LONDON, Sept 1 (Reuters) – US federal prosecutors have ordered Binance, the world’s largest cryptocurrency exchange, to provide comprehensive internal records of its anti-money laundering controls as well as disclosures about its chief executive and founder Changpeng Zhao, according to a recent report. 2020 written request viewed on Reuters.
The Justice Department’s Money Laundering Division asked Binance to voluntarily turn over messages from Zhao and 12 other executives and partners on issues such as the exchange’s exposure of illegal transactions and solicitation of U.S. customers. It also searched all company records with instructions that “documents will be destroyed, altered or removed from Binance’s files” or “transferred from the United States.”
The December 2020 request, which was not previously reported, was part of a Justice Department investigation into Binance’s compliance with U.S. financial crime laws that is still ongoing, four people familiar with the investigation said.
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US authorities, the people said, are investigating whether Binance violated the Bank Secrecy Act. This requires crypto exchanges to register with the Treasury Department and meet anti-money laundering requirements if they conduct “substantial” business in the United States. The law, designed to protect the US financial system from illegal funding, carries prison terms of up to 10 years.
Reuters was unable to determine how Binance and Zhao, one of the most prominent figures in the crypto sector, responded to the inquiry from the department’s criminal division.
In response to Reuters’ questions about the letter and the investigation, Patrick Hillmann, Binance’s Chief Communications Officer, said, “Regulators around the world are reaching out to all major crypto exchanges to better understand our industry. This is a standard process for any regulated organization and we regularly work with agencies to address any questions we may have.” Binance has “an industry-leading global security and compliance team” of over 500 people, including former regulators and law enforcement officials, Hillmann added added.
He did not say how Binance responded to the Justice Department’s request. A ministry spokesman declined to comment.
The request shows the broad spectrum of the US investigation into Binance. The probe’s existence was reported by Bloomberg last year, but little was known about it until now. A Binance spokeswoman told Bloomberg at the time: “We take our legal obligations very seriously and work closely with regulators and law enforcement.”
The letter made 29 separate requests for documents prepared since 2017, covering the company’s management, structure, finances, anti-money laundering and sanctions compliance, and operations in the United States. “Binance is requested to produce all documents and materials that respond to this letter in its possession, custody or control,” it said.
Founded in Shanghai in 2017 by Zhao, known as CZ, Binance controlled more than half of the world’s crypto trading markets as of July, processing more than $2 trillion worth of transactions this month. Born in China and educated in Canada, where he has citizenship, Zhao told Bloomberg in March that he would be based in Dubai for the “foreseeable future,” which Binance this month licensed to conduct some operations.
A series of Reuters articles this year revealed how Binance has fueled its explosive growth while maintaining weak customer controls and withholding information from regulators. Reuters noted that the loopholes in Binance’s compliance program allowed criminals to launder at least $2.35 billion in illicit funds through the exchange, which also served traders in Iran despite US sanctions. Until mid-2021, Binance customers could trade crypto by registering with just an email address.
Binance disputed the Reuters results, calling them “outdated”. The exchange said it is “pushing higher industry standards” and strives to “continue to improve our ability to detect illegal crypto activity on our platform.” It said it did not believe Reuters’ calculations of illicit cash flows were accurate.
Crypto exchanges have come under increasing scrutiny in the United States, where senior government officials, including Treasury Secretary Janet Yellen, have publicly supported more regulation of the sector this year. In February, the Justice Department set up a national cryptocurrency enforcement team to “tackle the growth of crime related to these technologies,” with a focus on exchanges.
This month, the founders of another exchange, BitMEX, pleaded guilty to violating the Bank Secrecy Act and were later sentenced to up to two and a half years of probation. BitMEX agreed to pay a $100 million fine to settle separate charges of violating the law. BitMEX now says it is “fully committed to conducting its business in accordance with all applicable laws” and has made “significant investments” in its compliance program.
The 2020 Justice Department letter was addressed to Binance Holdings Ltd., a Cayman Islands company, and Roberto Gonzalez, a Washington-based attorney with the Paul, Weiss law firm. Binance Holdings owns the Binance brand and is owned by Zhao, according to regulatory filings. Gonzalez and Paul Weiss did not respond to requests for comment.
Binance has an opaque corporate structure. It has declined to provide details of the ownership or location of its main exchange, Binance.com, which has stopped accepting customers in the United States since mid-2019. Customers there are instead routed to a separate U.S.-based exchange called Binance.US, which is also controlled by Zhao, according to regulatory filings. Binance.US was registered with the Treasury in 2019; the main switch has never done so.
Since last year, over a dozen financial regulators around the world have issued warnings against Binance, saying it is either serving users without licenses or violating anti-money laundering regulations. In July, the Dutch central bank said it had fined Binance over €3 million for violating its financial crime laws. A Binance spokesman said at the time that the fine marks a “pivot point in our ongoing collaboration” with the central bank.
In the 2020 request, the Justice Department requested all documents identifying Binance employees responsible for complying with the Bank Secrecy Act, details of its anti-illicit finance policies, and any reports of suspicious financial activity it filed with authorities would have. Binance has been asked to provide information on all transactions between the exchange and users involved in ransomware, terrorism and dark web marketplaces, as well as those affected by US sanctions.
The department also requested documents related to the “business basis” for the formation of Binance.US. It requested communication with the 13 executives and partners — including Zhao, its co-founder Yi He, and its chief compliance officer Samuel Lim — on “the formation of Binance.US and its relationship with Binance.” Lim and He are still at Binance.
Reuters reported in January that Lim and other senior officials were aware that Binance’s money laundering controls were not strict, according to company news verified by the news outlet. Neither Lim nor Binance have commented on the news.
In addition to the Justice Department’s request, the Securities and Exchange Commission issued a subpoena for Binance.US operator BAM Trading Services that same month. The subpoena, verified by Reuters, asked BAM to turn over documents showing whether employees also worked for the main exchange Binance and what services they provided to the US company.
Binance.US did not respond to Reuters questions. The SEC said it would not comment on a possible investigation.
((Reporting by Angus Berwick and Tom Wilson; Editing by Janet McBride))
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