Taking Notes on a Criminal Conspiracy
The Feds have Binance's internal chats and CZ's phone. Is this the beginning of the end for crypto's biggest exchange?
On March 27th, the Commodities and Futures Trading Commission (CFTC) filed a civil lawsuit against the Binance cryptocurrency exchange. The suit alleges that Binance broke a multitude of U.S. laws by allowing U.S. customers to access and use their trading platform. Additionally, the CFTC alleges that Binance engaged in market manipulation, fraud, and flagrant violations of laws against money laundering.
The CFTC is limited to civil enforcement actions. However, the CFTC lawsuit contains damning evidence of criminal activity on the part of Binance, CEO Zhao, and their chief compliance officer Samuel Lim. The CFTC suit includes liberal quotes from messages between Binance employees and even asserts that the agency has gained direct access to Mr. Zhao’s cell phone. We assume this evidence has been made available to criminal enforcement agencies like the Department of Justice.
Unfortunately, it does not seem like Binance executives were fans of The Wire, which provided some excellent instructions about what not to do when operating an illegal enterprise:
Based on the evidence advanced by the CFTC , as well as evidence shared by various media outlets, we believe it is a matter of time before key Binance executives face criminal prosecution. Given that this lawsuit reads like a “best hits” compilation of some of Binance’s most egregious behavior, it is worth reading in full. However, for now let’s take a look at some of the highlights.
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Binance flouted KYC/AML laws: “Do a half-assed” job
The CFTC suit contains multiple examples of Binance’s lax approach to know-your-customer/ anti-money launder (KYC/AML) rules. For example (emphasis added):
"But according to Lim, Binance purposely engaged a compliance auditor that would “just do a half assed individual sub audit on geo[fencing]” to “buy us more time.” As part of this audit, the Binance employee who held the title of Money Laundering Reporting Officer (“MLRO”) lamented that she “need[ed] to write a fake annual MLRO report to Binance board of directors wtf.” Lim, who was aware that Binance did not have a board of directors, nevertheless assured her, “yea its fine I can get mgmt. to sign” off on the fake report. Around the same time as the referenced “half assed” compliance audit, in November 2020 the MLRO exclaimed to Lim in a chat, “I HAZ NO CONFIDENCE IN OUR GEOFENCING.”
Binance also knowingly provided services to clients with ties to darknet markets like Hydra, letting them off with warnings to be more careful:
Lim’s internal discussions with compliance colleagues illustrate that Binance has tolerated Binance customers’ use of the platform to facilitate “illicit activity.” For example, in July 2020, 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.” Lim chatted in response: “Can let him know to be careful with his flow of funds, especially from darknet like hydra. He can come back with a new account, but this current one has to go, it’s tainted.”
Remember, you are reading the messages of BINANCE’S CHIEF COMPLIANCE OFFICER. Seems he was quite compliant… with the orders of his boss, CZ:
In a January 2019 chat between Lim and a senior member of the compliance team discussing their plan to “clean up” the presence of U.S. customers on Binance, Lim explained: “Cz doesn’t wanna do us kyc on .com.”
The evidence provided by the CFTC matches reports that Binance has facilitated money laundering for various criminal actors in the past. In particular, we note the Justice Department’s recent prosecution of the Russian crypto exchange Bitzlato identified Binance as the top counterparty of that criminal entity.
Indeed, Mr. Lim and colleagues had this to say about terrorists using the Binance platform:
For example, in February 2019, after receiving information “regarding HAMAS transactions” on Binance, Lim explained to a colleague that terrorists usually send “small sums” as “large sums constitute money laundering.” Lim’s colleague replied: “can barely buy an AK47 with 600 bucks.”
And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: “Like come on. They are here for crime.” Binance’s MLRO agreed that “we see the bad, but we close 2 eyes.”
Binance illegally operated in the United States: “Teaching ppl how to circumvent sanctions”
The CFTC demonstrates that Binance has offered services to both retail and institutional clients based in the United States for several years. This policy was enacted despite CZ knowing full well that Binance was breaking the law:
For example, Zhao explained during a June 9, 2019 management meeting:
[T]here are a bunch of laws in the US that prevent Americans from having any kind of transaction with any terrorist, and then in order to achieve that, if you serve US or US sanctioned countries there are about 28 sanctioned countries in the US you would need to submit all relevant documents for review [but that is not] very suitable for our company structure to do so. So, we don’t want to do that and it is very simple if you don’t want to do that: you can’t have American users.
From the early days, chief compliance officer Lim was well aware of the dangers of offering illegal services to U.S. customers:
…in a December 2018 chat, Lim acknowledged that Binance was operating “in the USA” and advised his colleagues that “there is no fking way in hell I am signing off as the cco for the ofac shit.” In that same chat, Lim recognized that Binance’s customer support was “teaching ppl how to circumvent sanctions.” And Lim stated in an October 2019 chat: “the ofac regulation clearly states U.S. persons, doing biz with OFAC is wrong,” but clarified that Zhao desired to place competitive advantage over compliance: “thing is [Zhao] will only agree to block US on .com once US exchange has gotten all [money transmitter licenses] (to match [a U.S.-based digital asset exchange]).”
