The founder of crypto giant Binance has pleaded guilty to money laundering violations following an investigation spearheaded by the U.S. Department of Justice, the U.S. Department of the Treasury and the Commodity Futures Trading Commission. Changpeng Zhao, a Canadian national, agreed to pay a fine of $50 million and to resign his position as the chief executive officer of the largest cryptocurrency exchange in the world. Binance also pleaded guilty and agreed to pay $4.3 billion in fines and restitution. The guilty pleas are a spectacular development in the fast moving world of cryptocurrency exchanges as U.S. authorities continue to ratchet up the heat on freewheeling power brokers.

1. Introduction

On November 21, 2023, Mr. Zhao and Binance entered the guilty pleas before Judge Brian Tsuchida in the United States District Court of the Western District of Washington at Seattle. (here) The deal underpinning the guilty pleas is the culmination of a three year investigation and comes after Binance was accused by regulators of operating an unregistered securities exchange. (here) Since the implosion of FTX and the related fraud charges against Sam Bankman-Fried that I discussed in a previous post to On The Wire, U.S. federal authorities “have criminally charged a procession of crypto executives”. The Securities and Exchange Commission has filed lawsuits against some of the largest companies in the industry including the publicly traded American exchange, Coinbase. Yesterday, The New York Times reported that the S.E.C. sued Kraken, another crypto exchange, accusing it of “operating without proper registration and commingling customer deposits with its own corporate assets.” (here and here)

2. Background

Commonly known as CZ, Mr. Zhao was born in Lianyungang located in China’s Jiangsu province. He emigrated with his family to Canada at a young age where they settled in Vancouver, British Columbia. A graduate of McGill University in Montreal, Quebec, with a degree in computer science, he was ranked the 69th richest person in the world by the Bloomberg Billionaires Index with a net worth estimated at $23 billion as of this month. In a feature piece for Maclean’s, Canada’s national magazine, Ethan Lou described the niche occupied by Binance in the crypto world as “not hugely popular” among regulators but “beloved by fans with a tolerance for flux.” (here) Mr. Zhao said “[i]t takes a certain type of personality to deal with a lot of uncertainty.” Launched by Mr. Zhao in 2017 Binance grew into the world’s largest cryptocurrency exchange by trading volume in under a year. In 2019, Mr. Zhao launched Binance’s affiiate, Binance.US, wholly owned by Mr. Zhao through BAM Trading Services, Inc. Reporting for The Washington Post, Eli Tan and Devlin Barrett said the court filings paint Mr. Zhao as the architect of a system that shielded American customers from regulatory supervision referring to U.S. customers as “VIPs”. Mr. Zhao called the revenue from U.S. users a “grey zone”.

3. The Informations

The charging document in each case is called an Information. The Information charging Binance Holdings Limited alleges the company failed to register as a money services business, violated the Bank Secrecy Act by failing to implement and maintain an effective anti-money laundering program and caused violations of U.S. economic sanctions under the International Emergency Economic Powers Act (IEEPA). (here) The Information charging Mr. Zhao alleges that he also violated the Bank Secrecy Act by failing to implement and maintain an effective anti-money laundering program. (here) The following extracts from each Information will give you a summary overview of the key allegations.

