Binance, CZ, Sued By CFTC For Compliance Breach

Major crypto exchange Binance is being investigated by the US Commodity Futures Trading Commission (CFTC) over concerns that it allowed Americans to place wagers that violated US rules, Bloomberg reported, citing undisclosed people familiar with the matter.

Binance is led by CEO Changpeng Zhao, or CZ for short, the most outspoken Crypto leader, and the man partially responsible for the collapse of FTX. From the outside, his company appears to be a strong business with stable cash flow. But under the surface, the company is murky at best.

CZ has recently said the company is “still profitable” and has “fairly large cash reserves.” But he offers no hard numbers. Binance is a private company and isn’t obligated to disclose how much money it makes or how. What’s more, Binance’s giant global exchange, Binance.com, isn’t licensed in the nations that require the toughest public financial disclosures.

In the U.S. Binance has avoided reporting requirements by running a small, relatively limited exchange called Binance.US that’s regulated under “money transmitter” licenses in 46 states.

But this exchange appears to have upset some regulators. Yesterday morning, the Commodity Futures Trading Commission (CFTC) released a 74 page report alleging regulatory breaches by major crypto exchange Binance. The CFTC, which regulates futures, swaps, and other derivatives, accused Binance of breaching several provisions of the Commodity Exchange Act.

As punishment for the breaches, the CFTC argues Binance should be fined and prohibited from operating in the United States. The CTFC accuses Binance of having an “ineffective compliance program” and claims it “knowingly” broke the law.

In addition to suing Zhao, the CTFC also charges Samuel Lim, Binance’s former chief of compliance, for allegedly “aiding and abetting Binance’s violations through intentional conduct that undermined Binance’s compliance program.”

The agency claims Zhao, Lim, and other executives “failed to properly supervise Binance’s activities” and “actively facilitated violations of U.S. law” as a result.

The CFTC drew on emails and chats from Binance employees, finding that the company had offered commodity derivatives transactions to U.S. customers since at least July 2019.

Fake Reports

Some of this improper supervision materialized as fake anti money laundering reports. Partner company Paxos, which issued the Binance-branded stablecoin BUSD until last month, asked Binance to undergo a compliance report in October 2020 that required the exchange to submit an anti-money laundering report to its board of directors.

Binance boss CZ "answers to no one but himself", so CCO Lim instead asked the crypto firm's money laundering reporting officer to write a fake report for a fake board of directors, the CFTC said.

Binance and Zhao took steps to purposefully obscure where the exchange’s subsidiaries were located, the regulator said. This was part of a larger strategy that Zhao said was an effort to “keep countries clean,” the regulator alleged in the filing.

A key part of Binance’s alleged effort to generate fees and solicit U.S. users was the exchange’s VIP program, for high net worth individuals, the CFTC filing said.

“Binance is aware of its VIPs’ identities and geographic locations because Binance monitors its sources of transaction volume and fee-based revenue as a matter of course in conducting its operations,” the CFTC complaint alleges.

Binance’s VIPs were offered special privileges when law enforcement agencies pursued them or froze their assets, the CFTC alleged, claiming Binance gave VIPs a heads up or suggested they take their assets off the platform.

Terrorist Activities

Lim and other Binance personnel appear to have known the platform was being used for criminal activities and turned a blind eye, according to the CFTC's complaint.

In December, Reuters reported that the US Justice Department has been investigating Binance since 2018 for possibly laundering money, while separate investigations by the publication found it had processed over $2 billion for criminals and nearly $8 billion for Iranian firms seeking to avoid US sanctions.

And in February 2019, after receiving information “regarding HAMAS transactions” on Binance, Lim explained to a colleague that terrorists usually send “small sums'' as “large sums constitute money laundering.”

And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: “Like come on. They are here for crime.” Binance’s MLRO agreed that “we see the bad, but we close 2 eyes.”

Secret Communications

The complaint also alleges that Binance officers and employees obfuscated their communications with each other by using Signal, an encrypted messaging platform that can automatically delete messages after they are sent and read.

Executives continued to use Signal even after Binance received document requests

from the CFTC and after Binance purportedly distributed document preservation notices to its

Personnel. Zhao has also instructed Binance officers, employees, and agents to use Signal to

communicate with U.S. customers.

According to the complaint, these communications included a group chat between Zhao, Binance’s then-head of institutional sales, and Binance’s head of “Big Data,” which is the operational group responsible for creating and maintaining Binance’s data and databases including the database that contains customer- and transaction-related information.

The attack on Binance is just the latest following the collapses of FTX, Silvergate Bank, and Signature Bank, all of which were involved in crypto lending and derivatives, and a negative outcome could severely damage Binance’s reputation, or even its solvency.