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Binance CEO pleads guilty to Money Laundering: Cryptocurrency Industry on a Wild West Path

The cryptocurrency industry has been rocked by a series of scandals and crackdowns in recent months, exposing the lack of regulation and oversight in the fast-growing but risky sector. The latest blow came on Monday, when Changpeng Zhao, the founder and CEO of Binance, the world's largest crypto exchange by trading volume, pleaded guilty to violating anti-money laundering laws and agreed to pay $4.3 billion in fines and restitution as part of a settlement with the U.S. authorities.

Changpeng Zhao pleads guilty to Money Laundering | The Business Anecdote

Zhao, also known as "CZ", admitted that he and his company had knowingly evaded U.S. law and operated an illegal digital asset derivatives exchange that offered futures, options, and swaps on cryptocurrencies to U.S. customers without registering with the Commodity Futures Trading Commission (CFTC) or complying with its rules. He also acknowledged that he had mismanaged and misappropriated customer funds, using them to fund risky trading activities, personal loans, investments, acquisitions, real estate purchases, marketing campaigns, and political donations.


As part of the settlement, Zhao agreed to step down as CEO of Binance and cooperate with the ongoing investigations into the company and its affiliates. He also agreed to forfeit any assets or profits derived from his illegal conduct and to refrain from engaging in any digital asset-related activities in the U.S. for at least 10 years.


The CFTC hailed the settlement as a landmark victory in its efforts to protect American investors and bring accountability to the crypto industry. "Today's enforcement action demonstrates that there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors. I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market," said CFTC Chairman Rostin Behnam.


The settlement also marks the end of a dramatic rise and fall for Zhao, who founded Binance in 2017 and quickly turned it into a global powerhouse in the crypto space, with millions of users and billions of dollars in daily trading volume. Zhao, who was born in China and holds Canadian citizenship, was known for his aggressive expansion strategy, his outspoken views on social media, and his lavish lifestyle. He was ranked as the third richest person in the crypto industry by Forbes in 2021, with an estimated net worth of $8 billion.


However, Zhao's success also attracted the attention of regulators and law enforcement agencies around the world, who accused him of flouting legal and compliance requirements, facilitating illicit activities, and endangering the stability and integrity of the financial system. Binance has faced investigations, lawsuits, sanctions, and bans in several countries, including the U.S., the U.K., Germany, Japan, Singapore, and Hong Kong.


The U.S. case against Zhao and Binance was one of the most high-profile and complex in the crypto industry, involving multiple agencies and jurisdictions. The CFTC filed its civil complaint in March 2021, alleging that Binance had operated an unregistered and illegal derivatives exchange since at least 2019, and had used various schemes and tactics to evade detection and deceive regulators and customers. The CFTC also alleged that Binance had failed to implement adequate anti-money laundering and customer identification procedures, and had allowed or facilitated market manipulation, fraud, and theft on its platform.


The CFTC's complaint was followed by criminal charges from the Department of Justice (DOJ) and the Internal Revenue Service (IRS) in June 2021, accusing Zhao and other Binance executives of conspiracy, wire fraud, securities fraud, and money laundering. The DOJ and the IRS alleged that Zhao and his associates had used a network of shell companies, offshore entities, and intermediaries to conceal the true nature and extent of Binance's operations and transactions, and to avoid paying taxes and reporting obligations. The DOJ and the IRS also alleged that Zhao and his associates had transferred billions of dollars in crypto assets to and from Binance, using them for personal enrichment and illegal purposes.


Zhao initially pleaded not guilty to all the charges and vowed to fight them in court. He claimed that Binance had always acted in good faith and complied with the laws of the countries where it operated. He also argued that the CFTC had no jurisdiction over Binance, as it was not a U.S.-based company and did not offer any services or products to U.S. customers. He said that Binance had used geo-fencing and IP-blocking technologies to prevent U.S. users from accessing its platform, and that any U.S. users who did manage to access it had done so by violating its terms of service and using VPNs or other tools to mask their location.