• The Binance Information alleges that, by failing to register with the U.S. Department of the Treasury Financial Crimes Enforcement Network (FinCEN) as a money services business, Binance operated an unlicensed money transmitting business (MTB) in violation of U.S. law. Binance operated as an unlicensed MTB in part to prevent U.S. regulators from discovering that it facilitated billions of dollars of cryptocurrency transactions on behalf of its customers without implementing appropriate “know your customer” (KYC) procedures, conducting adequate transaction monitoring or establishing sufficient controls that would have prevented its U.S. customers from engaging in transactions in violation of U.S. sanctions and to prevent Binance from processing other transactions involving illicit proceeds. As a result, Binance caused millions of dollars of cryptocurrency transactions between U.S. persons and persons in jurisdictions that are subject to comprehensive U.S. sanctions in violation of IEEPA. Due to its failure to implement an effective anti-money laundering program, Binance processed transactions by users who operated illicit mixing services and laundered proceeds of darknet market transactions, hacks, ransomware and scams. (paras. 1, 21 and 22)
• The Zhao Information alleges that Mr. Zhao prioritized Binance’s growth, market share, and profits over compliance with the Bank Secrecy Act (BSA). Binance facilitated billions of dollars of cryptocurrency transactions on behalf of its customers without implementing appropriate “know your customer” (KYC) procedures or conducting adequate transaction monitoring. As a result of Mr. Zhao’s willful failure to implement an effective anti-money laundering program, Binance processed transactions involving proceeds of illegal activity and caused transactions between U.S. persons and persons in jurisdictions that are subject to comprehensive U.S. sanctions. As the chief executive officer Mr. Zhao exercised day to day control over Binance’s operations. Between June 2017 and October 2022 more than a million U.S. retail users conducted more than 20 million deposit and withdrawal transactions worth $65 billion. These users conducted more than 900 million spot trades worth more than $550 billion. Mr. Zhao prioritized Binance’s growth and profits over compliance with U.S. law telling Binance employees that it was “better to ask for forgiveness than permission” in what he described as a “grey zone.” Mr. Zhao knew that U.S. users were essential for Binance to grow, were a significant source of revenue and had a substantial network effect. (paras. 1, 9 and 10)

Binance agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total financial penalty of $4,316,126,163 as part of its plea agreement. Binance also agreed to retain an independent compliance monitor for three years and remediate and enhance its anti-money laundering and sanctions compliance programs. (here) Mr. Zhao agreed to pay a fine of $50 million and to resign as the CEO of Binance. He also faces up to 18 months imprisonment under federal sentencing guidelines. (here)

4. Is it a Good Deal for CZ?

Several legal experts told Reuters it was a “good outcome” for Mr. Zhao that leaves his wealth largely intact. But that opinion is not universally held. Professor Yesha Yada of Vanderbilt University Law School said the fine appeared to be manageable for Binance. “This deal looks designed to give Binance the chance to live another day, while removing CZ, a figurehead who has been so intrinsically linked to the growth of a business model,” she said. Given the seriousness of the violations, Mr. Zhao appears to have “come out of this looking pretty good” said Robert Frenchman of Mukasey Frenchman LLP. “He still has enormous wealth,” Mr. Frenchman added. And Daniel Silva, a partner at the Buchalter law firm and former federal prosecutor said the allegations could have supported charges carrying stiffer penalties such as fraud. “He was at risk of much more serious charges, and so this resolution is a very favourable one for him,” Mr. Silva said. (here) But Howard Fischer, a partner at the New York law firm Moses & Singer LLP, described the plea agreement as a warning in an interview with Dan Milmo of The Guardian. “The libertarian ideal that some crypto enthusiasts trumpet – that the industry is decentralized and beyond traditional legal norms and obligations – has no weight with regulators and criminal authorities,” he said. (here)

5. Conclusion

The penalty in Binance’s settlement is one of the largest imposed against a financial firm in the United States. “Binance turned a blind eye to its legal obligations in the pursuit of profit,” said U.S. Secretary of the Treasury Janet L. Yellen in a press release by the Department of Justice. “Today’s historic penalties and monitorship to ensure compliance with U.S. law and regulations mark a milestone for the virtual currency industry,” she added. (here) Assistant Attorney General Matthew G. Olsen of the Justice Department’s National Security Division said Binance’s crimes gave sanctioned customers unfettered access to American capital and financial services. “This prosecution is a warning that companies that do not build sanctions compliance into their services face serious criminal penalties, as do the executives who lead them,” he said. Although the settlement is close to the $5 billion paid globally by Goldman Sachs in 2020 to resolve foreign bribery charges, it does not match the $8.9 billion paid by BNP Paribas in 2014 for violating U.S. sanctions rules. A sentence hearing has been scheduled for February 23, 2024, approximately a month before Mr. Bankman-Fried’s sentence hearing, in what The New York Times has called a “one-two punch by the Justice Department.”