Terrorists, drug dealers, gray cash. How Binance admins turned a blind eye to crypto crime

The founders of the crypto exchange Binance have been charged with illegal activities in the U.S., insider trading, and deficient anti-money laundering controls. The U.S. authorities believe that Binance management knew that HAMAS and Russian criminals were using the exchange's services but deliberately ignored this information. Furthermore, while attempting to circumvent regulatory requirements in the U.S., Binance management agreed to cooperate with the Russian supervisory body Rosfinmonitoring and leak customer data without hesitation.

ALL CARDS

• Binance's tricks

• How the managers turned a blind eye to crime

• What's next for Binance

• Binance's cooperation with Rosfinmonitoring

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On March 27, the U.S. Commodity Futures Trading Commission filed a lawsuit against the cryptocurrency exchange Binance, its CEO and founder Changpeng Zhao (commonly known as CZ), and its former chief compliance officer, Samuel Lim. The businessmen are being charged with massive violations of the U.S. Commodity Exchange Act and CFTC regulations. If the court agrees with the regulator's arguments, Binance will face heavy fines, and its employees will be banned from pursuing stock-trading activities.

Founded by Changpeng Zhao, a Canadian businessman of Chinese origin, Binance is the world's largest crypto exchange by daily trading volume. As of April 2023, Zhao's personal wealth was estimated at nearly $30 billion. The revenue of the Binance exchange in 2022 was estimated at $12 billion.

Changpeng Zhao

The CFTC accuses Changpeng Zhao and Samuel Lim of operating illegally in the United States. Trading with U.S. nationals accounts for the largest share of Binance's revenue: according to its top managers’ correspondence, 22% of Binance's revenue in 2019 came from American users and companies. By law, Binance cannot operate in the U.S. because it trades in cryptocurrency instruments: futures, options, and others. In America, this requires registration with the regulator, which Binance did not obtain.

Other charges brought forward against the Binance top management include insider trading and insufficient counteraction to money laundering. The text of the lawsuit was made available to The Insider. It contains indications that the exchange owner was aware of criminal money flowing through the platform but turned a blind eye to it.

Binance's tricks

To work around the restriction on trading in the U.S. market, the crypto exchange introduced a primitive “self-certification” of users. Whenever a new user tried to create an account, a window popped up, asking the customer if they were a U.S. citizen or resident. If they clicked on “no”, the platform permitted registration. Subsequently, to create an illusion of compliance, Binance began blocking U.S. users by IP address. However, this problem was easily solved by enabling a virtual private network (VPN), and Binance even provided tips on how to configure it. One of the regulator's accusations against the exchange is that the company instructed users on how to hide their location, that is, how to use a VPN tool.

All financial market transactions are subject to the Know Your Customer (“KYC”) procedure. However, the Binance website completely ignored this requirement for customers who withdrew less than two bitcoins a day. As of April 2023, that's about $56,000, and in 2021-2022 the amount fluctuated from $40,000 to $130,000. Citing Lim, the CFTC’s lawsuit says that “Binance’s decision to prioritize commercial success over compliance with U.S. law has been [Zhao’s] ‘biz decision.’”.

For large customers who were originally registered as U.S. nationals, Binance also offered the service of establishing shell firms in other jurisdictions: the British Virgin Islands, the Cayman Islands, Malta, and so on. In this case, users who wished to trade in financial instruments didn't even need to set up a new account but simply renamed an existing one.

Furthermore, Binance was accused of trading against its own clients, conducting transactions on the platform on behalf of 300 or so accounts, some of which directly or indirectly belonged to Zhao. The company even set up a special department to manage this trading activity. Zhao also traded on his platform under two personal accounts, which could be interpreted as insider trading. Binance has not disclosed to customers that it trades on its own markets.

How the managers turned a blind eye to crime

However, the most remarkable element of the U.S. regulator’s lawsuit is not evidence of violations of U.S. financial laws but Zhao's correspondence with Lim and other Binance executives.

According to the Commission, this correspondence was taken, in particular, from Signal. We do not know how specifically it became available to the CFTC. The lawsuit mentions that employee chats had an automatic message deletion feature enabled. Cyber lawyer Sarkis Darbinyan, head of the legal department at RoskomSvoboda, a Russian NGO promoting digital rights, believes the messages may have been leaked:

“The information could have originated from Binance employees who leaked the data. Or we can assume that someone has been intercepting CZ's messages on his phone. In this case, we are talking about the Pegasus software. However, the U.S. has banned the import of such programs by President Joe Biden's executive order. We can also assume that a few licenses were procured specifically to provide state agency employees with access to this correspondence. This in no way compromises Signal because the messenger has strong cryptography and chat encryption capabilities. As far as I know, there's still no technology that can infiltrate Signal between two users, intercept messages, and decrypt them.”