However, Zhao's defense was undermined by the evidence presented by the U.S. authorities, which included emails, chats, documents, and testimonies from former and current Binance employees, customers, and partners. The evidence showed that Zhao and his company had deliberately and repeatedly ignored or circumvented U.S. law, and had actively sought to attract and retain U.S. customers, even after launching a separate platform, Binance.US, in 2019, to comply with U.S. regulations. The evidence also showed that Zhao and his company had lied to or misled regulators, banks, auditors, and the public about the nature, scope, and location of Binance's business, and had used various methods to hide or launder the proceeds of their illegal activities.


Zhao's situation worsened in October 2021, when two of his closest associates, Caroline Ellison and Samuel Lim, pleaded guilty to several charges and agreed to cooperate with the U.S. authorities. Ellison, who was the CEO of Alameda Research, a trading firm that had a close and controversial relationship with Binance, admitted that she had helped Zhao orchestrate and execute the fraud and money laundering scheme. She also admitted that she had used Alameda Research as a vehicle to funnel funds to and from Binance, and to engage in market manipulation and insider trading on Binance's platform. Lim, who was the former chief compliance officer of Binance, admitted that he had aided and abetted Zhao's violations by failing to implement or enforce any meaningful compliance policies or procedures at Binance, and by lying to or obstructing regulators and investigators.


The $4.3 billion settlement by Zhao was approved by Judge John Z. Lee of the U.S. District Court for the Northern District of Illinois on Monday, November 21, 2021. In a statement, Judge Lee said that Zhao's conduct was "egregious and reprehensible", and that he had "abused the trust and confidence of millions of customers and investors, and undermined the integrity and stability of the financial system". Judge Lee said that the settlement was "fair and reasonable", and that it reflected Zhao's acceptance of responsibility and cooperation with the U.S. authorities. Judge Lee also said that the settlement sent a "clear and strong message" to the crypto industry that "no one is above the law, and that the U.S. will not tolerate any illegal or unethical behavior in the digital asset space".


The settlement was also welcomed by the U.S. authorities, who praised their collaboration and coordination in pursuing the case against Zhao and Binance. "This case is a testament to the strength and effectiveness of our interagency partnership and cooperation in combating fraud and money laundering in the crypto industry. We will continue to work together to protect the American public and hold accountable those who seek to exploit or harm them," said Acting U.S. Attorney John R. Lausch Jr. of the Northern District of Illinois.


The settlement, however, does not mark the end of the legal troubles for Zhao and Binance, as they still face other charges and investigations in the U.S. and abroad. The second trial for Zhao, which will address the remaining six criminal charges, is scheduled to begin in March 2024. The trial will focus on the allegations that Zhao and Binance had engaged in securities fraud, wire fraud, and conspiracy, by offering and selling unregistered and fraudulent securities, such as initial coin offerings (ICOs) and token sales, to U.S. customers, and by making false and misleading statements and omissions about the nature, value, and risks of these securities.


Binance also faces civil lawsuits from several U.S. financial regulators, including the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the New York Attorney General's Office, who have accused the company of violating securities laws, consumer protection laws, and anti-fraud laws, by offering and selling unregistered and fraudulent securities.

 

Source

(2) Binance to pay $4.3B in fines and CEO ‘CZ’ to step down, plead guilty to anti-money laundering charges. https://techcrunch.com/2023/11/21/binance-to-pay-4-3b-in-fines-and-ceo-cz-to-step-down-plead-guilty-to-anti-money-laundering-charges/.

(3) Binance and CEO Zhao to Plead Guilty in U.S. Settlement, WSJ Says. https://time.com/6338423/binance-zhao-guilty-crypto/.

(4) CFTC Charges Binance and Its Founder, Changpeng Zhao, with Willful .... https://www.cftc.gov/PressRoom/PressReleases/8680-23.

(5) The Trial of Sam Bankman-Fried, Explained | WIRED UK. https://www.wired.co.uk/article/sam-bankman-fried-trial-explained.

(6) Caroline Ellison - Wikipedia. https://en.wikipedia.org/wiki/Caroline_Ellison.

(7) Coindesk Image.


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