On November 21, the U.S. Department of Justice (DOJ) unsealed its criminal indictment against Binance.com (Binance), the world’s largest cryptocurrency exchange, and its CEO, Changpeng “CZ” Zhao (CZ). The indictment against Binance contains three charges: (1) conspiracy to violate the Bank Secrecy Act (BSA) by failing to implement and maintain an effective anti-money laundering (AML) program; (2) conducting an unlicensed money services business; and (3) willful violation of the International Emergency Economic Powers Act (IEEPA). On the same day, at a press conference also attended by Treasury Secretary Janet Yellen and Commodity Futures Trading Commission (CFTC) Chairman Russ Behnam, Attorney General Merrick Garland announced Binance pled guilty to all charges, and the DOJ is requiring Binance to pay approximately $4.3 billion in criminal penalties and forfeiture. CZ also pled guilty to violating the BSA by failing to maintain an effective AML program. As a result, he must resign as Binance’s CEO and is awaiting criminal sentencing.

The DOJ’s investigation of Binance is one of several parallel federal regulator enforcement actions. The CFTC entered a consent order with Binance and CZ for violations of the Commodity Exchange Act; the Financial Crimes Enforcement Network (FinCEN) entered a consent order with Binance for violations of the BSA and is requiring Binance to appoint an independent compliance monitor to ensure, among other things, that existing U.S. users are offboarded from Binance’s platform; and the U.S. Department of Treasury’s Office of Foreign Assets Control (OFAC) entered a consent order with Binance for violations of the IEEPA.

Below is a summary of the key allegations contained in the DOJ’s indictment:

Binance Maintained a Significant U.S. User Base Without Registering with FinCEN. A prominent theme throughout the indictment is that Binance, which is incorporated in the Cayman Islands, “prioritize[d] its growth over compliance with U.S. legal requirements” by deliberately attracting U.S. residents to its trading platform while lacking the requisite money services business license from FinCEN. The DOJ alleged that “[i]n or around March 2018, an employee confirmed CZ’s estimate that Binance had approximately three million U.S. users — more than a third of Binance’s eight million total users at the time.” In 2019, Binance launched Binance.US, which is incorporated in the United States and is registered with FinCEN. However, the DOJ contended that Binance did not redirect its largest U.S. users to Binance.US, and instead, permitted those users to continue to trade on Binance’s foreign, unlicensed trading platform. According to the DOJ, from August 2017 through October 2022, Binance’s own transaction data revealed that U.S. users conducted trillions of dollars in transactions that generated approximately $1.6 billion in profits for Binance.

Binance Did Not Maintain an Effective AML Program. As a “money services business” as defined by FinCEN, the DOJ argued Binance was required to comply with the BSA and implement an effective AML program “that is reasonably designed to prevent the money services business from being used to facilitate money laundering and the financing of terrorist activities.” According to the DOJ, although Binance operated primarily in the United States, Binance has never filed a suspicious activity report with FinCEN as required by the BSA and did not begin to collect “know your customer” information until May 2022. Notably, between August 2017 and April 2022, the DOJ alleged that cryptocurrency wallets belonging to Binance transferred a total of $106 million in Bitcoin to Hydra, a Russian darknet marketplace.

Binance Violated IEEPA by Causing U.S. Users to Transact with Users in Comprehensively Sanctioned Jurisdictions. The IEEPA authorizes the President of the United States to impose sanctions on countries, groups, entities, and individuals in response to any unusual and extraordinary threat to national security, foreign policy, or economy of the United States when the President declares a national emergency with respect to that threat. OFAC administers and enforces economic sanctions programs established by executive orders issued under the IEEPA. According to the DOJ, Binance knew that members of sanctioned jurisdictions were trading on its platform, but did not implement sufficiently effective controls to prevent the sanctions violations from occurring. For example, in its settlement press release, OFAC asserted that ” . . . in May 2019, as the management team discussed blocking U.S. IP addresses ahead of the Binance.US launch, [CZ] stated that ‘a very specific popup notice should appear for U.S. users trying to access a non-U.S. Binance platform . . . [and] [w]e need to word it carefully so that we let people know what they need to do, including using a VPN, without explicitly stating it.'”

Our Take. The DOJ’s approximately $4.3 billion fine against Binance is one of the largest penalties it has ever obtained from a corporate defendant in a criminal matter. Binance, which remains the world’s largest cryptocurrency exchange by volume, has not witnessed a mass exodus of funds after the indictment became public. Interestingly, although the lawsuit between Binance.US and the Securities and Exchange Commission remains ongoing, the presiding judge has reportedly asked the parties to resolve the dispute by December 15, given Binance and CZ’s guilty pleas.

All in all, we believe industry stakeholders should not take the DOJ’s enforcement action lightly. The DOJ has put crypto-related money transmitting businesses on notice: unlicensed money transmission activities and deficient AML programs will be met with stringent scrutiny, comprehensive compliance mandates, and sizeable requests for remediation.