Even before the CFTC's lawsuit, Reuters and the Wall Street Journal published reports citing Binance employees’ Telegram correspondence and insider documents obtained by the editors.

The top management of the crypto exchange was well aware that some accounts were using the platform to transfer money obtained by criminal or dubious means. For example, when Binance legal counsels wrote to Lim asking how to handle 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”, Lim suggested advising the client to create a new account rather than off-boarding them: “Can let him know to be careful with his flow of funds, especially from darknet like hydra <The Insider's note: Hydra is a Russian dark web marketplace for drugs and other illegal goods>. He can come back with a new account. But this current one has to go, it’s tainted.” This approach echoes Zhao’s policies. The lawsuit quotes one of the company’s employees: “Don’t need to be so strict. Offboarding = bad in cz’s eyes.”

The top managers knew some of the users were transferring criminal proceeds

Samuel Lim realized that some Binance customers, particularly from Russia, could be using the platform for money laundering. In February 2020, he wrote to the employee responsible for identifying such transactions: “Like come on. They are here for crime.” To which the employee, who held the position of MLRO (Money Laundering Report Officer), replied: “We see the bad, but we close two eyes.” On another occasion, she complained of having to compose a “fake annual MLRO report to Binance board of directors wtf”. Lim replied he could get the management to sign off on a fake report, although he was perfectly aware that Binance had no board of directors. In their correspondence, they also discussed the possibility of hiring a compliance auditor that would “just do a half-assed individual sub audit” to meet the formal audit requirements of blockchain platforms.

However, investigative journalist Andrei Zakharov, who authored a book about the cryptocurrency movement in Russia, says Russian users are unlikely to use Binance for money laundering:

“If you need to move a large sum of money, you can come to the Federation Tower or a cryptocurrency exchange elsewhere with a cold wallet on a flash drive and a suitcase of cash. You don't need the services of an exchange. Any large sums that go through Binance are visible in the blockchain. Since you can see cryptocurrency that is being laundered through a Binance wallet, it is commonly believed you can find out who is behind the wallet, and so can security agencies.”

Lim was also aware the platform had accounts registered by the Palestinian organization HAMAS, labeled a terrorist organization in the U.S. and other countries. In an exchange that took place in 2019, he explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering”. To this, the colleague replied: “can barely buy an AK47 with 600 bucks.”

Judging by the correspondence presented in the lawsuit, the C-suite at Binance also knew that some customers are on the sanctions lists of the U.S. and other countries. In 2018, Lim asked Zhao: “Are we going to proceed to block sanction countries ip addresses? ... Downside risk is if fincen <The Insider’s note: FinCEN, the bureau of the U.S. Department of the Treasury tasked with combating financial crime> or ofac <The Insider’s note: OFAC, the Office of Foreign Assets Control> has concrete evidence we have sanction users, they might try to investigate or blow it up big on worldstage.”

Another important benefit that Binance has provided its VIP customers is prompt notification of any law enforcement inquiry concerning their account. If a VIP user's account got blocked at the request of law enforcement agencies, their managers were to contact the user “through all available means”. “Do not directly tell the user to run, just tell them their account has been unfrozen and it was investigated by XXX. If the user is a big trader, or a smart one, he/she will get the hint,” Lim instructed employees at Zhao's behest.

Lim understood that the behavior described above could land him and other employees in a U.S. prison. In 2020, when the company already had many U.S. customers, he remarked they could face criminal charges due to the lack of a correct KYC policy. He wrote as much in October 2020, probably after the founders and top management of the crypto exchange BitMEX faced both a civil suit from the CFTC and a criminal case and were arrested on similar charges.

Reports of hackers, crooks, and drug cartels laundering money on Binance have been circulating in the media for a while. In June 2022, Reuters wrote that a total of $2.35 billion of questionable origin had passed through the exchange in the previous five years. As Indefibank CEO Sergei Mendeleev shared, some of the wallets pulling funds into the exchange belonged to “phone terrorists” responsible for bomb hoaxes at schools and train stations.

What's next for Binance

Following the charges, CZ tweeted “4”, a code for “Ignore the FUD”, meaning “ignore the manipulation”.

