Binance and CZ violated compliance rules to solicit US users

The Commodity Futures and Trading Commission has filed a complaint against crypto exchange Binance, its co-founder, Changpeng Zhao, and its former compliance officer, Samuel Lim, alleging that Binance was actively soliciting US users and subverting the “program of ineffective compliance” of the exchange. according to a filing in federal court in Illinois on Monday.

The filing has the potential to upend the exchange’s operations and is potentially just the first salvo in a regulatory crackdown on the world’s largest crypto exchange. Beyond restitution and monetary costs, the CFTC filing asked the court to impose additional measures, including trade and registration bans.

The regulator alleged Binance, Zhao, and Lim violated eight core provisions of the Commodities Exchange Act, including laws that require controls “designed to prevent and detect money laundering and terrorist financing.”

Just days before the complaint was filed with the CFTC, CNBC reported on how Binance employees worked to overturn the exchange’s compliance checks in China, using some of the same techniques as the CFTC. alleges Binance to solicit US users.

Zhao and Lim allegedly “actively cultivated lucrative and commercially significant ‘VIP’ clients, including institutional clients, located in the United States,” the complaint states.

“Today’s enforcement action demonstrates that there is no venue, or an alleged lack of venue, that will prevent the CFTC from protecting U.S. investors. I have been clear that the CFTC will continue to ‘Use full authority to find and stop fault in the volatile and risky digital asset market,’ CFTC Chairman Rostin Benham said in a statement.

Binance and Zhao have taken steps to deliberately obscure the location of exchange subsidiaries, the regulator said. It was part of a larger strategy that Zhao said was an effort to “keep countries clean,” the regulator alleged in the filing.

A key part of Binance’s alleged efforts to generate fees and solicit US users was the exchange’s VIP program for high net worth individuals, according to the CFTC filing.

“Binance is aware of the identity and geographic location of its VIPs because Binance monitors its sources of trading volume and paid revenue as evidence in the conduct of its operations,” the CFTC complaint alleges.

Binance VIPs were offered special privileges when law enforcement prosecuted them or froze their assets, CFTC alleged, saying Binance warned VIPs or suggested they remove their assets from the platform .

“Do not directly tell the user to run,” Binance told its VIP team, according to the filing. “If the user is a big trader or a smart trader, he will understand the index.”

Hours after the filing, Zhao issued a statement, saying he found the allegation did not offer a full representation of the facts, claiming that Binance had cooperated with international and US law enforcement requests and had frozen $160 million in the year’s direction of law enforcement. -nowadays.

CNBC previously reported how Binance’s customer service and VIP representatives advised users in mainland China on how to evade Binance’s compliance systems. The use of virtual private networks and alternative non-state documents has been advised by some volunteers and staff to traders in mainland China. The CFTC filing alleges that Binance engaged in similar activity for its US users.

“But as best we can, we try to get our users to use a VPN or ask them to provide (if there’s an entity) non-US documents. On the surface, we can’t be seen as having American users, but really, we should get them in other creative ways,” Lim told a Binance employee in 2020 according to the filing.

Lim reportedly advised against outright fraud, but encouraged “creative ways” to circumvent regulations. Binance “can encourage them to be a non-kyc account,” Lim. KYC stands for know your customer, a set of principles that guide anti-money laundering programs for financial institutions and are a key element in the fight against terrorist and illicit financing.

“We have made significant investments over the past two years to ensure that we do not have active US users on our platform,” a Binance spokesperson said in a statement, calling the complaint “ unexpected and disappointing”.

Early in the day, Zhao posted a tweet that read “4” in an apparent response to the CFTC filing.

The number four is one call to Binance’s dedicated international userbase for dismissing the negative publicity about the exchange as “fake news.”

“The best way forward is to protect our users and work with regulators to develop a clear and thoughtful regulatory regime,” Binance’s statement continues.

Zhao’s individual response echoed this. “We intend to continue to respect and cooperate with U.S. and other regulators around the world,” the Binance CEO wrote.