American case describes Binance’s knowledge of criminal users

For years, Binance founder Changpeng Zhao and other senior employees of the cryptocurrency exchange knew that some of its users were criminals. But despite regular warnings from some of its own employees that some transactions on Binance.com violated anti-money laundering laws, the company was reluctant to halt them.

These allegations, made public Tuesday in a sweeping federal case against Binance and Mr. Zhao, show how well he and his deputies understood criminals were using their trading platform — and how little they did to stop them.

In many cases, they worked hard to prevent the Financial Crimes Enforcement Network, a department of the Treasury Department that combats money laundering and other illegal financial transactions, from learning about their most notorious users, it appears from a FinCEN registration. Mr Zhao and Binance pleaded guilty on Tuesday to violations of the Bank Secrecy Act and agreed to pay large fines.

In April 2019, representatives of a technology company working with Binance contacted one of Mr. Zhao’s deputies to report that Hamas’s military wing, the Qassam Brigades, was raising money for what it described as “Palestinian resistance” through Bitcoin -to ask for donations. and that it had received funds through transactions on Binance.com. The Binance official acknowledged the report and then tried to convince the tech company’s representatives to downplay Binance’s role in the transactions, according to documentation FinCEN posted on its website on Tuesday.

In July 2020, another company working with Binance pointed users to Binance.com, the trading platform, which has ties to both Hamas and others from the Islamic State group. A senior Binance employee acknowledged that these customers were “extremely dangerous to our business,” but told subordinates to check whether any of them were considered a VIP — a user who did enough business on the exchange to warrant a special to justify treatment – ​​before closing his account.

“Let him take his money and leave,” the employee wrote, according to the filing, “and tell him that third-party compliance tools have flagged him.”

Mr. Zhao’s lawyers and a Binance spokeswoman did not respond to requests for comment.

Carl Tobias, a professor at the University of Richmond School of Law, said the government’s actions against Binance were partly intended to send a message to the rest of the crypto industry about the consequences of not complying with the US laws. While it was a smart move, Mr. Tobias said, it is unlikely to completely solve the problem.

Ordinary people who tried to participate in the industry recently suffered major losses and watched as one of crypto’s most prominent figures, Sam Bankman-Fried, the founder of the FTX exchange, was exposed as a fraudster.

“The question is: is there potential for crypto to regain some public trust?” said Mr. Tobias.

Not everyone sees such a major crisis of confidence in the sector.

“There are many other smaller companies trying to follow the letter of the law in the United States without assuming that the U.S. is powerless to protect its citizens,” said Ron S. Geffner, a partner at Sadis & Goldberg. who leads the law firm’s Financial Services group.

Mr Geffner said the illegal activity on Binance’s trading platform was part of the natural evolution of the industry, which grew too quickly for early participants to handle. Binance was founded during a period of “hypergrowth,” he said, before there was widespread concern about U.S. law and before anyone really understood how to build the necessary controls into its businesses to root out bad behavior. It was the perfect environment for criminals to thrive.

Mr Geffner said other companies, such as US-based exchange Coinbase, were taking US laws more seriously. They employed people with more traditional experience in the financial sector and a different attitude to following the rules, he added.

Yet Coinbase has also settled claims from regulators that it violated anti-money laundering laws, but no criminal charges have been filed.

“Some of the people at Coinbase came from broker-dealers and had an idea of ​​the regulatory regime,” Mr. Geffner said. “It wasn’t someone sitting in another country saying, ‘Well, the US – who do they think they are?’ Why do they rule me when I’m in another part of the world?’”

Court documents filed on Tuesday in the US case against Binance illustrate the tension Mr Geffner described. At times, Mr. Zhao seemed to want to avoid having to deal with American regulators in the first place, as when he instructed his employees to figure out how to classify users in the United States as somewhere else in the world so that they wouldn’t doing. come under the supervision of the American authorities. But at other times, the documents show, Mr. Zhao appeared to agree with his deputies’ suggestions that Binance should try to block access to its platform for users from countries or organizations under government sanctions.

The people still hoping to profit from crypto appear to have already left struggling companies like Binance. Mr. Geffner said he attended a monthly “crypto salon” in New York on Tuesday evening, where about 25 people gathered to discuss a topic related to the industry – “groomed,” he added – and no one even but the Binance had mentioned. case.

“Binance is old news,” Mr. Geffner said. The topic for Tuesday’s salon was “the development of quantum computing and data security.”