Binance, a crypto giant, kept weak money-laundering records

Binance stated publicly that it welcomes government oversight. Reuters found that the company was also withholding information from regulators, retaining weak customer checks, and acting against its own compliance department’s recommendations.

It was October 2018. Zhao had come to Malta to seek Binance’s new home after having left mainland China in the previous year when authorities began cracking down against cryptocurrencies. Zhao expressed gratitude to Malta for its openness to crypto-firms.

Zhao said to the audience in filmed remarks, “Binance got really fortunate.” “Malta arrived at a moment when regulatory clarity was extremely important.”

Binance also informed Malta’s financial regulator that it was planning to apply for a license to run its exchange from the island. This was a significant step towards mainstream legitimacy. Zhao stated that Binance would move to the island.

Binance’s relocation proposal was part of the Maltese government strategy to make Malta a “Blockchain Island.” Zhao promised that Binance would raise funds for local cancer patients.

The romance was over soon.

Zhao began to worry about the conditions of the license. According to four people who were directly involved in the licensing discussions, Zhao was concerned by the strict anti-money laundering protocols as well as the requirement for financial disclosure. Reuters was told that Binance informed the regulator privately the following year that it had abandoned its plan. Reuters has seen a letter from Binance in 2020 that shows that donations to the charity were also scrapped. Binance insisted for months that it was following the laws of Malta when it described its terms of usage to its customers.

A Reuters investigation found that Zhao’s transactions with the Mediterranean island were part of a larger pattern. Zhao stated repeatedly that he welcomes regulatory oversight, and Binance praised its anti-money laundering program. Binance withheld information about its finances from regulators. At least eight of them have warned customers about the dangers of using the exchange. Binance continued to conduct weak checks on customers despite senior company executives raising concerns and acting against its own compliance department’s recommendations.

$914 billion, Binance’s spot trading volume in November 2021

Binance spokeswoman said in a statement that the company was leading in investing in future technologies and legislation. This will help the crypto industry become regulated and secure.

Reuters interviewed dozens of Binance’s former top employees, advisors, and business partners. They also reviewed hundreds of documents including confidential correspondence between Binance (and national regulators) and company internal messages.

Binance operates outside the rules that regulate traditional financial institutions and many of its crypto competitors, according to reports. Binance’s opaque corporate structure allowed it to offer products that are not permitted by many national regulators. Binance has refused to disclose the jurisdiction where its main online exchange is located, which complicates regulators’ efforts in trying to monitor its activities. It has also minimized the need for costly background checks on clients.

Additional findings include:

According to regulatory filings and those with direct knowledge, Binance has declined to answer questions about its operations on at least four occasions.

* Binance staff including Samuel Lim, Chief Compliance Officer, and Karen Leong, former Global Money Laundering Reporting officer, expressed concerns about weak “know your customer” checks that are intended to prevent money laundering. Three former Binance employees said that they raised these concerns to Zhao, but he ignored them.

* Binance acted in violation of its compliance department’s assessment, continuing to recruit customers from seven countries, including Russia, and Ukraine in an internal report circulated early 2020, which was seen by Reuters.

* Binance relaxed compliance rules last year with a German business partner. This caused some disquiet among Binance staff.

* Binance received dozens of letters from German police and lawyers representing more than 30 fraud victims. These letters were seen by Reuters. They sought information about several million euros they suspect were laundered through an exchange. Reuters was informed by several of the letter senders that Binance replied saying it couldn’t help. Reuters was unable to review the majority of Binance’s written replies.

* The German Federal Police sought information from Binance last winter about two men who were suspected of helping an Islamist gunman in Vienna, in November 2020. A police letter stated that one of the men had made unspecified transactions on Binance.

Binance spokesperson stated that the company was striving to raise industry standards. Binance was founded in 2017. He said that the crypto industry was still very young when Binance was established. It was difficult to find guidance about how crypto should be regulated. Know Your Customer (KYC technology) was still in its infancy, law enforcement agencies weren’t educated on crypto and policies like those that regulate anti-money laundering wasn’t designed for the crypto market.

