The CFTC alleges that Binance may have deliberately supported transactions by organized crime and terrorist organizations. CFTC communication logs include then-Chief Compliance Officer Lim and a money laundering reporting officer.
“Internally, Binance executives, employees, and agents have admitted that the Binance platform has aided potentially criminal activities,” the complaint added. In February 2019, Lim informed a coworker that terrorists send "little funds" because "big sums imply money laundering." ‘Can barely buy an AK47 with 600 bucks,' Lim's colleague answered. In February 2020, Lim said, "Like come on" about Binance consumers, especially Russians. Criminals are here. "We see the terrible, but we close 2 eyes," said Binance's money laundering reporting officer.
In another instance, “a Binance employee wrote to Lim and another colleague asking if a customer whose recent transactions ‘were very closely associated with illicit activity' and ‘over 5m USD worth of his transactions were indirectly sourced from questionable services' should be off-boarded or if it was in the class of cases ‘where we would want to advise the user that they can make a new account.'”
According to the CFTC, Lim warned via internal chat: “Can let him know to be careful with his flow of monies, especially from darknet like hydra,” adding, “He can come back with a new account.” But this one must go—tainted.” it's Binance's 2019 terms of service said that it could not "offer services to any U.S. person." Binance started blocking IP addresses that year.The CFTC said Binance simply installed a pop-up window on its website that appeared when users tried to join in from a US IP address.
The agency stated the pop-up did not prevent users from signing in, depositing, or trading, but instead prompted them to "self-certify" that they were not in the U.S. Binance's "geofencing" IP address compliance restrictions did not block clients from "restricted jurisdictions," including the U.S. The CFTC said Binance advised U.S. consumers to use VPNs to avoid restrictions. The government stated a 2019 "Beginner's Guide to VPNs" taught clients how to use a VPN. “I HAZ NO CONFIDENCE IN OUR GEOFENCING,” a Binance “money laundering reporting officer” told Lim after Paxos requested a compliance audit.
The complaint alleges that at least three U.S. trading firms used Binance, which goes beyond consumer accounts. Firms are described but not named. The CFTC said that Binance's "VIP" program for large accounts expedites trades and alerts them if law enforcement targets their cash.The complaint stated that Binance monitors its sources of transaction volume and fee-based revenue, so it knows its VIPs' identities and locations.
The program's "primary benefit" is "rapid notification of any law enforcement investigation involving their account," which Lim built on Zhao's orders, according to the CFTC.
The complaint stated that Binance's VIP staff was to "contact the user using all accessible methods (text, phone) to advise him/her that his account has been frozen or unfrozen" once funds were frozen or unfrozen. Tell the user their account has been unfrozen and XXX investigated. “A smart or big trader will receive the hint.”
The agency said Zhao and others used Signal "with its auto-delete functionality enabled" for business communications "even after Binance received document requests from the CFTC and after Binance reportedly sent document preservation instructions to its personnel." The complaint stated that auto-delate allows users “to hide their tracks after speaking regarding inculpatory matters.”
BAM Trading runs Binance.US. The allegation stated that Zhao controls BAM Trading, which has never been registered with the agency. The CFTC stated Zhao depicted Binance as a pirate ship and wanted Binance.US to be a naval boat when he hired BAM Trading's first CEO. The agency said that Binance.US and Binance.com shared marketing and branding.
Binance relied "on a maze of corporate entities" like FTX, which collapsed due to its complex international structure. The agency claims Binance used a variety of company organizations to conceal its location and confound outsiders.
The CFTC stated that Binance has even confused its Chief Strategy Officer by obfuscating its location and operating companies. The agency's subpoena search for Lim's address also confused locations. Binance had 300 "house accounts" that traded on the platform and were "directly or indirectly owned by Zhao," as well as two other Zhao-controlled organizations, Merit Peak and Sigma Chain, and two Zhao-managed person accounts.
The CFTC stated that Binance does not inform clients that it trades in its own markets in its Conditions of Use or elsewhere. “Consistent with its apparent aim to conceal its private trading activities on its own exchanges, Binance has declined to answer to Commission-issued investigative subpoenas seeking information about its proprietary trading activity on Binance, including transaction data and discussions among the Binance "quant desk." ” The “house accounts” are excluded from a “relatively new ‘insider trading' policy” since the CFTC found no evidence that Binance monitored or controlled them for fraud or market manipulation.
"Binance.com does not trade for profit or'manipulate' the market under any circumstances," Zhao declared late Monday EDT. Binance "trades" several times. Crypto revenues. We occasionally change them to fiat or other cryptocurrencies for expenditures. Affiliates provide liquidity for less liquid pairs. Affiliates are controlled to avoid big profits." "Personally, I have two Binance accounts: One for Binance Card, one for my crypto holdings," he said. I eat our dog food and store my crypto on Binance.com. I occasionally need to convert bitcoin for personal spending or the card."
The complaint regularly mentions Zhao as a defendant. Since Binance has no board of directors, Zhao "answers to no one but himself" and owns all of its business companies, according to the agency. The CFTC stated Zhao "directly approves products" and that some of the 120 firms, including Binance Holding, Binance IE, and Binance Services, had commingled assets and shared infrastructure.
The CFTC claimed Zhao used his credit card to pay for some Binance Amazon Web Services accounts. “Zhao also manages Binance's details. In January 2021, Binance generated over $700 million, Zhao personally approved a $60 office furniture spend.
Zhao hired a senior management team as Binance grew, but he retained control “over all critical decisions for the enterprise,” the complaint said, “including which products to offer and whether and how to implement and enforce anti-money laundering (“AML”) controls and Know Your Customer (“KYC”) procedures.”
“Zhao is ultimately responsible for considering the legal and regulatory risks associated with Binance's business activities, including those linked to the launch of Binance.US,” the CFTC said. Zhao, Lim, and other Binance management got weekly reports about Binance's U.S. clients "and the effectiveness of Binance's efforts to capture the U.S. market," the CFTC claimed. The agency classified Binance's Litecoin, ether, USDT, and Binance USD as commodities. As Paxos received notice of an inquiry into a joint stablecoin offering with Binance, Binance Dollar (BUSD) came under scrutiny more than a month ago. Monday's complaint included Paxos. The CFTC stated Binance tried to hide its inadequate compliance procedures from Paxos and other partners. Binance had a compliance exam in 2020 to "satisfy Paxos."
“But according to Lim, Binance purposefully employed a compliance auditor that would ‘just do a half assed individual sub audit on geo[fencing]' to ‘buy us more time,'” the CFTC claimed in the complaint. The CFTC seems to think Litecoin is a commodity, despite its lower profile. Regulators disagree on ether. Ether is a security, according to SEC Chair Gary Gensler and New York Attorney General Letitia James. James sued KuCoin this month, calling ether a security. CFTC Chair Rostin Behnam claims it is a commodity.