Binance used several approaches to offer services to U.S. customers. For smaller clients, Binance created “no KYC” accounts that placed a limit of two bitcoin/day worth of withdrawals. Binance encouraged U.S. customers to transition to this account type to continue to use the platform. Binance also encouraged customers to use virtual private networks (VPNs) to evade the platform’s own controls. Binance went so far as to create a guide for how to use a VPN. Mr. Lim himself admitted the guide was created to help customers:
In a March 2019 chat, Lim explained to his colleagues that “CZ wants people to have a way to know how to vpn to use [a Binance functionality] . . . it’s a biz decision.” And in an April 2019 conversation between Binance’s Chief Financial Officer and Lim regarding Zhao’s reaction to controls that purported to block customers attempting to access Binance from U.S.-based IP addresses, Lim said: “We are actually pretty explicit about [encouraged VPN use] already – even got a fking guide. Hence CZ is ok with blocking even usa.”
When an employee asked Lim how to retain one particular U.S. based customer, he said this in response:
No we cannot change their status to non us if they are us. Thats fraud. But we can encourage them to be a non kyc account. Or use a vpn. Yea can bypass [limitations on non-KYC accounts, such as withdrawal limits], give a little hand. that you guys can work something out. plase be clear we only do this for our biggest traders/VIPs… this is SPECIAL treatment.
Binance had a different approach for its larger, “VIP” trading clients. For these special customers, Binance told them to create offshore shell companies and then transfer their old U.S.-based accounts to the new shellco:
Binance personnel began assisting U.S. VIP customers in creating “new” accounts using “new” KYC documentation as early as June 2019, and reported directly to Zhao on their efforts. For example, in a Binance group chat dated June 12, 2019, a Binance employee directed the following message to “@czhao,” which is a handle used by Zhao:
Today our VIP team talked with three VIP8 users, we didn’t talk too much details and they all satisfied that we can help them onboarding their new non-US corporate accounts. That’s a good start, we’ll contact more VIPs tmr.
Zhao responded in the same chat: “cool.”
The CFTC provides evidence that CZ himself directed these activities:
On October 9, 2020, around the time Binance began sending emails to U.S. customers pursuant to the policy, Zhao had the following exchange with an employee who would ultimately become Binance’s head of institutional sales:
VIP team member: Hi CZ . . . I went through list of affected API clients, it includes a number of large strategic accounts including [a Chicago-headquartered trading firm] who is currently is a top 5 client and 12% of our volume
Zhao: Give them a heads up to ensure they don’t connect from a us Ip. Don’t leave anything in writing. They have non us entities. Let’s also make sure we don’t hit the biggest market makers with that email first. Do you have signal?
“Don’t leave anything in writing”… maybe CZ is a Stringer Bell fan after all?
Binance traded against its own customers: “House accounts”
It has been reported previously that Binance operated its own affiliated market making services on their exchange. However, the CFTC revealed that Binance operates “approximately 300 ‘house accounts’” that trade against Binance users.
In response, Binance admitted to trading on the platform with the following self-contradictory statement:
Binance.com does not trade for profit or “manipulate” the market under any circumstances. Binance “trades” in a number of situations. Our revenues are in crypto. We do need to convert them from time-to-time to cover expenses in fiat or other crypto currencies. We have affiliates that provide liquidity for less liquid pairs. These affiliates are monitored specifically not to have large profits.
Mhm. According to the CFTC:
On information and belief, Binance has not subjected the trading activity of Merit Peak, Sigma Chain, or its approximately 300 house accounts to any anti-fraud or antimanipulation surveillance or controls and to the extent Binance purports to have required its officers, employees, and agents to abide by a relatively new “insider trading” policy, Binance’s approximately 300 house accounts are exempt from that policy.
We have to wonder what percentage of Binance’s daily trading volumes might be accounted for by these 300-odd accounts…
Conclusion: Time is running out for ol’ CZ and the gang…
Now, as we mentioned at the start of this article, the CFTC is a civil enforcement agency. While they will likely extract large fines from Binance and finally prevent them from doing business in the United States, it is unlikely that their actions would be a death blow to CZ’s empire.
However, we note that the evidence cited above (in addition to substantially more information we did not share) suggests a multitude of severe criminal violations. When read in the context of public reports about Binance laundering money for criminals, evading sanctions, conspiring to evade U.S. securities laws, and other violations, it seems clear to us that criminal indictments are quite likely.
We also note an interesting detail from the CFTC lawsuit:
Zhao has communicated over Signal with the auto-delete functionality enabled with numerous Binance officers, employees, and agents for widely varying purposes. For example, the following Signal text chains or group chats collected from Zhao’s telephone were among those set to auto-delete…
Wait… how did the CFTC get ahold of CZ’s phone? Is it possible that there is a rat on Binance’s pirate ship? Maybe it has something to do with the ongoing Department of Justice investigation into Binance?
All we can say is:
Good luck, CZ. You’re going to need it!
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