Without going into detail, the spokesperson said that Reuters’ information was “wildly out of date and – at several points – completely incorrect.” Binance legal representatives stated that documents reviewed by Reuters were only “partial” and did not accurately reflect how decisions relating to very serious issues were made by Binance.

Leong, Lim, Zhao didn’t reply to individual requests for comment.

Binance is a symbol of governments’ efforts to control the crypto sector. The United States and Britain’s top regulators have urged lawmakers to give them more control over the sector.

Binance’s business boomed in the COVID-19 pandemic. Institutional and retail investors alike embraced crypto. However, more than a dozen national regulators warned about Binance. Others claimed it was operating in the absence of a license within their jurisdictions. Others warned people not to use its services. After the UK regulator refused to answer questions regarding the global business of Binance, it stated in mid-2021 that Binance’s UK unit was “not capable” of effective supervision.

Zhao said to Reuters in October that he had never deliberately withheld information from regulators. A spokesperson for Binance stated, “It is categorically false” to assert that Binance is knowingly withholding information regarding its corporate structure from regulatory agencies.

The power of bitcoin

Zhao was born in China and raised in Canada. He is an important figure in crypto, sharing his belief in bitcoin’s liberating power with his 5 million followers on Twitter. The 44-year old is most well-known by his initials, CZ.

Binance was established in Shanghai by Mr. Zhang in 2017. Since then, the exchange has expanded to all corners of the cryptocurrency market. This includes spot and derivatives trading as well as non-fungible tokens. According to CryptoCompare data, Binance’s November spot trading volumes reached $914 billion. This is more than fivefold higher than the previous year and five times greater than Coinbase. Binance’s derivatives trading volumes were $1.8 trillion.

Binance is a small corporation with limited public information. Although Binance claims it doesn’t have a headquarters or identifies the entity that controls its main exchange, Zhao has stated in recent months that he would like to establish several regional headquarters.

A chart of internal organisations that Binance submitted in April 2020 to Liechtenstein’s financial regulator may help shed some light. This chart, which was not previously reported, shows Binance consisted of 30 entities at that time, many owned by Zhao.

Binance also sent a previously unreported document to the regulator stating that Binance had more than $100 million in assets in the Cayman Islands holding companies at the end of 2018 when bitcoin’s price and Binance’s trading volumes were a fraction of today.

As international authorities express growing concern about cryptocurrency’s use in money laundering and other crimes, Binance has provided new insight into its operations. Top policymakers including Janet Yellen, U.S. Treasury Secretary, and Christine Lagarde (European Central Bank President) have warned that cryptocurrencies could be used to commit crimes due to their anonymity and lack of regulation. In August, the Dutch central bank warned that Binance wasn’t in compliance with laws designed to prevent money laundering and terrorist funding. Two people familiar with the investigation first reported Bloomberg, say that the U.S. Internal Revenue Service is also investigating possible money laundering at Binance. The IRS declined confirmation of any investigation.

Binance announced in August that it will tighten customer checks to prevent laundering. This is a significant shift for the exchange where users used to be able to trade using just an email address.

“Appetite to risk”

Binance was launched by Zhao in July 2017. Zhao claimed Binance was a new paradigm in global finance, in a paper that was intended to raise funds from investors. He wrote that Binance would be a global marketplace to sell smaller cryptocurrencies, created in the wake of bitcoin’s rise.

With $15 million in initial coin offerings (ICO) funds, in which crypto startups sell and issue virtual tokens to investors, Zhao began planning his global expansion from a small office in Shanghai with a tight-knit team. Bobby Lee, a Shanghai-based crypto entrepreneur, shared his admiration for Zhao’s persistence, ambition, and willingness to take risks.

The exchange gained popularity quickly, with over 120,000 users as of late August. Many of these were located in the United States and China, while others are in Japan. A trader could sign up for a basic Binance account with just an email address. No personal information was required. Binance charged traders a small fee for each trade or withdrawal.

