Monday, June 24

Binance Founder Changpeng Zhao Pleads Guilty to Money Laundering Violations

Changpeng Zhao, the founder of Binance, the largest cryptocurrency exchange in the world, pleaded guilty to money laundering violations, the government said on Tuesday, a stunning blow to the most powerful and influential figure in the global crypto industry.

Binance itself also pleaded guilty and agreed to pay $4.3 billion in fines and restitution to the government, according to federal authorities. Under the agreement, Binance reached settlements with the Justice Department, the Treasury Department and the Commodity Futures Trading Commission, which have all been investigating the company for years.

As part of his guilty plea, Mr. Zhao agreed to pay a $50 million fine and step down from his role as the company’s chief executive. Mr. Zhao faces up to 18 months in prison under federal sentencing guidelines, but prosecutors are keeping open the possibility of asking for a stiffer penalty, according to senior Justice Department officials.

Binance, as part of its own plea deal with federal prosecutors, will accept the appointment of a government monitor to oversee the business. Mr. Zhao is barred from any involvement in Binance until three years after the monitor is appointed, court papers show.

Mr. Zhao and a representative for Binance entered the guilty pleas in federal court in Seattle. In a statement, Binance said the agreement acknowledged “our company’s responsibility for historical, criminal compliance violations.” The company said Richard Teng, a top executive, would take over as chief executive, but that Mr. Zhao would remain “available for consultation on historical areas of our business.”

Mr. Zhao said on X, the platform formerly known as Twitter, that he had “made mistakes” and “must take responsibility.” But he also said he was looking forward to taking a break from his exhausting schedule, and planned to do some “passive investing” in various crypto projects.

For the relatively young and fast-growing crypto world, the guilty pleas from Binance and Mr. Zhao were a monumental development. At times, Binance has processed two-thirds of all digital currency trades, making it a vital power broker and intermediary in the crypto world. Long believed to be the richest man in crypto, Mr. Zhao is the industry’s most prominent and closely watched champion, with more than 8.5 million followers on X.

The guilty pleas completed something of a one-two punch by the Justice Department. This month, the disgraced crypto mogul Sam Bankman-Fried was convicted of fraud at a criminal trial arising from the collapse of his FTX crypto exchange.

The actions against Binance and Mr. Zhao were announced at a news conference in Washington attended by Treasury Secretary Janet L. Yellen and Attorney General Merrick Garland. Mr. Zhao and other executives “engaged in a deliberate and calculated effort to profit from the U.S. market without implementing the controls that are required by U.S. law,” Mr. Garland said.

Since the implosion of FTX a year ago, federal authorities have criminally charged a procession of crypto executives, and the Securities and Exchange Commission has filed lawsuits against some of the largest companies in the industry, including Coinbase, the publicly traded American exchange. On Monday, the S.E.C. sued Kraken, another crypto exchange, accusing it of operating without proper registration and commingling customer deposits with its own corporate assets.

Court documents made public on Tuesday described a wide-ranging effort by Mr. Zhao and other senior Binance employees to evade laws, including portions of the Bank Secrecy Act, that require financial institutions and their employees to learn their customers’ true identities, avoid doing business with criminals or people barred by economic sanctions, and register any U.S.-based businesses with regulators. Customers from Iran, Cuba and Syria — all of which face sanctions — were able to access the Binance platform, court papers said.

At the news conference, Treasury officials noted that Binance had failed to institute programs to report suspicious transactions involving terrorist groups — including Hamas in the Gaza Strip, Al Qaeda and ISIS. “Binance was allowing illicit actors to transact freely, supporting activities from child sexual abuse to illegal narcotics to terrorism,” Ms. Yellen said.

The authorities also said that Mr. Zhao knew that Binance’s efforts to stop people in sanctioned countries from doing business on the exchange were inadequate. Prosecutors specifically charged Binance with conspiring to run an unlicensed money transmitting business and violating banking and sanctions laws.

