Binance gets hit with crypto’s worst possible fate: compliance

By Amy Castor and David Gerard

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In our 100%* reliable guide to the future of crypto in December 2022, our crystal balls showed us that:

Either Binance or Tether is likely to go down in 2023. More likely Binance. (But then, we thought Tether would definitely go down by December 2017.)

We haven’t quite achieved the first — Binance hasn’t completely shut down yet — but the exchange and CZ himself just settled with the US Department of Justice, the Treasury, and the CFTC. [DOJ press release]

This was a multi-agency action, also involving FinCEN, OFAC, and IRS Criminal Investigation. Secretary of the Treasury Janet Yellen appeared in the DoJ announcement video personally. [DoJ press release; DoJ, video; Treasury press release]

The stake through Binance’s heart won’t be the $4.3 billion in fines — it’ll be the compliance. The DOJ and FinCEN will place compliance monitoring staff in the exchange for up to five years. The monitors will also be looking into past transactions for anti-money-laundering violations.

The compliance will cost a fortune by itself. Does Binance even have this much money in actual dollars?

 

Forbes does it again!

 

4 (billion)

Binance has pleaded guilty to running and conspiring to run an unlicensed money transmitter in violation of the Bank Secrecy Act and to violating sanctions by supplying services to Iran. [Charges and plea, PDF; Case docket]

Binance must pay $4.3 billion in fines to the various agencies — that’s actual US dollars, not tethers. Of that amount, $898,618,825 is due within 30 days, $1,612,031,763 within 6 months, and $1,805,475,575 within 15 months.

Binance CEO Changpeng Zhao (CZ) flew into Seattle from Dubai to personally plead guilty to willful violations of the Bank Secrecy Act. Per the plea agreement, “Defendant prioritized Binance’s growth, market share, and profits over compliance with the BSA.” The plea agreement also contains a statement of facts in the case. [CZ plea agreement, PDF]

CZ must step down from any control of Binance for three years from the date the DOJ monitor is appointed. He must pay a total fine of $150 million — if he pays the $150 million to the CFTC before he is sentenced in the plea deal, he doesn’t also have to pay the DOJ’s $50 million fine.

Binance has named Richard Teng, former head of regional markets outside the US, as its new CEO, effective immediately. We said in June that Teng seemed to be the hot pick for the job. This settlement may have been in the works for a while. [Twitter, archive]

CZ faces up to 18 months in prison — a slap on the wrist, considering the billions he made criming. The New York Times reported that “prosecutors are keeping open the possibility of asking for a stiffer penalty, according to senior Justice Department officials.” [NYT, archive]

Sentencing is scheduled for February 23. CZ posted a $175 million bond and is free on bail as long as he shows up in Seattle two weeks before the sentencing. So that’s nice. (The judge still has to approve the order.) [Appearance bond, PDF]

As part of the deal, CZ has agreed to not “make any public statement, in litigation or otherwise, contradicting his acceptance of responsibility.” So you probably won’t see him tweeting “4” (“FUD”) this time.

Instead, he tweeted: “I made mistakes, and I must take responsibility.” He added, “Funds are SAFU!” We’ll see about the second part. [Twitter, archive]

In its official statement, Binance wrote: “We are confident that Binance will emerge as a stronger company as we lay the foundation for the next 50 years.” This is good news for bitcoin! [Binance, archive]

CFTC settlement

The CFTC sued Binance in March 2023. As part of the settlement, Binance must pay $1.35 billion to the CFTC. CZ must pay $150 million. Binance’s former chief compliance officer Samuel Lim was also personally fined $1.5 million. [CFTC press release; CFTC press release]

A statement from Commissioner Kristin Johnson offers some details on the new compliance requirements. [Statement of Kristin N. Johnson]

As well as doing proper know-your-customer — not whatever it’s been doing until now — Binance must have a board of directors with at least three independent members. CZ will not be allowed onto the board.

Binance must put up a board compliance committee and an audit committee. The exchange will also have to operate a checklist  of the nationalities of business entities to keep derivatives away from US customers.

Commissioner Caroline Pham, previously crypto’s best friend at the CFTC — remember that photo with Sam Bankman-Fried? — was very enthusiastic about this settlement. If we were cynical, we’d think she’d realized crypto wasn’t such a good post-CFTC job opportunity these days. [Statement of Caroline D. Pham; Statement of Caroline D. Pham]

Treasury

FinCEN and OFAC have their own consent agreements with Binance. [FinCEN press release; FinCEN consent order, PDF; OFAC press release, PDF; OFAC settlement, PDF]

OFAC is concerned by the extensive sanctions violations. FinCEN is also concerned by how Binance just ignored the BSA and acted as the cashier’s desk for ransomware operators and the darknet markets. FinCEN wasn’t happy with the child pornography either.

