​Reuters learns about accusations of Binance in violations of US sanctions and money laundering

WASHINGTON (Reuters) - Splits between U.S. Department of Justice prosecutors are delaying the conclusion of a long-running criminal investigation into the world’s largest cryptocurrency exchange Binance, four people familiar with the matter have told Reuters.

The investigation began in 2018 and is focused on Binance’s compliance with U.S. anti-money laundering laws and sanctions, these people said. Some of the at least half dozen federal prosecutors involved in the case believe the evidence already gathered justifies moving aggressively against the exchange and filing criminal charges against individual executives including founder Changpeng Zhao, said two of the sources. Others have argued taking time to review more evidence, the sources said.

The inquiry involves prosecutors at three Justice Department offices: the Money Laundering and Asset Recovery Section, known as MLARS, the U.S. Attorney’s Office for the Western District of Washington in Seattle and the National Cryptocurrency Enforcement Team. Justice Department regulations say that money laundering charges against a financial institution must be approved by the MLARS chief. Leaders from the other two offices, along with higher-level DOJ officials, would likely also have to sign off on any action against Binance, three of the sources said.

Through interviews with almost a dozen people familiar with the case, including current and former U.S. law enforcement officials and ex-Binance advisors, along with a review of company records, Reuters has pieced together the most comprehensive account so far of how the investigation developed and how Binance has sought to keep it at bay. Prosecutors’ deliberations on charging Binance have not been previously reported.

The stakes are high for the deeply troubled crypto sector. If the investigation goes against Binance and Zhao, it could loosen Binance’s grip on the industry. Its hold has been strengthened by the recent collapse of rival exchange FTX.

Binance’s defense attorneys at U.S. law firm Gibson Dunn have held meetings in recent months with Justice Department officials, the four people said. Among Binance’s arguments: A criminal prosecution would wreak havoc on a crypto market already in a prolonged downturn. The discussions included potential plea deals, according to three of the sources.

A Binance spokesperson said, “We don’t have any insight into the inner workings of the US Justice Department, nor would it be appropriate for us to comment if we did.” The Justice Department declined to comment.

The charges under investigation are unlicensed money transmission, money laundering conspiracy and criminal sanctions violations, the four people said. No final charging decisions have been made, though prosecutors consider Zhao and some other executives to be subjects of the investigation, one source familiar with the situation said. Ultimately, the Justice Department could bring indictments against Binance and its executives, negotiate a settlement, or close the case without taking any action at all.

Little has been revealed about the case. Reuters reported previously that in 2020, prosecutors requested extensive internal records from Binance about its anti-money laundering checks, along with communications involving Zhao and other executives.

The new reporting shows that the case has shadowed Binance for most of its five years in existence, shaping Zhao’s management of the company while he drove its explosive growth around the world. He instigated a recruitment spree last year that led to the hiring of officials from the Internal Revenue Service’s Criminal Investigation division, the U.S. government agency that was investigating Binance. He enforced strict secrecy rules on employees, telling them to use email as little as possible and to communicate using encrypted messaging services, according to company messages that Reuters has previously reported.

Reuters has investigated Binance’s financial crime compliance over the course of 2022. The reporting showed that Binance kept weak anti-money laundering controls, processed over $10 billion in payments for criminals and companies seeking to evade U.S. sanctions, and plotted to evade regulators in the United States and elsewhere.

Binance has disputed the articles, calling the illicit-fund calculations inaccurate and the descriptions of its compliance controls “outdated.” The exchange has said it is “driving higher industry standards” and seeking to “further improve our ability to detect illegal crypto activity on our platform.”

Launched by Zhao in Shanghai in 2017, Binance now dominates the crypto industry. The exchange processed trades worth around $1.6 trillion in October, about half of the entire crypto market’s trading volume. That sum dwarfed its former challenger FTX, which handled $230 billion in trades that month, according to data site CryptoCompare.

FTX imploded in early November, triggering a wave of public demands for greater regulation of the cryptocurrency industry. Founder Sam Bankman-Fried had boasted his exchange was the “most regulated,” but he based it in the Bahamas, where oversight was light, and secretly used customer deposits. The Justice Department has opened an investigation into FTX’s handling of company funds, Reuters has reported. In a bankruptcy hearing, attorneys for FTX said the exchange was run as a “personal fiefdom” of Bankman-Fried. Bankman-Fried says he didn’t knowingly commit any wrongdoing.

Sources familiar with Justice Department operations said it is as yet unclear whether this new probe will add impetus to the investigation into Binance or slow it down.

Zhao, who declines to disclose the location or entity behind his own exchange, accelerated his rival’s fall by announcing that Binance would sell its holding of FTX’s digital token. This sparked a surge of user withdrawals, ultimately forcing FTX to file for bankruptcy.

In a blog post several days later, Zhao wrote that Binance “must lead by example” going forward. “We cannot let a few bad actors sully the reputation of this industry,” he wrote.

“LAWYER UP”

Prosecutors in the U.S. Attorney’s Office in Seattle began investigating Binance in 2018, following a wave of cases that saw criminals use Binance to move illicit funds, the four people familiar with the probe said.

The Seattle office partnered with MLARS to pursue the case, along with agents from the IRS Criminal Investigation division.

Binance began to address the chances of U.S. enforcement action that year. A summary of a company meeting in October 2018, attended by Zhao, said, “Lawyer up in the US, address regulatory risks.”

