Binance founder Changpeng Zhao pleads guilty to money laundering violations

Changpeng Zhao, the founder of Binance, the largest cryptocurrency exchange in the world, pleaded guilty to money laundering violations, a stunning blow to the most powerful and influential figure in the global crypto industry.

Binance itself also pleaded guilty and agreed to pay $4.3 billion in fines and restitution to the government, according to federal authorities. Under the agreement, Binance also settled with the Treasury Department and the Commodity Futures Trading Commission, which has also been investigating the company.

As part of his guilty plea, Mr. Zhao to pay a $50 million fine and will also step down from his role as CEO of the company. The government is seeking an 18-month prison sentence for Mr. Zhao, the maximum suggested under federal guidelines, according to senior Justice Department officials.

Binance, as part of its own plea agreement with federal prosecutors, will agree to the appointment of a government monitor to oversee the company. Mr. Zhao is barred from any involvement in Binance until three years after the monitor is appointed.

Mr. Zhao and a representative of Binance filed the guilty pleas in federal court in Seattle. Mr. Zhao’s lawyers could not be reached for comment. A spokesperson for Binance did not respond to a request for comment.

For the relatively young and fast-growing crypto world, the guilty pleas of Binance and Mr. Zhao a monumental development. At times, Binance has processed two-thirds of all digital currency trades, making it a vital power broker and intermediary in the crypto world. Long considered the richest man in crypto, Zhao is the most influential figure in the industry, with more than 8.5 million followers on X, the platform formerly known as Twitter.

The guilty pleas completed something of a one-two punch by the Justice Department. Earlier this month, crypto entrepreneur Sam Bankman-Fried was convicted of fraud in a criminal case stemming from the collapse of his FTX crypto exchange.

“The message here should be clear,” Attorney General Merrick Garland said in a statement. “Using new technology to break the law doesn’t make you a disruptor, it makes you a criminal.”

Since the implosion of FTX a year ago, federal authorities have charged a procession of crypto executives criminally, and the Securities and Exchange Commission has filed lawsuits against some of the biggest companies in the industry, including Coinbase, the publicly traded US exchange. On Monday, the SEC sued Kraken, another crypto exchange, accusing it of operating without proper registration and commingling customer deposits with its own corporate assets.

Court documents made public on Tuesday described an extensive effort by Mr. Zhao and other senior Binance employees to evade laws, including parts of the Bank Secrecy Act that require financial institutions and their employees to learn the true identities of their customers, avoid doing. doing business with criminals or individuals excluded from financial sanctions and registering any US-based business with regulatory authorities. Customers from Iran, Cuba and Syria – all of which face sanctions – were able to access the Binance platform. Authorities said Mr. Zhao knew that Binance’s efforts to stop people from the sanctioned countries from doing business on the exchange were insufficient. Federal prosecutors specifically charged Binance with conspiring to operate an unlicensed money transmission business, violating federal bank secrecy laws and violating federal sanctions laws.

READ MORE  Israeli troops remain in Gaza, marking significant escalation: NPR

“From the very beginning, Zhao and other CFOs engaged in a deliberate and calculated effort to take advantage of the US market without implementing the controls required by US law,” Mr. Garland.

In addition to the illegal foreign transactions, Binance did business with firms based in the United States, even though they were not supposed to have such clients on its platform. Instead, another platform – Binance.US, which Mr Zhao also owned – was required to handle the business and comply with the country’s anti-money laundering laws. But Mr. Zhao and other Binance employees believed it would be better for the primary cryptocurrency exchange to handle large clients, the lawsuits said.

According to the archives, Mr. Zhao, commonly known as CZ, personally concealed Binance’s dealings with major US-based clients – who were referred to as VIPs and handled by a special manager – to “get the US regulatory agencies not to cause any problems.”

The filing cited a June 2019 call in which Mr. Zhao advised other Binance employees to speak with US-based VIP customers using methods such as phone calls that would leave “no trace” of the interactions.

Binance also offered some key customers a chance to regain access to its main trading platform, even after they were kicked out over concerns they were involved in criminal activity, the court papers said. The papers cited an incident in July 2020 in which Binance staff identified a particular user as being among the “top contributors to illegal activity”, banned the user from the platform, and then discussed giving the user instructions on how to open a new Binance account without revealing any previously identified problematic connections.

The financial penalty in Binance’s settlement is one of the largest ever imposed by the US government. That’s close to the roughly $5 billion that Goldman Sachs paid to authorities in the United States and around the world in 2020 to settle foreign bribery charges arising from the 1MDB sovereign wealth fund scandal. But that falls short of the $8.9 billion BNP Paribas paid federal prosecutors in 2014 for violating U.S. sanctions rules.

READ MORE  The EPA's new rule could remove protections from more than half of US wetlands

Prior to the settlement, regulators had taken a number of steps this year to punish Binance. In March, the Commodity Futures Trading Commission filed a civil suit against the company and Mr. Zhao, accusing them of violating financial rules designed to protect American investors.

Then in June, the Securities and Exchange Commission charged Binance and Mr. Zhao for mishandling client funds and lying to regulators. Notably, the SEC, which is determined to regulate digital assets like a stock or bond, was not a party to the settlement, according to the documents. The regulator did not respond to a request for comment on Tuesday.

The drumbeat of enforcement actions has hurt Binance’s business. Following the SEC lawsuit, banks cut off access to Binance.US, forcing the firm to freeze much of its trading activity. A number of top managers left.

S.E.C. also said that Binance transferred billions of dollars in customer funds to a separate company, Merit Peak Limited, which was controlled by Mr. Zhao.

That charge echoes the collapse of FTX, once Binance’s biggest international rival. This month, Mr. Bankman-Fried convicted on charges that he misappropriated billions in client funds by using the money to fund campaign donations and other extravagant spending. When FTX collapsed last year, Mr. Zhao emerged as the resigned face of the crypto industry after his tweets helped set off the chain of events that led to the implosion.

In public, Mr. Zhao often dismissed negative news stories by labeling them “FUD,” or fear, uncertainty and doubt, the shorthand the crypto industry has long used to deride skeptics and critics.

He also hired a larger compliance staff, arguing that Binance had learned from its mistakes and matured. In January, a former federal prosecutor, Noah Perlman, was named Binance’s new head of global compliance.

Still, cracks are beginning to show. This year, Binance’s share of the crypto trading market has fallen amid the onslaught from regulators. And in July, several of its top executives, including its head of strategy and a senior compliance officerannounced that they are leaving the company.

Alan Rappeport contributed with reporting.