Among a flurry of other Chinese ICOs that were launched, Binance’s debut attracted unwanted attention from Chinese authorities. As part of a wider crackdown on cryptocurrency, Beijing banned token issuances from September 2017. The Chinese central bank stated that recent ICOs had “seriously disrupted economic and financial order” without naming Binance.

Zhao relocated Binance from mainland China. Corporate records indicate that he established a new Binance company in Hong Kong in late September. It was controlled by a Cayman Islands-based holding company. Zhao told interviewers that Zhao and his team moved to Tokyo.

Binance’s new Japan base saw rapid growth as bitcoin’s price soared to an all-time high of nearly $20,000. According to a blog post by the company, Binance’s income surged and it earned profits of around $208 million in six months since its launch.

Zhao started to market Binance worldwide. To promote Binance to local crypto traders, Zhao enlisted the help of hundreds of Binance Angels in around 50 countries. They received discounts in return for spreading Zhao’s views on crypto via Telegram groups. Customers were told by an Angel in the Philippines that “CZ” is available to make them all rich.

Binance was the largest global exchange in terms of trading volume, reaching almost 8 million users in March 2018.

Zhao has expanded to the “fiat-to-crypto” marketplace, in which people can buy crypto using government-issued “fiat”, such as U.S. dollars.

Zhao set up local exchanges across the globe to receive deposits. These types of trading are usually subject to more stringent background checks. This market was huge potential because Zhao could target legions of people without crypto.

Zhao made a pitch for governments to allow his company to enter their country in a blog post titled “Benefits of Crypto” that was published last month. He wrote that Binance would benefit from favourable regulations, which would result in a “huge infusion of funds into the local economy” as well as “handsome tax revenue.”

A new problem appeared. Japan’s regulator declared that Binance was offering cryptocurrency exchange services to Japanese residents without registration and issued a public warning.

Zhao took to the road.

“Welcome To Malta”

At that time, Joseph Muscat, the Maltese Prime Minister at the time was working on one of the first laws to regulate cryptocurrency-based businesses. Zhao arrived in Malte to meet Silvio Schembri, a young secretary to the parliamentary, who was Muscat’s crypto policy advisor.

Schembri presented to Zhao at his office the plan of Malta to be “The Blockchain Island,” Schembri recalled during a Reuters interview. Schembri explained that crypto firms could be granted a license and legal certainty if they meet the disclosure requirements of the regulator.

Binance stated in a press release the next day that Zhao was impressed with Malta’s regulatory framework and that he would hire 200 people once the Maltese parliament passed the Virtual Financial Assets Act.

Muscat, who had welcomed Binance that day, praised Malta’s “global trailblazers”. Schembri spoke in parliament and said that Binance’s huge profits would have a ripple effect on the local economy. Zhao set up a local business and continued his travels.

He travelled to Uganda to launch Binance’s Africa business. He attended a dinner at the British parliament to discuss digital currency. He went hiking in the Alps of Liechtenstein along with the owner and operator of a local cryptocurrency exchange.

As Zhao travelled the globe, signs of trouble began to emerge.

Hackers broke into Zaif, a Japanese cryptocurrency exchange, and stole $63,000,000 of cryptocurrency. According to the civil complaint Zaif filed in January against Binance, $10 million was transferred to Binance for “laundering”. The complaint cites blockchain data that shows hackers divided the funds into thousands, each worth two bitcoins. This is the maximum amount a Binance account can trade with an email.

According to the complaint Zaif requested Binance to block the transactions immediately after the hack. Binance refused and said that Zaif was responsible for the failure to prevent the hack. The judge stated that Binance was involved in settlement talks. Later, Zaif dismissed the action. Contacted by Reuters both Binance, and Zaif’s owner, Tokyo’s Caica Digital Inc declined to comment on any settlement.

