Binance failed to live up to its anti-money laundering obligations, report says

January 25, 2022, 2:10 AM UTC

On Friday, Chaopeng Zhao, founder and CEO of Binance—the world’s largest cryptocurrency exchange—tweeted: “Journalists [are] talking to people who were let go from Binance and partners that didn’t work out [who] are trying to smear us. We are focused on anti-money laundering, transparent and welcome regulation.” 

Zhao, the Chinese-Canadian entrepreneur who is known ‘CZ’ in the crypto world, penned the tweet in response to a Reuters investigation into Binance published on the same day. In public, Binance lauded greater government oversight. But behind closed doors, the company operated its exchange with weak customer checks and anti-money laundering (AML) processes, and obscured information about its finances and business structure from regulators, the Reuters report said.

A year after China launched its 2017 crackdown on cryptocurrencies, Binance, then located in Shanghai, began searching for a new operational base. In 2018, it settled on Malta—the island country between Italy and North Africa. Zhao however, became uneasy after he learned about Malta’s strict AML protocols and financial disclosures needed to obtain a license to operate in Malta. By 2019, Binance scrapped its Malta plans, according to Reuters, which reviewed several hundred documents, including internal company messages and correspondence between Binance and regulators, and conducted interviews with Binance’s partners, advisers, and former senior employees.

Binance’s moves in Malta matched a “wider pattern”, Reuters said, in which the company expanded and recruited customers from locations at high risk for money laundering and had no fixed headquarters, which allowed it to operate under a murky corporate structure to offer crypto services and products that would normally be tightly regulated. It also failed to take the advice of its own compliance team on several occasions.

Launched in 2017, Binance is now the world’s top crypto exchange by volume. Every day, it processes more than $76 billion worth of cryptocurrencies, according to third-party estimates as of November.

View of the Valletta harbor in Malta.

In Germany, Binance teamed up with Munich-based CM-Equity, a regulated financial services firm, to offer a stock tokens trading service. But the exchange backpedaled on its compliance agreement to closely investigate users who had deposited $11,000 or more in one transaction. Binance upped the figure to $100,000 and dictated these new terms to the German firm. In July, Binance stopped offering the stock tokens to focus on other crypto products, it said.

From May to July last year, Binance’s German team also received 44 letters from German authorities and law firms that pointed to suspected money laundering on Binance’s platform, says Reuters.

Additionally, Binance acted against its own internal risk reports by recruiting customers from locations at high-risk of money laundering, like Russia and Eastern Europe. Binance’s internal compliance team flagged the exchange’s insufficient know-your-customer checks to prevent money laundering, but three former senior company employees who voiced their concerns to Zhao were ignored, according to Reuters.

In response to the report, Binance said Reuters’ information was “wildly outdated and, in several places, flatly incorrect,” without providing any specific examples.

In an email exchange with Fortune on Monday, a Binance spokesperson confirmed it “worked with [the German authorities] on the reported case… [and] is working with law enforcement agencies around the globe on a daily basis. In 2021, the exchange responded to over 5,600 law enforcement requests, said the spokesperson.

The spokesperson added that Binance’s top priority has always been user protection and that it has now recruited one of the “most seasoned digital forensics teams” to work with regulators and law enforcement agencies. The company also said that it had implemented mandatory know-your-customer procedures to trade on the platform. “We recognize that raising the standard for improved KYC is vital as it… protects users, the wider ecosystem [and] raises the levels of trust in crypto,” the spokesperson said, referring to know-your-customer laws.

Binance’s struggles to obtain regulatory approval and comply with anti-money laundering and know-your-customers laws aren’t uncommon, but indicative of the crypto sector’s balancing act in juggling rapid, sustainable growth alongside living up to compliance standards and increasing regulatory pressure. Still, cryptocurrency security experts argue that the sector has actually improved its anti-money laundering processes in recent years and the blockchain technology that exchanges like Binance use offer more transparency for regulators, law enforcement, and compliance teams.

Scott Pounder, head of investigations at crypto transaction analysis and compliance firm Crystal Blockchain, says that the percentage of exchanges tracked by his company that have failed to file a country of registration has dropped to 13% from 18% since 2019—with the country of registration being a key requirement for anti-money laundering compliance.

Meanwhile, the proportion of cryptocurrency transactions linked to illicit activity has also dropped sharply to less than 1%, says Tom Robinson,” co-founder and chief scientist at blockchain analysis firm Elliptic. “The vast majority of activity is legitimate,” he says, adding that blockchain analytics makes it possible to pinpoint funds that originated from illicit activity “far beyond what is possible in traditional finance.”

However, five people interviewed by Reuters said that Binance has the high-tech tools needed to track movement of coins on the blockchain—but weak compliance checks meant that even with sophisticated tech, Binance can’t keep unidentified funds from being redirected onto the exchange.

Pounder argues that the measures Binance has in place are “consistent” across larger and more centralized crypto exchanges, and are “comparable” to traditional financial institutions. Still, he acknowledges that the crypto industry is still maturing when it comes to know-your-customer processes. It requires measures that are more than just verifying a person or business’ identity, but also includes creating a behavior profile of what can be expected from clients. Client information collected at an early stage is “critical… it informs what profile to associate a client with,” he says.

Even with ramped up compliance measures, it’s unlikely that Binance’s—and its peers’—regulatory pressures will let up soon. Governments worldwide—from China, Iran, to Kosovo, Kazakhstan and Sweden and Iceland—are rapidly clamping down on Bitcoin mining, threatening the status of cryptocurrencies. Governments say Bitcoin mining—the process of creating new units of the digital currency via solving complex equations—gobbles up massive computing power and energy, for severely straining national energy grids.

And just last week, Pakistan’s Federal Investigation Agency (FIA) last week, opened an investigation into a scam that defrauded investors out of over $100 million after hackers redirected the stolen money into 26 wallets registered on Binance. In December, Turkey’s financial watchdog fined Binance’s Turkish arm $750,000 for non-compliance with anti-money laundering requirements—the highest penalty it could levy under the country’s laws. In the same month, Binance Asia withdrew its application to operate a crypto exchange in Singapore, likely ending speculation that the city-state would serve as Binance’s global headquarters.

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