DOJ Reaches Groundbreaking Criminal Settlement with Cryptocurrency Exchange Binance and CEO Changpeng Zhao (Part I of III)
Matt Stankiewicz, Partner at The Volkov Law Group, breaks down Binance’s recent criminal settlement agreements with U.S. regulators. Matt can be reached at [email protected].
On November 21, 2023, The U.S. Department of Justice (“DOJ”) announced settlement agreements with Binance Holdings Limited (“Binance”), the world’s largest cryptocurrency exchange, and Changpeng Zhao (affectionally known as “CZ” in the cryptocurrency industry), the exchange’s founder and Chief Executive Officer (“CEO”). Under these agreements, Binance and CZ each agreed to plead guilty to a variety of offenses in order to resolve the ongoing investigations. Binance plead guilty to violations of the Bank Secrecy Act (“BSA”), failure to register as a money transmitting business, and a variety of sanctions violations under the International Emergency Economic Powers Act (“IEEPA”). This guilty plea was a resolution of investigations conducted by the DOJ, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and Office of Foreign Assets Control (“OFAC”), and the U.S. Commodity Futures Trading Commission (“CFTC”). CZ, meanwhile, plead guilty to related violations including failure to maintain an effective anti-money laundering (“AML”) program in violation of the BSA.
CZ initially created Binance in 2017 in order to serve the still burgeoning cryptocurrency industry. Originally based in China, the company grew quickly with the rise of the industry and served customers all over the world. Binance grew to serve millions of customers in more than 180 countries and has processed transactions in volumes that rise to trillions of U.S. dollars. The company introduced its U.S. exchange—Binance.US—in 2019, which has had various legal issues in its own right.
The indictment alleges Binance intentional purposefully ignored U.S. regulations as part of its growth strategy, ultimately determining that compliance would limit its ability to attract and retain users. This would be especially true related to users based in the U.S., as that would subject Binance to those same regulations. Binance knew that the early cryptocurrency users valued privacy and that any semblance of a know-your-customer (“KYC”) program would be a nonstarter.
As such, Binance had virtually no compliance program during its rampant growth. Compliance was an afterthought for many of its internal systems. For example, the exchange maintained a “matching system” that connected buyers and sellers for each transaction. This matching engine was designed solely to operate around prices without regard to any other characteristic of the entities involved. As such, the system frequently matched U.S. users with users in sanctioned jurisdictions, causing repeated sanctions violations in the process. This led to causing at least 1.1 million transactions between U.S. Persons and citizens of Iran within in a three-year period.
As part of its settlement agreement with DOJ, Binance will face a total financial penalty of $4,316,126,163. Of that amount, $2,510,650,588 constitutes a forfeiture and the remaining $1,805,475,575 constitutes a criminal fine. Binance has agreed to retain an independent compliance monitor for a period of three years, which have again become somewhat more common in these types of cases in recent years. Binance also agreed to remediate and enhance their AML and sanctions compliance programs. Further, Binance separately reached settlement agreements with OFAC, FinCEN, and the CFTC, of which the DOJ will credit nearly $1.8 billion towards those resolutions. Binance’s settlement with OFAC resolved 1,667,153 apparent violations of multiple sanctions programs for a fine of $968,618,825. FinCEN’s consent order includes a financial penalty of $3.4 billion, imposes a five-year monitor overseen by FinCEN, and includes significant compliance remediations, which includes Binance’s complete exit from the U.S. market. Binance’s CFTC consent order requires Binance to disgorge $1.35 billion and pay a $1.35 billion civil penalty.
Applying the Corporate Enforcement Policy factors, DOJ cited the following:
- The nature, seriousness, and pervasiveness of the misconduct. The DOJ noted that Binance prioritized growth over profit and disregarded U.S. law for a period of five years.
- Binance received no voluntary disclosure credit.
- Binance received only partial cooperation credit. While the company did cooperate during the agreement and provided significant documents and analysis, the DOJ believed that the company ultimately delayed the production of certain critical evidence, including recordings of meetings between senior executives.
- Binance did engage in some remedial measures, including items such as IP blocking, restricting access for U.S. users, incorporated KYC procedures for new accounts, requiring KYC procedures for active accounts, restricting access for sanctioned parties, and generally making significant investments in its AML compliance program.
Based upon these and other factors, DOJ awarded Binance a 20-percent reduction from the bottom of the sentencing range.
Notably, the SEC’s suit against Binance will continue, though the judge has asked the parties to resolve the dispute by December 15.
Changpeng Zhao’s Settlement
CZ, meanwhile, reached his own respective settlement agreements with these U.S. regulators to resolve his own involvement in the alleged violations. Much of CZ’s involvement includes not just knowledge of the violations, but willful conduct intended to avoid compliance, which will be discussed in a subsequent post.
His settlement agreement with the DOJ includes a $50 million penalty, credited against payment made to the CFTC for that settlement (which includes a $150 million penalty). Further, CZ stepped down as CEO of Binance and will no longer have any involvement with the company. The agreement also prohibits CZ from making any public statements, directly or indirectly, that contradicts his acceptance of responsibility and his admission of guilt. Finally, CZ is still facing a prison sentence between 10 to 18 months.