Jersey ducks a crypto bullet after Binance admits to money laundering and agrees to pay $4.3bn

Binance Markets Ltd [part of the Binance Group] planned to base its European exchange in Jersey, following it signing a Memorandum of Understanding with Digital Jersey in June 2018. The exchange was said to target traders in Europe and the UK who can trade Bitcoin and Ethereum against the British Pound and the Euro.

The then Group CEO, Changpeng Zhao [now resigned and changed with money laundering, see below], gave his comments at the launch of the MoU, saying:

• “We have chosen Jersey to be the next big step in our global expansion strategy for its clear and pro-crypto investment and regulatory environment.
• With its local economy based on a major currency (GBP), and its close proximity to the UK and Western Europe, we are confident the cooperation with Jersey will not only benefit the local economy, but also form a strong operational foundation for our expansion into the rest of Europe.”

In January 2019, Binance established its presence in Jersey and registered itself with the JFSC and subject to anti-money laundering requirements for Virtual Currency Exchange.

However, in June 2019 it ceased trading, after its parent company has been refused permission to operate by the The UK's Financial Conduct Authority [FCA]. The FCA published its decision on Binance Markets Ltd and warned consumers to be, "...wary of adverts online and on social media promising high returns on investments in crypto asset or crypto asset-related products." [https://www.fca.org.uk/news/news-stories/consumer-warning-binance-markets-limited-and-binance-group]

And then on Tue 21 Nov 2023  it was announced that Binance admitted money laundering and agreed to pay $4.3bn

The US Justice Department charged the company with conducting an unlicensed money transmitting business, a conspiracy charge and violating the International Emergency Economic Powers Act.

The attorney general Merrick Garland said at a press conference that:-

• The total of $4.3bn in fines Binance and Zhao had agreed to pay as part of guilty pleas was one the largest penalties the justice department had ever obtained from a criminal matter.

Binance too agreed to

• Plead guilty, accept the appointment of a monitor, and pay a criminal fine of nearly $1.81bn as well as a $2.51bn order of forfeiture to settle three criminal charges.

Changpeng Zhao, founder of Binance, the world’s largest cryptocurrency exchange, As part of a guilty plea, agreed to

• Resign from the company.
• Plead guilty to money laundering
• Pay a $50m fine and would be barred from any involvement in the business.

Zhao wrote in a tweet,

• “Today, I stepped down as CEO of Binance. Admittedly, it was not easy to let go emotionally.
• But I know it is the right thing to do. I made mistakes, and I must take responsibility.
• This is best for our community, for Binance, and for myself … I can’t see myself being a CEO driving a startup again.”

According to Garland,

• The Binance chief, had entered a guilty plea in person on Tuesday in Seattle.
• Zhao had “willfully violated federal law that guards against money laundering and terrorist financing”.
• “From the very beginning, Zhao and other Binance executives had engaged in a deliberate and calculated effort to profit from the US market without implementing the controls that are required by US law,”
• There were millions in transactions from the US to Iranian users, users in Syria and Russian-occupied Ukraine, and terrorist groups including Isis.
• “Binance willfully enabled hundreds of millions of dollars in transactions between American users and users subject to US sanctions. Its platform accommodated criminals across the world who used Binance to move stolen funds and other criminal proceeds,”

Treasury secretary Janet Yellen said

• US financial regulators had been investigating Binance for more than three years and found that it had engaged in “consistent and egregious violations” of US law that “allowed illicit actors to transact freely” on the platform and “supporting activities from child sexual abuse, to illegal narcotics and terrorism across more than 100,000 transactions”.

Yellen said

• Binance had posed risks “to the US financial system, US citizens and our country’s national security for too long”.

And she had a message for the cryptocurrency industry:

• “Let me be clear, we’re also sending a message to the virtual currency industry more broadly – today and for the future, the virtual currency exchanges and financial technology firms wish to realize the tremendous benefits of being part of the US financial system they must play by the rules. If they do not, the US government will take action.”

Richard Teng, Binance’s head of regional markets outside the US, was named CEO of the firm after the justice department remarks concluded.

The announcement is another huge blow for the cryptocurrency sector. The settlement with Binance comes less than a month after Sam Bankman-Fried was convicted on seven counts of fraud and conspiracy for his part in the collapse of FTX, a trading platform that had been second only in size to Binance.

The FTX founder faces 115 years in prison when he is sentenced next year.

Zhao, or CZ, played a significant role in FTX’s collapse. He was given the opportunity to look over FTX’s books shortly before it collapsed. But he declined to step in, and ensured the collapse of the smaller rival when he tweeted that Binance was dumping its position in FTX’s house token, FTT.

Zhao and Bankman-Fried, though strikingly opposite in character and appearance, had both promised a rosy future for digital currencies that some predicted could replace sovereign currencies.

But financial regulators and prosecutors did not see it that way.

When charges against Bankman-Fried were announced in December of last year, the US attorney Damian Williams said the “phenomenal downfall” of the cryptocurrency exchange and the criminal charges that followed were “not a case of mismanagement or poor oversight, but of intentional fraud, plain and simple”.

Binance has been under justice department’s scrutiny since at least 2018, just one of a string of legal and regulatory headaches it faces in the US.

Federal prosecutors asked the company in December 2020 to provide internal records about its anti-money laundering efforts, along with communications with Zhao.

Financial regulator the Commodities Futures Trading Commission (CFTC) filed civil charges against Binance in March, alleging it failed to implement an effective anti-money laundering program to detect and prevent terrorist financing.

The CFTC alleged.

• Internally, Binance officers and employees acknowledged that the platform facilitated “potentially illegal activities”,
• In February 2019, Binance’s former chief compliance officer Samuel Lim received information on transactions by the militant Palestinian group Hamas on Binance, the CFTC wrote.

Zhao, a billionaire who was born in China and moved to Canada at the age of 12, said

• The CFTC’s “complaint appears to contain an incomplete recitation of facts, and we do not agree with the characterization of many of the issues alleged”.

Sources

• https://www.theguardian.com/business/2023/nov/21/binance-settlement-crypto-exchange
• https://www.digital.je/choose-jersey/success-stories/fintech-sandbox/binance-jersey/
• https://www.bailiwickexpress.com/jsy/news/finance-watchdog-issue-cryptocurrency-warning/
• https://www.theguardian.com/business/2023/nov/21/binance-settlement-crypto-exchange
• https://www.fca.org.uk/news/news-stories/consumer-warning-binance-markets-limited-and-binance-group