Exclusive-U.S. sought records on Binance CEO for crypto money laundering probe

According to a late-2020 written request, US federal prosecutors ordered Binance, the biggest cryptocurrency exchange in the world, to submit significant internal information concerning its anti-money laundering inspections, along with correspondence with its founder and CEO Changpeng Zhao.

According to a late-2020 written request seen by Reuters, U.S. federal prosecutors asked Binance, the largest cryptocurrency exchange in the world, to provide extensive internal records about its anti-money laundering checks and communications involving its chief executive and founder Changpeng Zhao.

Binance was ordered to voluntarily provide up communications from Zhao and 12 other officials and partners to the Justice Department's money laundering division on topics including the exchange's identification of illicit transactions and the solicitation of U.S. clients. Additionally, it was looking for any corporate records that included directives to "delete, modify, or erase documents from Binance's archives" or "transfer from the United States."

Four sources with knowledge of the probe said the Justice Department's continuing investigation of Binance's compliance with U.S. financial crime laws included the December 2020 request, which had not previously been publicized.

According to the persons, US officials are looking into whether Binance broke the Bank Secrecy Act. If crypto exchanges perform "significant" business in the United States, they must register with the Treasury Department and adhere to anti-money laundering regulations. The statute, which is intended to safeguard the American financial system from criminal financing, allows for 10-year prison sentences.

Reuters was unable to determine how Binance and Zhao, two of the most well-known individuals in the cryptocurrency industry, replied to the department's criminal division's request.

Patrick Hillmann, chief communications officer at Binance, responded to Reuters' inquiries regarding the letter and the probe by saying that regulators from all over the world are getting in touch with the biggest cryptocurrency exchanges to learn more about our sector. Every regulated firm must follow this procedure, and we often collaborate with agencies to answer any queries they may have. With over 500 personnel, including former regulators and law enforcement officials, Binance has "an industry leading global security and compliance team," according to Hillmann.

He didn't mention how Binance handled the request from the Justice Department. An official from the department refused to comment.

The request indicates the extensive nature of the American inquiry into Binance. Bloomberg revealed the probe's existence last year, but nothing is now known about it. "We take our legal duties extremely seriously and cooperate with authorities and law enforcement in a constructive approach," a Binance representative said to Bloomberg at the time.

The letter included 29 distinct demands for papers created since 2017 that addressed the company's management, organizational structure, financial situation, compliance with anti-money laundering and sanctions laws, and US operations. Binance was told that they had to provide over "any records and materials that are related to this letter in their possession, custody, or control."

Zhao, often known as CZ, founded Binance in Shanghai in 2017. As of July, Binance controlled more than half of the global cryptocurrency trading markets and processed transactions totaling more than $2 trillion. Zhao, who was born in China and had his education in Canada, where he also holds citizenship, said to Bloomberg in March that he would be headquartered in Dubai for the "foreseeable future." That same month, Dubai gave Binance permission to carry out certain activities.

This year, a series of Reuters investigations exposed how Binance fueled its rapid expansion while maintaining lax client controls and hiding information from authorities. According to Reuters, Binance's compliance programme had holes that allowed criminals to use the exchange, which also catered to Iranian merchants despite U.S. sanctions, to launder at least $2.35 billion in illegal cash. Customers of Binance might trade cryptocurrencies by signing up with only an email address until the middle of 2021.

Reuters' results were rejected by Binance as being "outdated." The exchange said it is working to "drive greater industry standards" and "further strengthen our capacity to identify unlawful crypto activity on our platform." It said that it did not believe Reuters' estimates of illegal financial flows to be accurate.

U.S. observation

In the United States, crypto exchanges are being scrutinized more and more. Important government authorities, like as Treasury Secretary Janet Yellen this year, have openly endorsed further regulation of the industry. The Justice Department launched a national cryptocurrency enforcement team in February with a focus on exchanges to "tackle the development of criminality utilizing these technology."

The owners of a different exchange, BitMEX, pled guilty to breaking the Bank Secrecy Act in the same month and received up to two and a half years of probation as a result. BitMEX agreed to pay a $100 million fine to resolve separate allegations of Act violations. Currently, BitMEX claims that it has "significant investments" in its compliance program and is "completely dedicated to conducting its company in conformity with all relevant regulations."

Roberto Gonzalez, a lawyer at the Washington-based firm Paul, Weiss, and Binance Holdings Ltd., a Cayman Islands-based corporation, were both recipients of the Justice Department's 2020 letter. The Binance trademark is held by Binance Holdings, which Zhao controls, according to regulatory filings. Gonzalez and Paul, Weiss did not answer inquiries for comments.

Binance's business structure is unclear. It has neglected to disclose the ownership or location of its primary Binance.com exchange, which hasn't taken on new US clients since the middle of 2019. According to regulatory documents, customers there are instead routed to a different U.S.-based exchange named Binance.US, which is likewise under Zhao's control. While the main exchange never registered with the Treasury, Binance.US did in 2019.

More than a dozen financial authorities from all around the globe have warned about Binance since last year, claiming that it was either providing services to clients without licenses or was breaking anti-money laundering laws. The Dutch central bank said in July that Binance had been penalized more than 3 million euros for operating in violation of those regulations. The penalty, according to a spokeswoman for Binance at the time, represented a "pivot in our continuing partnership" with the central bank.

The Justice Department requested all records from Binance in the 2020 request, including information on the company's practices for preventing unlawful funding, specifics of those rules, and any reports of suspected financial activities that Binance had made to the authorities. In addition to individuals who are subject to U.S. sanctions, Binance was requested to disclose details on any transactions it may have had with users engaged in ransomware, terrorism, and darknet markets.

Documents pertaining to the "business justification" for the creation of Binance.US were also sought by the government. It demanded correspondence about "the founding of Binance.US and its connection to Binance" that included the 13 executives and partners, including Zhao, his co-founder Yi He, and his chief compliance officer, Samuel Lim. He and Lim remain at Binance.

According to corporate correspondence seen by Reuters in January, Lim and other top workers were aware that Binance's money-laundering procedures were not stringent. Binance and Lim have not responded to the communications.

The operator of Binance.US, BAM Trading Services, was sent a subpoena by the Securities and Exchange Commission in the same month in addition to the Justice Department's request. According to the subpoena, which was seen by Reuters, BAM was expected to provide information on the services it was offering the American business and if any of its workers also worked for the main Binance exchange.

Binance

Reuters' inquiries were unanswered by the US. The SEC said that it makes no comments about potential inquiries.