Money Laundering, Sanctions Compliance; What The Binance Case Means

Sanctions lawyers knew it was going to be bad before reaching the end of the first page of the charging document. Under the section heading, Overview, the government summarized the facts and circumstances that gave rise to the criminal case against cryptocurrency exchange Binance Holdings Limited, doing business as binance.com, and the companion case against its CEO, Changpeng Zhao, better known as CZ. There, on line six of the overview, line 23 of the charging document, was the adverb that gets laser focus from every sanctions lawyer and every sanctions investigator, willfully.

Binance Was An Unregistered Money Transmitter

As a cryptocurrency exchange operating at least in part in the U.S., not to mention serving U.S. users, Binance was a money transmitter. This is not a new law implemented to regulate the cryptocurrency industry. Nor is this a new application of existing U.S. law to a cryptocurrency exchange.

Since at least 2011, the United States government has been talking about virtual currencies. In 2013, FinCEN, the Financial Crimes Enforcement Network—a bureau within the United States Treasury Department—issued guidance titled, Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. In its 2013 guidance, FinCEN made clear that:

“An administrator or exchanger that (1) accepts and transmits a convertible virtual currency or (2) buys or sells convertible virtual currency for any reason is a money transmitter under FinCEN’s regulations, unless a limitation to or exemption from the definition applies to the person.”

To be clear, the term person refers to individuals as well as entities. The guidance continued:

“FinCEN’s regulations define the term ‘money transmitter’ as a person that provides money transmission services, or any other person engaged in the transfer of funds. The term ‘money transmission services’ means ‘the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means.’

“The definition of a money transmitter does not differentiate between real currencies and convertible virtual currencies. Accepting and transmitting anything of value that substitutes for currency makes a person a money transmitter under the regulations implementing the BSA.”

According To The Government, Binance, CZ, And Others, Conspired To Violate U.S. Anti-Money Laundering Laws

As a money transmitter, Binance was required to register with FinCEN. According to the government, Binance did not.

As a money transmitter, Binance was required to comply with the Bank Secrecy Act, which would have meant, among other things, filing suspicious activity reports and implementing an effective anti-money laundering, or AML, program that would have reasonably prevented Binance from being used to launder money or finance terrorism. Again, according to the government, Binance did not.

To be certain, later, according to the government, in addition to its global cryptocurrency exchange, located on the Internet at binance.com, Binance did create a separate U.S. cryptocurrency exchange, located at binance.us, that apparently did register with FinCEN. But, according to the government—as explained in the charging document, as well as at the joint-press conference held by the Department of Justice, the Treasury Department, and the Commodity Futures Trading Commission, more commonly known by its initialism, CFTC—even after the creation of binance.us, Binance intentionally kept some U.S. “VIP users” on its global exchange, binance.com.

Simply put, according to the government, Binance, CZ, and others, conspired to violate U.S. anti-money laundering laws.

Anti-Money Laundering Compliance And The Bank Secrecy Act

To understand why the government takes anti-money laundering laws so seriously, it helps to understand that those laws exist in order to prevent the introduction of criminal proceeds into the financial system, and in order to prevent the financial system from being used to finance terrorism. The government’s concerns are not hypothetical; its objectives are not theoretical. According to the government, as a result of Binance’s failure to implement an effective anti-money laundering program as required by the Bank Secrecy Act, binance.com “processed transactions by users who operated illicit mixing services and laundered proceeds of darknet market transactions, hacks, ransomware, and scams.” Further, according to the government, some of those binance.com transactions did apparently allow money to flow to terrorist organizations.

Sanctions Compliance And International Emergency Economic Powers Act

The International Emergency Economic Powers Act, IEEPA, authorizes the President of the United States to impose economic sanctions against countries, groups, entities, or individuals. IEEPA authorizes North Korea sanctions, Ukraine/Russia-related sanctions, and Iran sanctions. IEEPA authorizes the blocking of transactions with terrorist organizations like Al Qaeda, ISIS, and Hamas. IEEPA even authorizes the implementation of sanctions against certain individuals. And IEEPA authorizes the enforcement of those sanctions.

The federal prosecutors, agents, and analysts who do this work take sanctions violations heart-attack-seriously. So, too, do sanctions lawyers, investigators, consultants, and experts. Thus, when the charging document promptly used the adverb willfully to describe Binance’s IEEPA violations, sanctions lawyers knew it was going to be bad. Indeed, as set out later in the charging document:

“As a result of Defendant’s decision not to implement comprehensive controls blocking illegal transactions between sanctioned users and U.S. users, Defendant willfully caused transactions between U.S. users and users in comprehensively sanctioned jurisdictions in violation of U.S. law. Specifically, between in or about January 2018 through May 2022, Defendant caused at least 1.1 million transactions in violation of IEEPA between users it had reason to believe were U.S. persons and persons it had reason to believe resided in Iran, with an aggregate transaction value of at least $898,618,825.”

Binance And CZ Plea Agreements

Binance has pleaded guilty to conspiracy to conduct an unlicensed money transmitting business; conducting an unlicensed money transmitting business; and violation of the International Emergency Economic Powers Act. Additionally, Binance has settled cases with the Treasury Department and the CFTC. In total, Binance will be required to pay $4.3 billion in fines and forfeiture. Where necessary and appropriate, Binance has also agreed to institute new, or enhance existing, compliance programs. Additionally, the plea agreement requires a monitorship and reporting requirements to be imposed on Binance.

For his part, CZ has pleaded guilty to failure to maintain an effective anti-money laundering program. According to his plea agreement, he will be required to pay a $50,000,000 fine, in addition to other penalties. CZ is set for sentencing on February 23, 2024.

How An Effective Compliance Program Can Help A Company Mitigate Risk, Avoid A Crisis

Whether one is a cryptocurrency exchange and a money transmitter, or any other money services business, or a bank or a financial firm, required to comply with the Bank Secrecy Act, an effective compliance program will in many ways mitigate the risk of violations.

Moreover, and this is true for every individual or entity engaged in any form of international business, anywhere in the world—regardless of whether one is a cryptocurrency exchange, a money transmitter, a money services business, a bank, a financial firm, a multinational corporate, or any other company engaged in international business—sanctions are heart-attack-serious. An effective sanctions compliance program, however, and when necessary self-reporting, will unequivocally mitigate risk and help avoid a legal, commercial, financial, and reputational crisis.