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US prosecutors unclear about binance investigation

Splits among US Department of Justice prosecutors are delaying the resolution of a protracted criminal investigation into Binance, the largest cryptocurrency exchange in the world, according to four people with knowledge of the situation.

According to these people, the investigation was launched in 2018 and is concentrated on Binance’s compliance with American anti-money laundering laws and sanctions. As per two of the sources, some of the at least six federal prosecutors working the case feel that the evidence already gathered supports taking aggressive action against the exchange and charging specific executives, including the founder Changpeng Zhao, with crimes. The sources claimed that some have argued for taking the time to consider more evidence.

The Money Laundering and Asset Recovery Section, also known as MLARS, the U.S. Attorney’s Office for the Western District of Washington in Seattle, and the National Cryptocurrency Enforcement Team are all involved in the investigation. According to Justice Department regulations, the MLARS chief must give his or her approval before filing money laundering charges against a financial institution. Any action against Binance would probably require approval from senior DOJ officials as well as leaders from the other two offices, according to three sources.

Reuters has put together the most thorough account of the investigation’s development and Binance’s efforts to thwart it so far through interviews with nearly a dozen people with knowledge of the case, including current and former U.S. law enforcement officials and ex-Binance advisors. The decision by the prosecution to charge Binance has not previously been disclosed.

The severely troubled cryptocurrency industry is playing with fire. Binance’s hold on the market might be lessened if Zhao and Binance are found to be guilty. Because of the most recent failure of rival exchange FTX, its grip has grown stronger.

Focus of the investigation

According to the four people, the defense lawyers for Binance at the American law firm Gibson Dunn have recently met with representatives from the Justice Department. One of Binance’s defenses is that a criminal prosecution would devastate the crypto market, which is already experiencing a protracted downturn. According to three of the sources, potential plea bargains were discussed.

A spokesperson for Binance 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,

Justice Department officials opted not to comment.

Unlicensed money transmission, a money laundering conspiracy, and criminal sanctions violations are the alleged offenses that are under investigation. According to a source with knowledge of the situation, no charges have been officially decided upon, but Zhao and a few other executives are believed to be the focus of the investigation by the government. In the end, the Justice Department may decide to charge Binance and its executives, work out a resolution, or simply close the case without taking any further action.

About the case, not much has been made public.

According to a previous report from Reuters, prosecutors asked Binance for extensive internal records about its anti-money laundering checks as well as communications involving Zhao and other executives in 2020.

A hiring frenzy

The latest information reveals that the case has followed Binance for the majority of its five years of existence, influencing Zhao’s management of the business as he spearheaded its meteoric global expansion. Last year, he started a hiring frenzy that resulted in the hiring of representatives from the American government agency that was looking into Binance, the Internal Revenue Service’s Criminal Investigation division. According to company messages that Reuters has previously reported, he imposed strict secrecy rules on employees, ordering them to use email as little as possible and to communicate using encrypted messaging services.

Over the course of 2022, Reuters looked into Binance’s compliance with financial crime laws. According to the reporting, Binance maintained lax anti-money laundering controls, processed more than $10 billion in payments for criminals and businesses trying to circumvent U.S. sanctions, and planned to get around regulators both domestically and abroad.

Binance has disputed the articles, calling the descriptions of its compliance controls “outdated” and the calculations for illicit funds “inaccurate.” In addition to “further improving our ability to detect illegal crypto activity on our platform,” the exchange has stated that it is “driving higher industry standards.”

Binance, which Zhao founded in Shanghai in 2017, now rules the cryptocurrency market. In October, the exchange processed trades totaling about $1.6 trillion, or about half of the total trading volume in the cryptocurrency market. According to data website CryptoCompare, that amount dwarfed its former rival FTX, which handled $230 billion in trades that month.

Early in November, FTX collapsed, sparking a surge of public calls for more regulation of the cryptocurrency sector. Sam Bankman-Fried, the exchange’s founder, had bragged that it was the “most regulated,” but he had established it in the Bahamas, where regulation was lax, and had secretly used customer deposits. According to Reuters, the Justice Department has launched an investigation into FTX’s use of corporate funds. Attorneys for FTX claimed during a bankruptcy hearing that Bankman-Fried operated the exchange as a “personal fiefdom.” According to Bankman-Fried, he didn’t intentionally do anything wrong.

It is still unclear, according to sources familiar with Justice Department operations, whether this new investigation will speed up or slow down the one into Binance.

By announcing that Binance would sell its holding of FTX’s digital token, Zhao—who will not reveal the location or organization behind his own exchange—accelerated his rival’s decline. This led to a spike in user withdrawals, which ultimately compelled FTX to declare bankruptcy.

A few days later, Zhao stated in a blog post that Binance “must lead by example” moving forward. “We cannot allow a few dishonest people to damage this industry’s reputation,” he wrote.

Engaging the attorneys

Following a string of cases in which criminals used Binance to move illegal funds, prosecutors in the U.S. Attorney’s Office in Seattle started looking into Binance in 2018, according to the four people with knowledge of the investigation.

In order to pursue the case, the Seattle office collaborated with MLARS and agents from the IRS Criminal Investigation division.

