Binance founder and CEO Changpeng Zhao stepped down from his crypto company Tuesday after admitting he violated US anti-money laundering and sanction laws in a $4B plea deal with the feds.
As part of the deal, Binance Holdings Limited admitted it knowingly engaged in a trifecta of non-compliant actions: lack of anti-money laundering controls, unlicensed money transmission, and violating US sanction laws.
The resolution calls for Binance to pay a financial penalty of $4.32 billion dollars – $1.81 billion due in 15 months, and another $2.51 billion forfeiture.
Zhao will personally cough up $50 million out of his own pocket as part of the resolution. He faces a maximum prison sentence of 18 months, to be decided in February.
The US Department of Justice (DOJ) and other government agencies have been investigating the company’s financial dealings since 2018.
The US Securities and Exchange Commission (SEC) filed the civil suit against Binance this past June, calling the world’s biggest crypto exchange “an extensive web of deception.”
The DOJ, who led the case, said the deal is the largest corporate resolution to include criminal charges for an executive.
Federal prosecutors say Binance willfully violated the Bank Secrecy Act (BSA), which requires a company to maintain transparent financial records to deter and prevent its funds from being used to launder money.
Zhao, a Canadian national, pleaded guilty in Seattle court on charges he failed to maintain an effective anti-money laundering program, in violation of the BSA.
Binance was also charged with failing to register as a money-transmitting business and purposefully disregarding sanction laws under the International Emergency Economic Powers Act (IEEPA).
“Binance did more than just fail to comply with federal law. It pretended to comply,” US Attorney General Merrick Garland said.
Binance employees knew of red flags
Prosecutors say Binance purposefully avoided implementing anti-money laundering controls and procedures – essentially allowing illicit actors to anonymously trade hundreds of millions of dollars worth of digital assets using the Binance exchange.
Transactions included moving proceeds from ransomware variants, darknet markets, exchange hacks, and other internet-related scams.
“We need a banner ‘is washing drug money too hard these days - come to binance we got cake for you,’” - Binance employee
Justice officials say the lack of safeguards also allowed US customers to conduct dealings with entities in US-sanctioned jurisdictions, such as Iran, Cuba, Syria, and Russian-occupied regions of Ukraine. In 2019, Binance became aware of transactions carried out on the exchange by the militant Palestinian group Hamas.
“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,” said Secretary of the Treasury Janet L. Yellen.
What’s more, Binance was able to profit off the illicit transactions by charging significant trading fees totaling roughly $1.35 billion, prosecutors said.
Feds say that compliance staff were well aware the company lacked protocols to flag or report transactions for money laundering risks and that the missing safeguards were attracting criminals to the exchange.
“We need a banner ‘is washing drug money too hard these days - come to binance we got cake for you,’” one employee wrote.
Prosecutors say Binance would focus on retaining valuable VIP customers, who made up a large portion of the company’s trading volume and revenue.
Zhao was said to be personally involved in wooing the VIPs, helping them to set up new accounts as offshore entities to transfer holdings into, and even encouraging the VIPs to provide information implying they were located outside the US.
“For years, Binance allowed users to open accounts and trade without submitting any identifying information beyond an email address, the DOJ said.
Zhao speaks out after stepping down
Binance, headquartered in San Francisco, was founded by Zhao in 2019.
The Chinese-born billionaire, often referred to as CZ, posted on X soon after the deal was announced.
“Today, I stepped down as CEO of Binance. Admittedly, it was not easy to let go emotionally. But I know it is the right thing to do. I made mistakes, and I must take responsibility. This is best for our community, for Binance, and for myself, he said.
“Binance is no longer a baby. It is time for me to let it walk and run. I know Binance will continue to grow and excel with the deep bench it has, the former CEO said.
Zhao made a point in his statement to note that Binance was not accused of misappropriating user funds or engaging in any type of market manipulation.
Zhao also said besides consulting, he planned to take a break from the crypto world as he has not had a “real” day off in over 6 years. After that, he would look into investing in various crypto-related start-ups.
The former CEO announced his replacement as Richard Teng, the company's now Global Head of Regional Markets.
“Richard is a highly qualified leader and, with over three decades of financial services and regulatory experience… He will ensure Binance delivers on our next phase of security, transparency, compliance, and growth,” Zhao said.
Teng put out his own post on X after accepting the new role, stating he would use everything he learned "over the past three decades of financial services and regulatory experience to guide" the remarkable, innovative, and committed Binance team.
Additionally, Binance's former chief compliance officer Samuel Lim was charged by the US Commodity Futures Trading Commission (CFTC).
The case is said to be another devastating blow to the crypto industry after the conviction of FTX founder Sam Bankman-Fried earlier this month. Bankman-Fried was found guilty of bilking more than $8 billion from customers of the now-bankrupt crypto exchange in one of the biggest financial frauds on record.
Only days after the SEC filed the suit against Binance, the agency filed another civil lawsuit against Coinbase, the second-largest cryptocurrency platform in the US, for failing to register as an exchange in violation of compliance laws. Coinbase has filed a motion to dismiss the case, submitting its final argument to a federal judge in October, citing that it “falls outside the agency’s delegated authority.”
The SEC has been pushing to assert jurisdiction over the crypto industry, which the SEC chair has labeled a "Wild West" that has undermined investor trust in the US capital markets.
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