Cyber criminals have utilized cryptocurrency exchanges like Binance for money laundering due to the pseudonymous nature of digital currencies. Here’s a general overview of how they might do this:
- Obtaining Cryptocurrency through Illicit Means: Cyber criminals may acquire cryptocurrencies like Bitcoin through illegal activities such as hacking, ransomware attacks, online scams, or dark web transactions.
- Creating Accounts on Exchanges: They create accounts on cryptocurrency exchanges like Binance. This often involves using fake or stolen identities to avoid detection, as legitimate exchanges require identity verification (Know Your Customer, KYC) for account creation.
- Depositing the Illicit Funds: The acquired cryptocurrency is then deposited into their accounts on these exchanges. This step is critical in the laundering process as it moves the funds from a directly traceable source (like a ransomware payment) to a more mainstream financial network.
- Layering through Transactions: To obscure the origin of the funds, criminals may engage in a series of complex transactions. This involves converting cryptocurrencies into other digital assets, trading across various pairs, or moving funds across multiple accounts and exchanges. The goal is to disassociate the illicit funds from their original source.
- Using Tumblers/Mixers: In some cases, services known as tumblers or mixers are used. These services mix potentially identifiable or ‘tainted’ cryptocurrency funds with others, making it harder to trace back to the original source.
- Withdrawing or Spending: Finally, the laundered funds are either withdrawn as fiat currency through the exchange or used to purchase goods and services directly with cryptocurrency, thereby entering the legitimate economy.
In a landmark legal development, Binance, the world’s largest cryptocurrency exchange, and its CEO Changpeng Zhao, popularly known as “CZ,” have agreed to a $4.3 billion settlement with U.S. authorities over charges of money laundering and other financial crimes. This settlement marks one of the most significant actions against a major player in the cryptocurrency industry.
Background of the Case: Founded in 2017, Binance quickly rose to prominence as a leading cryptocurrency exchange. However, its rapid growth and global operations caught the attention of U.S. regulators, leading to intense scrutiny over its compliance with anti-money laundering (AML) regulations and sanctions laws.
Changpeng Zhao’s Involvement: Changpeng Zhao, the charismatic and influential founder of Binance, found himself at the center of these legal challenges. Facing allegations of knowingly failing to implement an effective AML program and violating economic sanctions, Zhao appeared in a Seattle federal court to enter his plea. In a significant turn of events, he pleaded guilty to the charges and agreed to pay a $50 million fine to the Commodity Futures Trading Commission (CFTC).
Details of the Settlement: The $4.3 billion settlement, a figure unprecedented in the crypto industry, includes criminal fines and forfeiture amounts exceeding $2.5 billion. Binance’s admission of engaging in unlicensed money transmitting and sanctions violations underscores the severity of the charges. The settlement also involves agreements with the Department of Treasury’s Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Assets Control (OFAC), and the CFTC.
Zhao pleaded guilty to a number of violations identified by the DOJ and other U.S. agencies. He appeared in a Seattle federal court to enter his plea and announced his resignation as CEO of Binance. Richard Teng, formerly Binance’s global head of regional markets, succeeded him as CEO. Binance admitted to engaging in anti-money laundering, unlicensed money transmitting, and sanctions violations. The settlement with the DOJ and other agencies, including FinCEN, OFAC, and the CFTC, amounted to approximately $4.3 billion. Of this, about $1.8 billion will be credited toward resolutions with these agencies. Zhao personally agreed to pay a $50 million fine to the CFTC.
The charges against Binance and Zhao included knowingly failing to register as a money services business and violating the Bank Secrecy Act by not implementing an anti-money laundering program. This was seen as a deliberate effort to profit from the U.S. market without adhering to U.S. laws. The exchange collected about $1.35 billion in trading fees from U.S. customers. Statements from U.S. Attorney General Merrick Garland and Secretary of Treasury Janet Yellen emphasized the necessity for all institutions, regardless of location, to comply with U.S. laws if they wish to benefit from the U.S. financial system.
Binance’s challenges were not limited to this case. The company has faced other issues, such as the collapse of FTX, a competitor, and the termination of a major acquisition deal by Binance.US, its American sister company, due to regulatory concerns. Moreover, Binance faced severed ties with Checkout.com over concerns related to anti-money laundering and compliance controls.
These developments reflect the complex and evolving regulatory landscape of the cryptocurrency industry, highlighting the need for major players like Binance to adhere strictly to legal and regulatory standards, especially in jurisdictions like the United States.
Leadership Changes and Future Compliance: Following the guilty plea, Zhao stepped down as CEO of Binance, a move signaling a new era for the exchange. Richard Teng, formerly the global head of regional markets at Binance, has been appointed as the new CEO. As part of its agreement, Binance is committed to overhauling its compliance program and will be under the supervision of an independent monitor for the next three years.
Industry and Regulatory Implications: This case represents a watershed moment for the cryptocurrency industry, highlighting the increasing regulatory focus on digital assets. U.S. Attorney General Merrick Garland emphasized that using new technology to break the law does not exempt companies from being held accountable. Secretary of Treasury Janet Yellen echoed this sentiment, insisting on adherence to U.S. laws for any institution benefiting from the U.S. financial system.
Conclusion: The Binance settlement serves as a stark reminder of the legal and regulatory complexities facing the cryptocurrency industry. As digital assets continue to intersect with mainstream finance, this case may set a precedent for how regulatory agencies across the globe approach compliance and enforcement in the crypto sphere.
Information security specialist, currently working as risk infrastructure specialist & investigator.
15 years of experience in risk and control process, security audit support, business continuity design and support, workgroup management and information security standards.