Zhao’s BAM company and ordering the defendants to return to BAM Trading’s/BAM Management’s customers the billions of dollars worth of assets held for the benefit of Zhao’s control. Seeking such emergency relief typically means the SEC believes they can persuade a judge that the defendants are committing fraud and that investor funds are at risk.

SEC Accounting Statement

SEC’s emergency action against Binance proves that the crypto world is not the Wild West, but more like a post-apocalyptic anarchy with zombies walking.

For example, Binance and Zhao are alleged to have transferred fiat and cryptocurrencies between multiple companies controlled by Zhao using Silvergate and Signature banks. https://johnreedstark.com/wp-content/upl oads/sites/180/2023/06/ SECMemorandumInSupport.pdf

The evidence compiled by their accounting experts (described in a declaration at https://johnreedstark.com/wp-content/upl oads/sites/180/2023/06/SachinDelaration.pdf) describes some obviously guilty asset transfers, including:

• Payment of $11 million to Simpson Marine (SEA) Pte Ltd, which appears to be a high-end Hong Kong yacht brokerage;

• $54.7 million withdrawn from Signature Bank to INSURED AIRCRAFT TITLE SERVICE LLC, a private aircraft title and escrow company based in Oklahoma;

• $424 million from Coinbase (also under SEC scrutiny); and

• $318 million from Alameda Research and $1.5 billion from Alameda Research (which has been criminally charged).

As AML expert Alison Jimenez put it, “The only thing missing is buying a Lamborghini.” https://linkedin.com/feed/update/urn:li:activity:7072222255618879488/

Additionally, the SEC has identified dozens of Binance accounts under Zhao’s actual control. Many of these accounts show transactions between various entities controlled by Zhao that are apparently almost interchangeable.

For example, the SEC states that $12 billion was sent to Zhao and $162 million was sent to a Singaporean company controlled by Binance backend employees, identified as Guangying Chen, whose names have no apparent connection to Binance. The SEC states that most of the funds sent to Zhao and Chen are now in “offshore” accounts, i.e., outside the United States.

Obstruction of Justice

Obstruction of justice broadly refers to an individual’s illegal action to prevent or influence the outcome of government litigation.

The CFTC claims that, at Zhao’s direction, Lim developed a policy instructing employees who deal with VIP clients to promptly notify them of law enforcement inquiries regarding their accounts.

One email stated:

“The VIP team will contact the user via all available means (SMS, phone) to notify them that their account has been frozen or unfrozen. Do not tell the user directly to run, just tell them their account has been unfrozen and is being investigated by XXX. If the user is a large trader, or a smart trader, he/she will get the hint,” according to the complaint. “https://www.cftc.gov/media/8351/%20enfbinancecomplaint032723/download

According to the CFTC, Zhao designed a secret scheme instructing U.S. VIP customers to evade Binance’s compliance controls and instructing Binance employees to ensure that all communications about their control subversion occurred on applications that aided the automatic destruction of evidence. https://www.cftc.gov/PressRoom/PressReleases/8680-23

Binance allegedly provided special services to any customers targeted by law enforcement agencies. According to the CFTC, Binance instructed its VIP team, as per a policy developed by Lim based on instructions from Zhao and called “Managing LE Information and Fund Transfer Requests”:

“[Account] freeze [as per the request of law enforcement agencies] and unfreeze [this will occur 24 hours after the account is frozen] after. The VIP team will contact the user via all possible means (SMS, phone) to inform them that their account has been frozen or unfrozen. Do not tell the user directly to run, just tell them their account has been unfrozen and is being investigated by XXX. If the user is a large trader, or a smart trader, he/she will get the hint.”

Binance even used Signal’s auto-delete feature for communications and even after Binance received a document request from the CFTC, Binance allegedly distributed document retention notices to its personnel.

For example, Zhao had the following exchange with an employee who eventually became Binance’s institutional sales head:

“VIP team member: Hi, CZ. . I browsed the list of impacted API customers, which includes many large strategic clients, including [a Chicago-based trading firm] currently our top 5 clients, accounting for 12% of our trading volume.”

Zhao: Remind them to ensure they are not connecting from a U.S. IP. Do not leave any written form. They have non-U.S. entities. We also need to ensure we don’t reach out to the largest market makers first via this email. Do you have signal?”

Future Action by the US

In its support memo, the SEC said, “It has been widely reported that Binance and Zhao are under investigation by US criminal authorities.” The SEC is clearly working with prosecutors and FBI agents, but did not disclose any further information.

Neither the CFTC nor the SEC cases have focused on money laundering. Frankly, this is the space reserved for the US Department of Justice to file and retain criminal charges against Binance.

My opinion is that the US Department of Justice is working with the SEC, CFTC, and multiple whistleblowers/informants, and the next wave will be filing criminal charges related to Binance.

If I am wrong in my prediction, I take full responsibility.

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