Some Binance staff members communicated via Telegram that they were aware that not all background checks were rigorous. Reuters reviewed the communications which were sent in February 2019. Lim is still in charge of compliance, while Leong is the Director of Compliance.

Leong stated that Zhao wanted “no KYC” in a single message. This refers to know-your-customer checks that verify client identities. Zhao wanted users to be able to trade within 10 minutes of signing up, Leong stated.

Leong also sent a message in the same exchange: “Reduce KYC. Raise Limits. BEST COMBO” appears to be referring to the limits on how much money users can deposit or withdraw. Leong posted than an emoji expressing sadness.

Lim expressed concern about Zhao’s plans for fiat-to-crypto exchanges. “Damn, why touch fiat if you don’t want to be compliant.” Lim wrote ironic LOL. “Just keep full of crypto man. Jizzus.”

Lim, a Singaporean became Binance’s chief compliance officer in early 2018. His Facebook profile once listed Lim’s interests as “Money lots of it” and he said he had worked at many banks.

Lim and Leong made private comments about Binance’s compliance policies that were different from Binance’s public statements. Lim stated to Fortune magazine in April 2019 “We want standards of anti-money laundering and compliance at a high level.” Binance also said that it would adhere to the Financial Action Task Force’s strict know-your-customer rules. This global watchdog sets anti-money laundering standards and guidelines for companies and governments.

Five people who had worked with Lim claimed that he didn’t have the experience necessary to manage compliance in a large company like Binance. Three people claimed that he complied with Zhao’s request to maintain loose compliance controls. The company had sophisticated tools at its disposal to track the movements of coins on the blockchain. These five people stated that the technology was not able to stop unidentified funds from reaching the exchange because of weak background checks.

Zhao maintained strict control over the company, which advisers and former employees compared to a personal fiefdom. One former senior staffer said that Zhao’s lieutenants were reluctantly to ask him difficult questions because they were afraid of CZ. Zhao said to his deputies that he didn’t want them “bringing me problems,” the person stated.

According to internal documents obtained by Reuters, Binance acted in violation of its internal risk ratings in at least seven countries. The compliance department produced a risk rating document that was circulated internally in the middle of 2020. It showed that 33 countries and territories, which included Russia and Ukraine, were deemed to be at “extreme” risk. According to Binance’s rules, this rating means that the firm shouldn’t accept customers from these countries. The department also circulated a separate document that stated the assessment was to “help the Management understand” how to apply anti-money laundering measures.

Zhao stated publicly that Binance was continuing its know-your-customer checks and investing more in compliance in the following year. He wrote to Binance’s customers in December, “We take our compliance standards seriously.”

Binance can continue to accept customers from these countries, however, this has not been reported in the risk rating document.

Reuters could not determine who made the adjustment. The risk rating document stated that the adjustment was based on “legal opinions on cryptocurrency operations from legal firms in the respective countries.” Zhao had previously announced a year ago a cooperation agreement on crypto. The Ministry of Digital Transformation in Ukraine said that it does not have any information regarding Binance’s risk assessment.

Its website shows that Binance is one of the countries ranked “extreme”, along with other countries. Binance runs Telegram community channels serving around 50,000 crypto enthusiasts from Myanmar, Pakistan, Uganda and Cambodia. Binance has uploaded educational videos to its YouTube channel in Pakistan over the past few months.

Binance said to Reuters that it uses “one of the most sophisticated approaches” for enforcing anti-money laundering and counterterrorism financing. It stated that its internal risk ratings “continuously shift based on a variety of variables.”

Global base

Binance seemed to be on a high in October 2018. Zhao returned to Malta in October 2018 after the passage of the blockchain law, which allowed crypto companies to apply to the island for a license.

Muscat recalled that Zhao met Muscat at his office to tell him Binance would make Malta its global base. Zhao was there with the chairwoman for Malta’s national charity that evening at the San Anton Palace party. Binance stated on its website that it had signed a contract to raise cryptocurrency donations for the charity’s work supporting terminal cancer patients. At the time, it was almost $200,000

Binance informed the Maltese financial watchdog through an agent that it intended to apply for a license. The regulator said this to Reuters. Binance updated its terms and use agreement to state that it was “governed under the law of Malta.” Zhao started giving a Maltese address for new companies set up in other countries, according to corporate filings.

