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US calls for Internal Records in Binance crypto money laundering probe

LONDON, Sept 1 – U.S. federal prosecutors have asked Binance, the world’s largest cryptocurrency exchange, to provide extensive internal records of its anti-money laundering controls, along with communications related to its CEO and founder Changpeng Zhao. 2020 written request seen by reporters.

The Department of Justice’s anti-money laundering section asked Binance to voluntarily turn over reports from Zhao and 12 other executives and partners on matters including the exchange’s disclosure of illegal transactions and recruitment of American customers. He also requested any company records with instructions that “documents be destroyed, altered or removed from Binance files” or “transferred from the United States.”

The December 2020 request, which was not previously reported, was part of an ongoing Justice Department investigation into Binance’s compliance with US financial crime laws, four people familiar with the investigation said.

  • How crypto giant Binance became a hub for hackers, fraudsters and drug dealers
  • Crypto giant Binance kept lax money-laundering controls even as it promised stricter compliance, documents show

U.S. authorities, the people said, are investigating whether Binance violated the Bank Secrecy Act. This requires crypto exchanges to register with the Treasury Department and meet anti-money laundering requirements if they conduct “substantial” business in the United States. The law, which is designed to protect the US financial system from illegal financing, carries prison terms of up to 10 years.

Reuters was unable to determine how Binance and Zhao, one of the most prominent figures in the crypto sector, responded to a request from the ministry’s criminal division.

In response to questions from Reuters about the letter and the investigation, Binance communications director Patrick Hillmann said: “Regulators around the world are reaching out to every major crypto exchange to better understand our industry. This is standard process for any regulated organization and we regularly work with agencies and resolve any questions.” Binance has a “leading global security and compliance team” with more than 500 employees, including former regulators and law enforcement agents, Hillmann added.

He did not say how Binance responded to the Justice Department’s request. A ministry spokesman declined to comment.

The request reveals the broad scope of the investigation into Binance in the US. The existence of the probe was reported by Bloomberg last year, but until now little was known about it. A Binance spokeswoman told Bloomberg at the time: “We take our legal obligations very seriously and are cooperating with regulators and law enforcement.”

The letter included 29 separate requests for documents made since 2017 that related to the company’s governance, structure, finances, anti-money laundering and sanctions compliance and doing business in the United States. “Binance is requested to produce all documents and materials consistent with this letter in its possession, custody or control,” it said.

Binance was launched by Zhao, known as CZ, in Shanghai in 2017 and has controlled more than half of the world’s cryptocurrency trading markets since July, processing more than $2 trillion worth of transactions this month. Born in China and educated in Canada, where he holds citizenship, Zhao told Bloomberg in March that he would be based “for the foreseeable future” in Dubai, which that month granted Binance a license to conduct some operations.

A series of Reuters articles this year revealed how Binance managed its explosive growth while maintaining lax customer controls and withholding information from regulators. Loopholes in Binance’s compliance program allowed criminals to launder at least $2.35 billion in illicit funds through the exchange, which also served traders in Iran despite US sanctions, Reuters has found. Until mid-2021, Binance customers could trade cryptocurrencies by registering with just an email address.

Binance disputed Reuters’ findings, calling them “outdated”. The exchange said it “drives higher industry standards” and seeks to “further improve our ability to detect illegal crypto activity on our platform.” It said it did not consider Reuters’ calculations of illicit financial flows to be accurate.

U.S. SCREENINGS

Crypto exchanges are under increasing scrutiny in the United States, where top government officials, including Treasury Secretary Janet Yellen, have publicly supported more regulation of the sector this year. In February, the Department of Justice created a national cryptocurrency enforcement team to “address the growth of crime involving these technologies” with a focus on exchanges.

That month, the founders of another exchange, BitMEX, pleaded guilty to violating the Bank Secrecy Act and were later sentenced to up to two and a half years of probation. BitMEX agreed to pay a $100 million fine to settle separate charges of violating the law. BitMEX now says it is “fully committed to conducting its business in compliance with all applicable laws” and has made “substantial investments” in its compliance program.

Binance has an opaque corporate structure. It declined to provide details about the ownership or location of its main exchange, Binance.com, which has not been accepting customers in the United States since mid-2019. Clients there are instead redirected to a separate US-based exchange called Binance.US, which is also controlled by Zhao, regulatory filings show. Binance.US registered with Treasury Department in 2019; the main exchange never did.

Since last year, more than a dozen financial regulators around the world have issued warnings against Binance, saying it either serves unlicensed users or violates anti-money laundering rules. In July, the Dutch central bank said it fined Binance over €3 million for violating its financial crime laws. A Binance spokesperson said at the time that the fine was “key in our continued engagement” with the central bank.

In a 2020 request, the Justice Department sought all documents that identified Binance employees responsible for complying with the Bank Secrecy Act, details of its anti-illegal finance policies, and any reports of suspicious financial activity it had filed with authorities. Binance has been asked to provide information on all transactions between the exchange and users involved in ransomware, terrorism and darknet markets, along with those targeted by US sanctions.

The ministry also requested documents related to the “business rationale” for the establishment of Binance.US. It requested a communication involving 13 executives and partners — including Zhao, his co-founder Yi He, and his head of compliance, Samuel Lim — on the topic of “the creation of Binance.US and its relationship with Binance.” Lim and On are still in Binance.

Reuters reported in January that Lim and other senior employees were aware that Binance’s money laundering controls were not strict, according to company reports reviewed by the news agency. Neither Lim nor Binance have commented on the reports.

In addition to the Justice Department’s request, the Securities and Exchange Commission issued a subpoena to Binance.US operator BAM Trading Services that same month. The subpoena, reviewed by Reuters, demanded that BAM hand over documents showing whether any employees also worked for the main exchange Binance and what services it provided to the US company.

Binance.US did not respond to questions from Reuters. The SEC said it does not comment on potential investigations.

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