In that year, Binance started to think about the possibility of American enforcement action. In an October 2018 company meeting that Zhao attended, it was stated in the summary, “Lawyer up in the US, address regulatory risks.”
Crypto exchanges must register with the Treasury Department and adhere to anti-money laundering regulations under the U.S. Bank Secrecy Act, which was created to safeguard the U.S. financial system from illicit finance. This is the case if they conduct “substantial” business in the country. Although almost a third of its users were based in the United States the year of its launch, Binance has never done so, according to a blog post on the company’s website.

As reported by Reuters in October, Zhao instead agreed to a proposal from a person giving Binance advice to “insulate” Binance from American scrutiny by establishing a new American exchange that would divert regulators’ attention away from the main platform. According to company messages, Zhao started to worry about U.S. authorities getting access to Binance’s internal documents.

One encrypted messaging service listed its “automatic self-erasing messages” as a perk in a guide distributed to staff members.

Binance’s legal department had minimal resources up until 2020. According to two people who worked with him, Jared Gross, its head of legal, was a former mergers and acquisitions lawyer with little experience working with authorities. Binance hired Roberto Gonzalez, a former Treasury deputy general counsel, from the American law firm Paul Weiss to represent them in the Justice Department investigation. Gross, who quit Binance last year, didn’t return calls or messages. Paul Weiss and Gonzalez remained silent.

Gonzalez received the DOJ’s request for documents from Binance in December 2020, which was also sent to Gonzalez by two MLARS lawyers and a prosecutor from Seattle. Any documents with instructions that “documents be destroyed, altered, or removed from Binance’s files” or that “information should not be committed to writing” were sought in response to the letter. Zhao and twelve other executives and advisors from Binance were the subjects of the request for communications.

A few days later, one of the individuals listed in the letter called one of the advisors in a panic. The caller explained to the advisor that Zhao’s secrecy regulations had caused many of the records crucial to Binance’s ability to respond to the DOJ to have already been deleted. This included Zhao’s approval of financial decisions at Binance, the source informed the advisor. US, a different American exchange that openly declares its “full independence” from the main Binance platform.

Reuters’ inquiries were “fueled with false insinuations,” a US spokesperson claimed, and Binance.US was a distinct organization with its own leadership team that was “solely responsible for overseeing decisions and activity across the business.” The call actually occurred, and it was about the Department’s letter from December 2020, according to text messages and phone records examined by Reuters.

Modern Taskforce

The following year, Binance started a massive hiring drive. At least five former employees of the IRS Criminal Investigation’s Cyber Crime Unit were hired by the company, including Tigran Gambaryan, a new global head of investigations. According to Binance, Gambaryan’s team will closely cooperate with law enforcement to identify and prevent crimes on the platform.

The operations of the Silk Road darknet drug market and the child abuse website Dark Scandals, whose operations Reuters described in an article last month, were just two of the well-known crypto crime operations that Gambaryan had assisted in leading investigations into as an IRS-CI special agent. According to two people who worked with him, Gambaryan was close to agents who were, even though he was not directly involved in the IRS-Binance CI’s investigation.

According to four people familiar with the outreach, his hiring was a part of a recruitment program by Binance among law enforcement officials in the United States, which offered salaries that were significantly higher than those offered at many other finance and cryptocurrency companies.

A comment from Gambaryan was not forthcoming. “We are proud to have in our ranks some of the most celebrated cyber investigators,” Binance told Reuters, “representing virtually every single major international law enforcement agency worldwide.” According to Binance, they are employing about 300 investigators “to protect users from illicit actors.”

Binance stopped allowing users to create accounts using only their email addresses in August 2021. According to prior Reuters reports, criminals from North Korean hackers to Russian drug traffickers have taken advantage of this feature to use Binance to move money anonymously.

Even though Binance required all users to submit identification, its compliance program still had holes. For instance, Reuters reported last month that Binance processed more than $1 billion in trades for Iranian cryptocurrency firms between then and this November, putting the company at risk of breaking U.S. sanctions.

A National Cryptocurrency Enforcement Team (NCET) was established in October 2021, according to Deputy Attorney General Lisa Monaco, to investigate “criminal misuses of cryptocurrency, particularly crimes committed by virtual currency exchanges.” In a different speech that same month, Monaco declared that the prosecution of people who benefit from corporate wrongdoing was the Justice Department’s “first priority in corporate criminal matters.”
Eun Young Choi, formerly Monaco’s senior counsel, was appointed by the Justice Department as NCET’s first director. According to the four people with knowledge of the matter, under Choi NCET joined MLARS and the U.S. Attorney’s Office in Seattle in coordinating the Binance investigation. Former Binance employees and business partners were reportedly used by agents to gather evidence.

According to the people, in recent months, prosecutors at NCET and the Seattle office decided they had enough evidence to prepare charges against Zhao and a few other executives in addition to Binance. The investigation team has grown frustrated as a result of the MLARS leadership’s reluctance to proceed with an indictment, the sources claimed.

According to those familiar with MLARS’ operations, the Justice Department has a reputation for taking its time before deciding whether to bring charges. But in October, the Department named Brent Wible, a former member of the Fraud Section and a prosecutor in the Southern District of New York, as the new MLARS chief. Both of those offices have a reputation among current and former law enforcement personnel for aggressively pursuing cases.
Kendall Day, a partner at Gibson Dunn and a former head of MLARS, has been hired by Binance to speak with the Justice Department. Three of the people said that Day recently visited Washington to meet with Justice Department officials. Day and officials talked about an out-of-court resolution to the case, whereby suspects might confess or pay a fine, the three sources claimed. Day remained silent.

source

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