Here Are the Most-Serious Allegations in the US Case Against ...

Muyao Shen, Bloomberg News

Changpeng Zhao speaks virtually during a conference in September. , Bloomberg

(Bloomberg) -- A years-long US government probe of Binance Holdings Ltd. came to an end on Tuesday when the world’s largest crypto exchange agreed to pay a $4.3 billion fine, while the company and its former chief executive officer, Changpeng Zhao, agreed to plead guilty to criminal charges. Under a sweeping deal worked out with the government and designed to keep the company operating, Zhao will also pay a $50 million fine and stepped down as head of the company. Binance was charged with three counts, including money laundering violations, conspiracy to conduct an unlicensed money transmitting business in the US, and sanctions violations. The settlement negotiated between the two sides will resolve allegations of criminal wrongdoing. Bloomberg News first reported the potential settlement on Monday.Below are some of the most-interesting parts of the of the government’s filing that lays out its case against Binance:

Binance handled billions of dollars of crypto transactions on behalf of its customers, including users in sanctioned jurisdictions such as Iran. Binance’s matching engine, which is the computerized tool that matches customers’ buy and sell orders, ran “without regard to whether the matched customers were prohibited by law from transacting with one another.” Between January 2018 to May 2022, Binance “caused at least 1.1 million transactions in violation of IEEPA between users it had reason to believe were US persons and persons it had reason to believe resided in Iran, with an aggregate transaction value of at least $898,618,825.” The IEEPA is the International Emergency Economic Powers Act, which allows the president to regulate international commerce with sanctions.   Binance intentionally was “vague” about the company’s principle place of business. In around August 2017, Binance’s internal document showed that more than 23% of Binance.com’s 122,729 users were from the US, and 19.9% of its users at the time were from China. As late as in 2019, Zhao stated that 20-30% of Binance’s traffic came from the US. Zhao said at the time “we do need to block by IP and also by KYC...blocking US overall is probably one of the largest business decisions we have to make ... but it’s better than losing everything.”  KYC refers to the “know your customer” process financial firms undertake to prevent money-laundering.  VIP clients accounted for more than 70% of Binance’s trading revenue as of June 2019. And of that 70%, US VIPs accounted for about one-third. Zhao and other Binance executives encouraged US VIP users to “conceal and obfuscate” their US connections including by creating new accounts. There’s an internal document called “VIP handling” that provided templates for messages that Binance employees would send to US users. By strategies like these, Binance was able to attribute about 16% of its total registered user based to the US by September 2020. In total, US users conducted “trillions of dollars” in transactions on Binance between August 2017 and October 2022, which generated $1.6 billion in profit for Binance, according to the company’s own transaction data. Binance did not collect full KYC information from a large share of its users until May 2022. In a September 2018 chat, Binance’s chief compliance officer at the time learned that Binance had “nothing in place” to review high-volume accounts for suspicious activity and flagged transactions that would be flagged as money laundering, or AML, risks but added that “as of now[,] there is no regulation for .com to play by.”  Binance’s chief compliance officer said that it’s “challenging to use the aml standards to impose on [Binance].com especially when Cz doesn’t see a need to.” Due to the failure to implement an effective AML program, illicit actors used Binance’s exchange in various ways. The file gave examples of transactions worth hundreds of millions of dollars between Binance and Russian darknet marketplace Hydra, as well as crypto mixer BestMixer. Hydra was a Binance VIP user, according to the filing. A year after Binance claimed it had begun to block persons in comprehensively sanctioned jurisdictions, an FBI inquiry in November 2019 caused Binance to discover about 600 “verified level 2” users from Iran. From about January 2018 through May 2022, Binance caused at least 1.1 million trades, totaling at least $898.6 million, between Binance’s US clients and clients ordinarily residing in Iran. Furthermore, between August 2017 and October 2022, Binance also caused millions of dollars of transactions between US users and users in sanctioned jurisdictions including Cuba, Syria, the Ukrainian regions of Crimea, Donetsk, and Luhansk.

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