Many customers had questions at the time about the location of the exchange. According to Telegram chat group reviews, Binance Angels began telling customers in a dozen countries that Binance had its main office now in Malta. One Angel informed traders in a public message to the Kazakh group that Binance’s Malta headquarters had their accounts and that they could not close them. Binance’s legal representatives stated that such messages are “patently inconspicuously not indicative of an wilful attempt by senior management to deceive users.

Zhao spoke at a crypto summit held in Malta in October. He praised the new law for “protecting investors” and promised to spend “most of my time” in Malta moving forward.

Getting the attention of Europe’s regulators

Zhao’s interest in Malta declined after 2018. Binance was required to submit all transactions and records to the Maltese regulator in order for Binance’s license application to be approved. Without identification, licensees could not allow the trading of assets. According to the regulator, Binance informed Maltese authorities in October 2019 that it did not plan to apply for a license. Four people who were directly aware of the decision claimed Zhao was scared by the requirements. Binance removed mentions of Malta from its terms of usage early in the next year.

Muscat stated that Binance was “surprised” by Malta’s “thoroughly” licensing process in an interview. He said, “It wasn’t just a rubber stamp saying, ‘Welcome, Malta, have a pleasant day.” Schembri said to Reuters that Binance didn’t “understand compliance” because they were “tech guys,” not financial.

Binance’s legal representatives stated that it was a matter of public record Binance had considered moving to different countries. “This is a clear indication of the rapid development in the regulatory environment cryptocurrency exchanges in different jurisdictions. It does not mean that our client has engaged with deceitful conduct in seriously considering Malta as a base for its operations.”

In a November 2020 letter, Reuters was able to see, the Binance head of Binance’s charitable arm had terminated its agreement. The charity claimed that it had never received the funds. Binance stated in a statement that it kept the funds safe and would work with the charity on how to make payments directly to patients. The statement stated that Binance wanted to work with the charity to reach their common goal of helping Maltese patients. However, this must be done in accordance to the Memorandum of Understanding.

Zhao’s project in Liechtenstein also was breaking down. Zhao’s business partner, Monty Metzger in the small country, wrote a resignation letter to Binance LCX. Metzger claimed that Zhao had made “material misstatements” and displayed “unusual, erratic” behaviour.

Metzger declined to comment, but wrote that “this kind of conduct isn’t befitting a chief executive officer.”

Martin Wachter, a former member of Binance LCX’s board, stated that he didn’t agree with Metzger and wasn’t aware of the failures he mentioned.

In the meantime, Binance was being noticed by European regulators.

Binance’s application to acquire a controlling share in a local bank was rejected by Liechtenstein’s regulator. According to the regulator’s report, it was partly based on the “legitimate assumption” that Binance could be involved in money laundering and terrorist financing. However, its analysis did not trace Binance’s origin.

Mid-December saw Consob, an Italian market regulator, write to Binance’s Maltese entity to ask it to make sure Binance’s services were compliant with Italy’s securities laws. Binance was at that time offering stock tokens, a type of cryptocurrency that can be used to represent traditional equities. According to correspondence between Consob, Binance, these were considered financial instruments that companies need a license for to market. Binance did not have a license to market in Italy. Consob spokesmen declined to comment on the correspondence.

Consob was contacted by Samuel Lim, the compliance chief. He denied that Binance offered “investment services.”

Consob was informed by him that the Binance exchange’s operations had been managed by a Swiss unit and not its Maltese counterpart. A spokesperson for Switzerland’s financial regulator said that Binance’s Swiss entity had “no authorisation” under financial market law. The spokesperson declined to comment on Binance interactions. Binance spokesperson stated, “Any suggestion that Consob was intentionally misled by us is categorically false.”