The U.S. Bank Secrecy Act, designed to protect the U.S. financial system from illicit finance, requires crypto exchanges to register with the Treasury Department and comply with anti-money laundering requirements if they conduct “substantial” business in the United States. Binance has never done so, despite almost a third of its users being U.S.-based the year of its launch, according to a company blog post.

Instead, Zhao approved a proposal from a person providing advice to Binance to “insulate” Binance from U.S. scrutiny by setting up a new American exchange that would draw regulators’ attention away from the main platform, as reported by Reuters in October. Zhao became concerned about U.S. authorities gaining access to Binance’s internal records, company messages show.

A guide issued to employees for one encrypted messaging service listed its “automatic self-erasing messages” as a benefit.

Until 2020, Binance’s legal department operated on bare bones. Its head of legal, Jared Gross, was a former mergers and acquisitions lawyer with little experience in dealing with authorities, according to two people who worked with him. Faced with the Justice Department investigation, Binance hired an external lawyer from U.S. law firm Paul Weiss, Roberto Gonzalez, who was previously Treasury’s deputy general counsel. Gross, who left Binance last year, did not respond to messages and phone calls. Gonzalez and Paul Weiss didn’t comment.

In December 2020, two MLARS attorneys and a Seattle prosecutor sent the DOJ’s request for documents to Binance, addressed to Gonzalez. The letter sought any records containing instructions that “documents be destroyed, altered, or removed from Binance’s files” or that “information should not be committed to writing.” The request asked for communications involving Zhao and 12 other Binance executives and advisors.

Several days later, an advisor to one of the people named in the letter received a panicked phone call from this person. The caller told the advisor that Binance was struggling to respond to the DOJ because many of the records relevant to the Department’s request had already been erased due to Zhao’s secrecy rules. This extended, the person told the advisor, to Zhao’s approvals for financial decisions at Binance.US, the separate American exchange which publicly says it is “fully independent” of the main Binance platform.

A Binance.US spokesperson said Reuters’ questions were “fueled with false insinuations,” and Binance.US was a separate entity with its own leadership team who are “solely responsible for overseeing decisions and activity across the business.”

Text messages and phone records reviewed by Reuters confirm the call took place and that it concerned the Department’s December 2020 letter. The advisor described the contents of the call on the condition that Reuters not identify the advisor or the caller.

Reuters, which was the first to disclose the request publicly, could not determine how Binance ultimately responded to the DOJ letter.

NEW TASKFORCE

The following year, Binance began a recruitment blitz. It hired at least five ex-officials from the IRS Criminal Investigation’s Cyber Crime Unit, including a new global head of investigations called Tigran Gambaryan. Binance said Gambaryan’s team would detect and prevent crimes on the platform and work closely with law enforcement.

As an IRS-CI special agent, Gambaryan had helped lead investigations into several notorious crypto crime operations, such as the Silk Road darknet drugs marketplace and a child abuse site called Dark Scandals, whose operations Reuters detailed in an article last month. Gambaryan was not involved in the Binance investigation at IRS-CI, but was close to agents that were, according to two people who worked with him.

His hiring was part of a recruitment program by Binance among law enforcement officials in the United States, offering salaries that far exceeded what was available at many other finance and crypto firms, according to four people familiar with the outreach.

Gambaryan didn’t respond to a request for comment. Binance told Reuters, “We are proud to have in our ranks some of the most celebrated cyber investigators representing virtually every single major international law enforcement agency across the globe.” Binance said they have around 300 investigators working “to protect users from illicit actors.”

In August 2021, Binance ended a policy that allowed users to open accounts with solely an email address. Reuters has reported previously that criminals ranging from Russian drug traffickers to North Korean hackers had exploited this feature to move money anonymously through Binance.

But even after Binance required all users to submit identification, gaps remained in its compliance programme. For example, between then and this November, Binance processed over $1 billion in trades for Iranian crypto firms, putting the company at risk of violating U.S sanctions, Reuters reported last month.

In October 2021, Deputy Attorney General Lisa Monaco announced the creation of a National Cryptocurrency Enforcement Team (NCET) to tackle investigations of “criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges.” Monaco, in a separate speech that month, said the Justice Department’s “first priority in corporate criminal matters” was to prosecute individuals who profit from corporate wrongdoing.

The Justice Department appointed Eun Young Choi, previously Monaco’s senior counsel, as NCET’s first director. Under Choi, NCET began coordinating the Binance investigation, joining the U.S. Attorney’s Office in Seattle and MLARS, according to the four people familiar with the case. Agents gathered evidence from former Binance employees and business partners, they said.

In recent months, prosecutors at NCET and the Seattle office concluded they had sufficient evidence to prepare charges not only against Binance, but also against Zhao and some other executives, the people said. However, MLARS leadership has been hesitant to move forward with an indictment, leading to frustrations within the investigation team, the people said.

MLARS has a reputation in the Justice Department for moving slowly in reaching prosecution decisions, people familiar with its activities said. In October, however, the Department appointed a new MLARS chief, Brent Wible, who previously worked in the Fraud Section and before that as a prosecutor in the Southern District of New York. Both of those offices are known, among current and former law enforcement officials, for pursuing cases more aggressively.

Binance has hired a former chief of MLARS, Kendall Day, a partner at Gibson Dunn, to engage in discussions with the Justice Department. Day met with Justice officials in Washington in recent months, three of the people said. Officials discussed with Day a possible resolution to the case out of court, whereby suspects would potentially plead guilty or pay a fine, the three sources said. Day didn’t comment.

This material is taken from the website reuters.com.