In addition to the outlawed foreign transactions, Binance did business with firms based in the United States, even though it was not supposed to have any such customers on its Binance.com platform, the authorities said. Instead, a different platform — Binance.US, which Mr. Zhao also owned — was required to handle that business and abide by the country’s anti-money laundering laws.

But Mr. Zhao and other Binance employees believed it would be better for the main cryptocurrency exchange to handle big customers, the court filings say.

According to the filings, Mr. Zhao, widely known as C.Z., personally sought to hide Binance’s dealings with large U.S.-based customers — who were referred to as VIPs and handled by a special manager — to “have the U.S. supervision agencies not cause any troubles.”

The filing cited a June 2019 call in which Mr. Zhao advised other Binance employees to talk to U.S.-based VIP customers using methods like phone calls that would leave “no trace” of the interactions.

Binance also offered some important customers a chance to regain access to its main trading platform even after they had been kicked off over concerns that they were engaged in criminal activity, the court papers said. The documents cited a July 2020 incident in which Binance employees identified a particular user as among the “top contributors to illicit activity,” barred the user from the platform, and then discussed giving the user instructions for how to open a new Binance account.

One Binance compliance employee said in a written communication that the company had an open door to people laundering drug money, according to the government. “Is washing drug money too hard these days,” the employee wrote. “Come to Binance we got cake for you.”

The penalty in Binance’s settlement is one of the largest ever imposed by the U.S. government against a financial firm. It’s close to the roughly $5 billion that Goldman Sachs paid to authorities in the United States and around the world in 2020 to resolve foreign bribery charges. But it falls short of the $8.9 billion that BNP Paribas paid federal prosecutors in 2014 for violating U.S. sanctions rules.

Before the settlement, regulators had made moves this year to penalize Binance. In March, the C.F.T.C. filed a civil suit against the firm and Mr. Zhao, accusing them of violating financial rules designed to protect U.S. investors.

Then in June, the Securities and Exchange Commission charged Binance and Mr. Zhao with mishandling customer funds and lying to regulators. Notably, the S.E.C., which is determined to regulate digital assets like stocks or bonds, was not a party to the settlement on Tuesday. The agency didn’t respond to a request for comment.

In its lawsuit against Binance, the S.E.C. said that the firm transferred billions of dollars in customer funds to a separate company, Merit Peak Limited, which was controlled by Mr. Zhao.

That accusation echoed the collapse of FTX, once Binance’s largest international rival. This month, Mr. Bankman-Fried, the FTX founder, was convicted on charges that he misappropriated billions in customer funds, using the money to finance campaign donations and other extravagant spending. After his own tweets helped set off the chain of events that led to the implosion of FTX last year, Mr. Zhao held himself up as the compliant face of the crypto industry.

The drumbeat of enforcement actions this year has hurt Binance’s business. After the S.E.C. lawsuit, banks cut off access to Binance.US, forcing the firm to freeze much of its trading activity. Several top executives soon departed.

In public, Mr. Zhao has often dismissed negative news stories by labeling them as “FUD,” or fear, uncertainty and doubt, the shorthand that the crypto industry has long used to deride skeptics and critics.

He also hired a larger compliance staff, and in January, a former federal prosecutor, Noah Perlman, was appointed Binance’s new global compliance chief.

Still, cracks were showing. This year, Binance’s share of the crypto trading market has dipped amid the onslaught from regulators. And in July, several of its top executives, including its chief strategy officer and a high-ranking compliance official, announced they were leaving the company.

Mr. Zhao’s fate remains unclear. His sentencing is months away. In the meantime, his bail was set at $175 million secured by $15 million in cash, and a federal judge permitted him to return to the United Arab Emirates, where he has been living this year.

In his post on Tuesday, he said he couldn’t see himself running a start-up again.

“Should there be listeners, I may be open to being a coach/mentor to a small number of upcoming entrepreneurs, privately,” he wrote. “If for nothing else, I can at least tell them what not to do.”

Alan Rappeport contributed reporting.