Federal Agencies Settle Charges Against Crypto Exchange Binance

Practical Law Legal Update w-041-5393 (Approx. 10 pages)

Federal Agencies Settle Charges Against Crypto Exchange Binance

by Practical Law Finance

CFTC Settlement

According to a CFTC press release, Binance and CZ (collectively, Binance defendants) have agreed to a proposed consent order that, if entered by the US District Court for the Northern District of Illinois, will resolve all CFTC charges against the Binance defendants for knowingly disregarding provisions of the CEA to profit from their operation of an illegal digital asset derivatives exchange (see Legal Update, CFTC Charges Major Crypto Exchange Binance and Its CEO with Numerous Violations).

According to the CFTC, between 2017 and 2023, Binance, among other things, illegally offered and executed commodity derivatives transactions to and for US customers and accepted funds from those customers, who, for most of the relevant period, were not required to provide any identity verification before trading on the Binance crypto-asset trading platform.

The CFTC further asserted that Binance implemented a business strategy of willful noncompliance with the CEA for financial gain. According to the CFTC, as part of this strategy, Binance took numerous steps to retain commercially valuable US customers, even though Binance defendants were aware that offering commodity derivatives to US persons subjected Binance to US law, including the CEA and CFTC regulations.

The CFTC also charged the Binance defendants with violating CFTC Regulation 1.6, which prohibits activities conducted outside the US to willfully evade or attempt to evade the CEA, by intentionally sabotaging and subverting the platform's superficial compliance controls, including controls designed to restrict the participation of US persons. According to the press release, CZ owned and controlled the opaque maze of entities that operated the Binance platform, and he was involved in and responsible for all of its strategic decisions.

Under the proposed consent order, Binance agrees that it:

Is liable for failing to register with the CFTC in numerous required capacities including as a futures commission merchant (FCM), foreign board of trade (FBOT), designated contract market (DCM), and/or swap execution facility (SEF).
Breached its duties arising out of its status as an FCM to implement effective know-your-customer (KYC) procedures and to diligently supervise its activities as an FCM.

The proposed consent order:

Requires Binance to disgorge $1.35 billion of ill-gotten gains and pay a $1.35 billion civil monetary penalty to the CFTC.
Requires CZ to pay a $150 million civil monetary penalty to the CFTC.
Enjoins Binance defendants from willfully evading the CEA, acting as an unregistered FCM, operating an illegal digital asset derivatives exchange, and failing to have adequate KYC compliance controls, among other activities listed in the proposed consent order.

CFTC Commissioner Kristin Johnson noted that these represent the most significant penalties imposed by the CFTC to date in connection with an investigation that does not allege fraud. Commissioner Johnson also noted that Binance has agreed to certain corporate-governance, risk-management, know-your-customer (KYC), and other reforms, including requirements for independent board members and related certification requirements, previously advocated by advocated by Commissioner Johnson.

According to a related CFTC press release, Binance chief compliance officer (CCO), Samuel Lim, agreed to a proposed consent order for a permanent injunction, a $1.5 million civil monetary penalty, and equitable relief that, if entered by the US District Court for the Northern District of Illinois, will resolve all charges brought by the CFTC against Lim for violating the CEA and aiding and abetting numerous violations of the CEA. CFTC Commissioner Caroline Pham noted that this was the first alleged charge of evasion under CFTC Rule 1.6(a) for activities outside the United States relating to swaps, and the first alleged charges for individual liability against a chief compliance officer (CCO).

Update: On December 18, 2023, the CFTC announced the entry of a consent order settling the CFTC action against the Binance defendants, finding that the Binance defendants violated the CEA and CFTC regulations, imposing a $150 million civil monetary penalty against CZ, and requiring Binance to disgorge $1.45 billion of ill-gotten transaction fees and pay a $1.35 billion penalty to the CFTC.

FinCEN Settlement

Binance and FinCEN entered into a consent order specifying that, between 2017 and 2023, Binance violated the BSA by failing to:

Register as a money services business (MSB) while doing business as a money transmitter in substantial part within the US, including by cultivating and serving over one million US customers through its platform.
Develop, implement, and maintain an effective anti-money laundering (AML) program that is reasonably designed to prevent the MSB from being used to facilitate money laundering and the financing of terrorist activities.
Identify and report suspicious transactions relevant to a possible violation of law or regulation via suspicious activity reports (SARs) with FinCEN, specifically transactions that involve or aggregate to at least $2,000 that are conducted by, at, or through the MSB and that the MSB knows, suspects, or has reason to suspect are suspicious.