Consob went quiet.

“Crypto to all”

The opportunity presented itself in early 2020. Investors who had cash leftover embraced crypto as a way to escape the restrictions imposed by countries. Binance witnessed monthly spot trading volumes increase from $64 billion in March, to $220 billion nine months later. Zhao set out to establish local units in the major European markets as it gained new users.

Zhao purchased a British firm that was already regulated by the financial watchdog. This allowed Binance to offer digital assets with regulatory oversight. This is a badge of trust for many crypto companies. It also sought to establish itself in Germany, a country that is increasingly open to cryptocurrency.

Binance announced a partnership agreement with CM-Equity, a Munich-based finance services company, a month after it purchased the UK. Binance’s entry into Germany was possible through this model, according to Alireza Siadat (a lawyer hired by the exchange to explore possibilities for entering Germany in 2020).

According to three individuals with direct knowledge, Binance’s agreement with CM Equity to offer stock tokens required strict background checks. A copy of the rules was reviewed by Reuters. It stated that Binance’s compliance team would examine a user more closely if they made deposits exceeding 10,000 euros ($11,000).

In spring 2021, the German venture was launched. Binance sent CM-Equity a revised compliance document in June. Binance said that it would only review accounts that received more than $100,000 in one transaction. The document was also seen by Reuters. Michael Kott, CEO of CM-Equity, told Reuters that if CM-Equity knew about the change in June, “we would certainly not have given Binance an opportunity to work alongside us.”

Binance attracted many German customers. According to Sensor Tower, the number of downloads for its app increased to 243,000 in May, compared to 6,000 one year ago.

According to internal Telegram messages and three people, Binance’s German staff were concerned. They received regular letters from the German police, prosecutors and law firms regarding suspected money laundering on this platform. The state prosecutor’s office and German police declined to comment.

Between May and July, 44 letters were sent by the enquirers to Binance, each one being reviewed by Reuters. They asked Binance for information on transactions totalling at least 2,000,000 euros. They claimed that the money had been stolen from German citizens and was being laundered through Binance. European regulators had previously issued warnings about several of these alleged frauds.

Binance’s German team sent copies of the letters along with other documents to Binance’s compliance and legal teams.

One of the letters sent to the team mentioned 791,000 euros as allegedly being laundered funds. A lawyer wrote that the alleged fraudsters had made 24 transfers of his client’s money between April and May. He cited a list listing transactions through Binance. Nearly all of these transfers exceeded Binance’s 10,000euro threshold to trigger an alert at that time.

Germany’s Federal Criminal Police Office sent a second letter seeking information about two men who were suspected of helping an Islamist gunman in Vienna, in November 2020. The letter stated that there was evidence that the two men had bought and sold crypto on Binance. It did not provide any further details. Both men were represented by lawyers and neither was charged with any crime. No arrest warrants were issued.

Binance was forced to retrench after being warned by Germany’s regulator about a possible fine for stock tokens. It renounced stock tokens and stopped selling derivatives on some European markets. It ended its partnership with CM Equity. This April warning was the first in a series of public notices issued by regulators around the globe, including Consob in Italy.

Binance’s business was not affected by the warnings. The three-month period July to September saw an increase in trading volumes of 44%, reaching $2.7 trillion.

Zhao published full-page ads in major newspapers in mid-November to publish “10 Fundamental Rights for Crypto Users.” Binance stated that these rights would protect users and prevent financial crimes. They also help create new standards for crypto.

Binance stated, “Together we can unlock crypto for all.”

Linking Shareholders and Executives :Share Talk

If anyone reads this article found it useful, helpful? Then please subscribe or follow SHARE TALK on our Twitter page for future updates. Terms of Website Use All information is provided on an as-is basis. Where we allow Bloggers to publish articles on our platform please note these are not our opinions or views and we have no affiliation with the companies mentioned

Weekly Newsletter

Sign up to receive exclusive stock market content in your inbox, once a week.

We don’t spam! Read our privacy policy for more info.