The DOJ has put compliance monitoring into place for three years. FinCEN and OFAC are requiring five years of compliance monitoring, starting 180 days from now.

Binance’s “compliance unit(s)” will have “sufficient authority and autonomy” and be adequately resourced in staff, expertise, and equipment to be effective in practice. That means a lot of compliance staff and expensive outside consultants and auditors.

An independent compliance monitor will be chosen by FinCEN and report back to FinCEN. A SAR lookback consultant will go through transactions since January 1, 2018, that should have had a suspicious activity report filed. There will also be an AML program consultant.

FinCEN can remove the monitor early if things are going well, or extend their term by a year if not.

US entities must be removed from Binance within 90 days.

OFAC and FinCEN may ask Binance for any relevant information, or to interview any relevant staff, at any time.

FinCEN has put in place a $150 million suspended fine, which Binance will be required to pay within ten days if found in violation.

The CEO and senior management are required to promote a “culture of compliance” throughout Binance with “sufficiently strong, explicit, and visible support and commitment to Binance’s AML program.” All employees will undertake AML training. Just how Satoshi wanted it.

What compliance means for Binance customers

The DOJ and FinCEN will have 24/7 access to current and historical customer information as they need it.

Real finance businesses that don’t run on crime can do compliance — they just don’t like it. Businesses that run on crime are screwed.

We’ll rapidly find out how much of Binance’s turnover really was crime.

Customers are already rushing for the exits. $950 million of cryptos were withdrawn in the first few hours after the Justice Department announcement. Order book liquidity was down 25% by this morning. [CoinDesk; CoinDesk]

If you would rather not have your ID documents and transactions on Binance looked over by FinCEN, this would be a good time to get off the exchange before the monitors are in place.

David spoke to TechMonitor about the settlement and emphasized that the punishment is the compliance, not so much the fine. [TechMonitor]

The pain in the backside that keeps on giving

Our good friend David Silverman is the author of Stop Harming Customers: A Compliance Manifesto, which is coming out in January 2024. It’s a good book and you’ll enjoy it. [Stop Harming Customers]

We asked David’s thoughts on the settlements:

The most interesting thing to me of all of this is how much the settlement reads like a “normal” settlement with a regular bank. This implies that Binance has a going business once you’ve removed all the money laundering customers, removed the US customers, and layered on a few hundred compliance staff, real banking controls, and regular monitoring and reporting to the regulators.

Binance’s $4 billion fine puts it in the top 20 of total fines paid by banks. [Tableau]

But it’s often not the fine that matters so much to banks, instead it is the consent order requirements to build out the compliance department. Adding a few hundred or few thousand compliance staff is an ongoing cost and significantly slows down the “let’s just accept money from anyone” approach. Expansion of risk and compliance departments have always been a significant factor in the costs associated with regulatory enforcement.

Binance is required to document policies, procedures, and how many staff they will need to do this (this means more compliance staff), hire an independent compliance monitor (this means hiring a consulting company with likely dozens of staff), and hire a SAR lookback person (who will also be a department, not a person).

Especially notable are the requirements to scan through and remove all US customers and to retroactively file the 100,000+ suspicious activity reports (SARs) that the US thinks should have been filed — and which will likely lead to more unpleasantness for those involved in the suspicious transactions. Also, this is a lot of work!

So this is just like regular crypto, but with ten albatrosses tied around everyone’s necks as they go about their daily routine. The birds require feeding with money, and will bite you hard on the nose if you say “USA nexus” or “VPN.”

What happens next

We had suspected that Binance was insolvent, but keeping things going with pegged copies of BUSD and a reserve full of their own BNB magic beans.

We’ve been telling you the fall of Binance was coming since the crypto crash — what with Binance’s bogus bailout fund, the auditor who ran screaming, the fake BUSD, the commingling, the fiat gateways closing, and that the secret ingredient is still crime.

Binance is the largest crypto exchange. It’s where the price of bitcoin is set. It’s where you apply dubiously-backed tethers to make number go up. But we don’t expect that to last.

Sanctioned entities will have to go elsewhere to launder their bitcoin. We suspect that CZ folded because of US pressure on Dubai not to protect him any longer — with the current troubles in the Middle East, the US just wasn’t going to put up with crypto going to Hamas and Iran.

Strong compliance enforcement will cause Binance to collapse at warp speed. We wouldn’t be surprised if they file for bankruptcy by next year, and the regulators just become creditors in the bankruptcy.

The high rollers — as in real-world casinos, that phrase was always a euphemism for “money launderers” — will need a new home. Justin Sun would probably love to help, but does anyone trust him enough?

Tether printed another 1 billion USDT today. Number must not go in a direction other than up! [Twitter, archive]

One glaring omission from yesterday’s proceedings: the SEC case against Binance is not settled.