According to the consent order, FinCEN assessed the factors outlined in the BSA Statement on Enforcement issued on August 18, 2020, including the:

Nature and seriousness of the violations, including the extent of possible harm to the public.
Impact or harm of the violations on FinCEN's mission to safeguard the financial system from illicit use, combat money laundering, and promote national security.
Pervasiveness of wrongdoing within an entity, including management's complicity in, condoning or enabling of, or knowledge of the conduct underlying the violations.
Financial gain or other benefit resulting from, or attributable to, the violations.
Presence or absence of prompt, effective action to terminate the violations upon discovery, including self-initiated remedial measures.
Timely and voluntary disclosure of the violations to FinCEN.
Systemic nature of the violations.

Under the consent order, FinCEN imposed a $3.4 billion civil money penalty against Binance and agreed to credit against that penalty the $2.47 billion civil money penalties Binance paid to the DOJ and CFTC. According to the consent order, FinCEN also agreed to suspend $150 million of the civil money penalty pending Binance compliance with certain undertakings, specifically:

Retaining an independent compliance monitor.
Offboarding of US users.
Conducting an SAR lookback review, in which a qualified independent consultant reviews transactions or attempted transactions by, at, or through Binance that occurred from January 1, 2018 through December 31, 2018 to determine whether activity was properly identified and reported under Treasury's compliance, exemptions, and summons authority regulation, which requires reporting of suspicious transactions.
Conducting an AML program review.

According to a press release, FinCEN's $3.4 billion settlement is the largest penalty in the history of the US Treasury Department (Treasury) and FinCEN.

The consent order provides that Binance admits only to the facts admitted in the DOJ's November 21, 2023 plea agreement with Binance (see DOJ Plea Agreement) and neither admits nor denies the remainder of the facts in the consent order.

OFAC Settlement

Binance and OFAC entered into a settlement agreement specifying that, from approximately August 2017 to October 2022, Binance and its senior management violated multiple OFAC sanctions prohibitions by matching and executing virtual currency trades on its platform between US persons and persons or users in sanctioned jurisdictions including Iran, Syria, North Korea, the Crimea Region of Ukraine, Cuba, the so-called Donetsk People's Republic, and the so-called Luhansk People's Republic. According to the settlement agreement, this conduct resulted more than one million virtual currency transactions, totaling $706,068,127 in virtual currency and futures products.

According to a Treasury press release, Binance deliberately undermined and ineffectually implemented its own sanctions compliance controls by directing users to virtual private networks that could circumvent Binance geofencing controls.

According to OFAC, Binance knew that maintaining both its base of US users and customers from sanctioned jurisdictions would inevitably lead to executed trades between US and sanctioned jurisdiction users due to the Binance matching algorithm in violation of US economic sanctions. To maintain this activity, Binance executives, including CZ, issued guidance to "appear" compliant, while knowingly allowing the activity to continue.

According to the settlement agreement, Binance:

Will pay to OFAC a civil monetary penalty of $968,618,825.
Has implemented a sanctions compliance program.
Will maintain sanctions compliance measures that are designed to minimize the risk of recurrence of similar conduct in the future for at least five years following the execution of the settlement agreement.

DOJ Plea Agreement

According to a DOJ press release, Binance Holdings pleaded guilty and agreed to pay over $4 billion to resolve the DOJ's investigation into Binance Holdings for:

Violations of the BSA by not implementing an effective AML program that was reasonably designed to prevent the Binance platform from being used to facilitate money laundering.
Failure to register as a money transmitting business.
Violations of the IEEPA by failing to implement controls that would have prevented US customers from conducting transactions with customers in sanctioned jurisdictions, despite knowing that the system it used to match customers for transactions would necessarily cause violations of IEEPA.

The DOJ press release also provides that CZ entered into a plea agreement in which he pleaded guilty to failing to maintain an effective AML program in violation of the BSA.

According to the press release, Binance Holdings has agreed to:

Forfeit $2,510,650,588.
Pay a criminal fine of $1,805,475,57.
Retain an independent compliance monitor for three years.
Remediate and enhance its AML and sanctions compliance programs.

The DOJ also provided a video of the guilty pleas and a statement issued by Attorney General Merrick Garland.

Federal Agencies Settle Charges Against Crypto Exchange Binance | Practical Law