4

— CZ 🔶 Binance (@cz_binance) March 27, 2023

Indeed, the market barely reacted: the price of the two largest cryptocurrencies, bitcoin (BTC) and ether (ETH), remained more or less stable. However, Binance’s own currency, Binance Coin (BNB), dropped by 7%. In a corporate statement released on the day the lawsuit was filed, Zhao argued that the company had done nothing wrong, complied with the law, and was monitoring its own transparency. He refrained from commenting on the credibility or source of the leaked correspondence.

The central charge in the lawsuit is the unauthorized trading in derivatives in the U.S. market. According to the cryptocurrency expert Mikhail Khudokormov, this case is mainly about the U.S. regulator’s desire to assert control over the entire crypto market. Since the beginning of the year, the Securities and Exchange Commission (SEC) has already filed several similar lawsuits against other leading crypto players.

This case is mainly about the U.S. regulator’s desire to assert control over the entire crypto market

“It looks pretty grim for the market because the state wants to control every single process. Aside from that, these lawsuits may have resulted from the scheming of Binance's competitors – other large cryptocurrency exchanges, such as Coinbase,” says Khudokormov. According to him, the fact that the regulator sued the global player and not its American subsidiary, Binance.US, can only be interpreted as exerting pressure on the market as a whole. Nevertheless, Khudokormov believes it’s premature to talk about the possibility of Binance's founder facing criminal charges for “turning a blind eye” to money laundering. The regulators won't be able to charge Binance.US with anything because the U.S.-registered company complies with the law, while the global company is not in the U.S. jurisdiction, the expert said. “[Changpeng Zhao and Samuel Lim] will face not only fines but also sanctions. The U.S. will deprive their businesses of any opportunity of working in America, with American users, and perhaps even outside of America,” said Irakli Ablotiya of cryptocurrency exchange AllTrust.Me.

Binance was also sued for $1 billion by two American law firms, Moscowitz Law Firm and Boies Schiller Flexner, alleging that the exchange partook in the trading of unregistered securities and paid influential individuals to illegally promote such services. Apart from CZ, three cryptocurrency influencers are named as defendants in the case: basketball celebrity Jimmy Butler and video bloggers Graham Stephan and Ben Armstrong. Essentially triggered by the CFTC lawsuit, this lawsuit targets specifically Binance.US, and if granted, will prevent the subsidiary from operating in the U.S. market, according to Irakli Ablotiya.

Binance's cooperation with Rosfinmonitoring

Notably, Binance felt the urge to circumvent regulatory requirements in the U.S. but not in Russia. As Reuters writes in its investigation, in 2021 Binance managers met with the representatives of Rosfinmonitoring, a Russian federal service combating financial crime, to discuss the transfer of client data, in particular names and addresses. According to the investigation, Gleb Kostarev, the head of Binance Eastern Europe and Russia, agreed to Rosfinmonitoring's demands to provide client data. This came to light from Kostarev’s correspondence with a business partner, who shared with Reuters that Kostarev “didn’t have much choice” in the matter. Kostarev's messages, as studied by Reuters, reveal that Binance also agreed to the Russian authorities’ demand to open a regional office in Russia, so that Russian regulators could request the customer data they needed inside the country.

Binance agreed to Rosfinmonitoring's demands to provide client data

In response to a Reuters query, Binance stated: “Should we consider establishing a local entity in Russia in the future, Binance will never share data without a legitimate law enforcement request.”. Translating from legalese into English, we understand this means “we will always leak your data to Rosfinmonitoring” since all requests from law enforcement agencies are purportedly legitimate in Russia.

Rosfinmonitoring's interest in Binance is understandable: Binance accounts were actively used by Alexei Navalny's supporters to finance his Anti-Corruption Foundation and were recommended by the Foundation as a safe way to make donations. The foundation raised over 670 bitcoins in crypto donations, which would now be the equivalent of about $19 million.

After Russia began the war, Binance blocked trading functionality for Russian clients with crypto assets exceeding € 10,000. However, these restrictions were lifted in April 2023. Moreover, while Russia ranks among the top five cryptocurrency markets in the world, those restrictions only affected 0.5% of users, according to Bloomberg. unlike Americans, Russian users who needed to bypass the KYC procedure had to buy pre-existing accounts on the darknet or forge documents, according to information security experts. In March 2023, Binance had to ban Russian users from purchasing euros and dollars, due to the tenth EU sanctions package.

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