Binance Settlement: A Wake-Up Call for the Crypto Industry
November 29, 2023
Binance is a cryptocurrency exchange that was founded in 2017. It quickly became the world’s largest cryptocurrency exchange by trading volume, and it has continued to grow rapidly since then. Binance is known for its user-friendly interface, competitive trading fees, and a vast array of cryptocurrency offerings.
Despite its widespread popularity and rapid growth, Binance has faced regulatory scrutiny for its lack of compliance with anti-money laundering (AML) regulations, prompting an important settlement with the U.S. authorities.
Binance Settles with FinCen and OFAC
In November 2023, Binance has reached a $4.4 billion settlement with U.S. authorities. This enforcement action, the largest ever taken by U.S. authorities, will require Binance to:
What Binance did wrong
For several years, Binance’s internal practices prioritized growth and innovation over compliance. The settlement exposed significant deficiencies in Binance’s culture, highlighting the consequences of prioritizing growth over compliance.
Unlicensed Operation in the U.S
One of the most significant violations according to the U.S. authorities’ statement is that Binance has operated as an unlicensed money service business (MSB). This enabled the company to gain a significant portion of the U.S. cryptocurrency market, generating substantial profits from U.S. customers by:
- Misrepresenting Compliance Efforts: Despite publicly claiming to have exited the U.S. market in 2019, Binance continued to operate as an unlicensed money service business, allowing U.S. users to trade and hold cryptocurrencies.
- Retaining High-Value U.S. Customers: Binance prioritized retaining its most valuable “VIP” customers, even if they were from the United States. These customers generated a significant portion of the company’s trading volume and revenue, prompting executives to formulate strategies to keep them on the platform.
- Assisting U.S. Customers in Circumventing Restrictions: Binance executives, including the former CEO Mr. Changpeng Zhao (CZ), actively contacted U.S. VIP customers, providing them with instructions on how to register new accounts with offshore entities and transfer their holdings to bypass U.S. restrictions.
Violations of AML Laws
In addition to the above violations, between 2017 and 2022, Binance’s failure to implement and maintain effective anti-money laundering (AML) and sanctions compliance programs enabled illicit actors to exploit the platform for nefarious purposes. The company’s shortcomings in this area included:
- Inadequate Customer Due Diligence (CDD): Binance failed to conduct thorough customer due diligence (CDD) procedures. According to the U.S. Department of Justice press release, “For years, Binance allowed users to open accounts and trade without submitting any identifying information beyond an email address”.
- Lack of Transaction Monitoring and Suspicious Activity Reporting: Binance processed over 100,000 suspicious transactions without filing a single Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN). According to Binance’s former Chief Compliance Officer, the company’s CEO had a policy of not reporting suspicious activity to FinCEN. This policy led to Binance failing to file SARs for transactions involving terrorist organizations, ransomware, child sexual exploitation material, frauds, and scams.
- Misleading Third Parties about AML Controls: Binance misled third parties about its AML controls, presenting itself as a compliant entity while engaging in practices that facilitated illicit activity.
- Enabling Anonymity-Enhanced Cryptocurrencies: Binance’s platform facilitated the use of anonymity-enhanced cryptocurrencies which allowed users to obscure the origin and destination of their transactions.
Violations of Sanctions programs
Binance’s violations of multiple sanctions programs extended beyond its AML failures, demonstrating a disregard for international regulations aimed at preventing the flow of funds to sanctioned individuals and entities. The failures included:
- Matching trades between U.S. users and those in sanctioned jurisdictions: For over five years, Binance matched and executed virtual currency trades on its online exchange platform between U.S. persons and users in sanctioned jurisdictions like Iran, North Korea, Syria, and the Crimea region of Ukraine.
- Mislead third parties about its sanctions controls: While Binance made efforts to project an image of sanctions compliance, senior managers permitted the presence of users from both the United States and sanctioned jurisdictions on the platform. This occurred even though there was an understanding that Binance’s trading algorithm could lead to violations of U.S. sanctions programs due to the presence of U.S. users on the platform.
As a result of the above sanctions violations, Binance:
- enabled the direct or indirect transfer of goods and services from the United States to sanctioned jurisdictions.
- facilitated transactions between U.S. persons and users – directly or indirectly – with sanctioned jurisdictions or with blocked persons.
CZ, the CEO of Binance was warned by his own compliance team that Binance lacked basic safeguards to prevent users from evading U.S. sanctions law and also about the “high risk” associated with some customers on their exchanged. However, CZ disregarded these warnings.
According to the comments of secretary of the Treasury Janet L. Yellen “Binance turned a blind eye to its legal obligations in the pursuit of profit. Its willful failures allowed money to flow to terrorists, cybercriminals, and child abusers through its platform”.
Binance Admits to Legal Violations
Binance admitted that:
- it willfully operated as an unregistered money services business (MSB).
- it prioritized growth and profits over compliance with U.S. law.
- it obscured its ties to the U.S while maintained its most important US customers.
- it willfully failed to establish, implement, and maintain an effective anti-money laundering program including conducting Know Your Customer (KYC) on a large number of its users.
- allowed a range of illicit actors to transact freely on the platform, damaging the integrity of the financial system.
CZ and Former Chief Compliance Officer were Held Personally Liable
CZ has pleaded guilty to intentionally causing Binance Holdings Limited to violate the Bank Secrecy Act by failing to implement an effective AML and sanctions compliance program. The settlement requires CZ to:
Additionally, Samuel Lim, Binance’s former Chief Compliance Officer, has been subjected to a $1.5 million civil penalty for aiding and abetting Binance’s compliance failures.
These actions underscore the personal accountability of executives in ensuring their companies adhere to regulatory requirements.
Binance Under the Microscope
Binance’s troubles didn’t end with the hefty fines. The company was also mandated to implement several additional measures. According to the statement of the Secretary of the U.S. Treasury, Binance will be required to:
- report the suspicious transactions it has failed to report to date.
- establish an effective anti-money laundering program to support the global AML/CFT regime.
- Be under increased scrutiny for five years through a third-party monitor, overseen by FinCEN.
- FinCEN will ensure Binance’s complete exit from the United States.
- The monitor will be able to access Binance’s systems, transactions, and accounts and will review and report on all actions included in the settlement agreements. Failure to live up to these obligations could expose Binance to substantial additional penalties.
Binance’s AML Settlement: A Call to Action
Binance’s case underscores the need for cryptocurrency companies to proactively adopt and implement effective AML programs, rather than waiting for regulatory intervention. Cryptocurrency companies must make AML compliance a top priority to protect the financial system and prevent illegal activities.
As the cryptocurrency industry faces increasing regulatory scrutiny, Binance’s settlement sets an example for implementing stricter AML enforcement measures. Cryptocurrency companies must proactively engage with regulators and demonstrate their commitment to complying with AML regulations. This proactive approach will foster trust and collaboration, ensuring a safe and compliant cryptocurrency ecosystem.
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As we’ve seen with Binance’s recent settlement, the consequences of neglecting regulatory compliance can be profound. This case serves as a stark reminder of the importance of adhering to anti-money laundering (AML) and other regulatory mandates. In this rapidly evolving financial landscape, your business needs a robust and reliable regtech solution to navigate these complexities confidently.
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