Binance money laundering scandal explained: What to know

What is Binance?

Binance is one of the world's largest cryptocurrency exchange platforms. Zhao founded Binance in 2017. The focus of Binance is altcoin trading, which uses cryptocurrencies designed and released by developers with their own visions of these tokens.

Altcoins are typically considered all cryptocurrencies other than Bitcoin and Ethereum. Altcoins employ different mechanisms to validate transactions using distributed ledger technology or opening new blocks for purchase or trade.

Even though Binance focuses on altcoin trading, the platform also offers cryptocurrency trading on popular tokens such as bitcoin, ether, dogecoin and BNB -- Binance's own coin. Binance provides traders with a cryptocurrency wallet to store their tokens. Transactions are verified and stored on the blockchain for a record of ownership.

Charges against Binance

Binance has been under investigation since at least 2018. Federal prosecutors requested access to internal documents, data on anti-money laundering initiatives, and correspondence between Zhao and others in December 2020.

The CFTC brought civil proceedings against Binance in March 2023 for failing to put in place an anti-money laundering program that would have identified and stopped dirty money transactions such as the financing of terrorism and illicit drug sales. The CFTC said officers and other Binance staff members were aware of the platform's illicit activity. The violent Palestinian organization Hamas completed transactions on Binance, according to the CFTC, and Binance's Chief Compliance Officer Lim was aware of them.

The Securities and Exchange Commission (SEC) also sued Binance in June 2023. The accusations include running broker-dealers and unregistered exchanges and falsely portraying trading controls and monitoring, according to the SEC press release. Furthermore, according to the SEC, Binance and Zao said that U.S. consumers could not transact on Binance.com but would still covertly permit high-volume users to do so. Binance was part of an "extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law," according to an SEC press release.

Meanwhile, the DOJ investigated Binance for criminal activity and filed criminal charges in November 2023. The charges stated Binance had lax anti-money laundering procedures in place and customers were able to mix illicit services and "laundered proceeds of the darknet market transactions, hacks, ransomware and scams." The indictment also said, "because of this scheme, Binance prioritized growth, market share and profits over compliance with U.S. law to become the largest cryptocurrency exchange in the world."

What are the latest criminal charges?

The prosecution claims that Binance intentionally violated U.S. sanctions and failed to register as a money service company. According to the accusations, Binance intentionally took advantage of the U.S. market without following any U.S. regulations or legal requirements. According to the prosecution, these actions might have begun in August 2017.

The criminal documents describe a company that, according to the prosecution, occasionally intentionally and purposefully ignored the transfer of money from countries and areas that are subject to sanctions -- including Syria, Iran, Cuba, Russia-occupied Crimea and the Donbas region in Ukraine. There was also trading that involved the criminal dark-web market Hydra.

According to U.S. Attorney General Merrick Garland, Binance broke American law and made it simple for thieves to transfer money that had been pilfered or illegally obtained. According to the indictment, Binance violated sanctions by facilitating more than 1.1 million transactions between Americans and Iranians. Nearly $900 million was exchanged in total throughout these transactions. The indictment then revealed that Hydra was directly responsible for around $106 million in revenue, which included transactions such as drugs, stolen information and money-laundering services.

Prosecutors alleged in the charges that Binance did not have any "know-your-customer requirements," which is a direct violation of U.S. money-laundering laws. Even though Binance had no real-estate offices in the U.S., it offered services to U.S. users that required following U.S. law.

The charging documents outline other details including the following:

• Binance processed around $27 million with a cryptocurrency "mixing" service making transactions harder to trace.
• Binance users included ransomware gangs and bad actors that pulled cryptocurrency from other exchanges.
• Binance facilitated transactions with militant groups such as Hamas.
• Binance allowed users to ignore or avoid money-laundering checks by checking on the user's "VIP level" before banning the account for violations, and sometimes, encouraging the VIP user to create a new account.

Zhao has pled guilty to all charges. Sentencing is scheduled for February 2024.

Crime and cryptocurrency

The allegations and settlement follow the former CEO of FTX, Sam Bankman-Fried, who was found guilty of fraud. FTX was formerly regarded as one of the largest cryptocurrency exchanges globally, alongside Binance.

Digital currency proponents argue that most cryptocurrency trades and exchanges are lawful and legitimate.

U.S. officials have emphasized that if businesses service U.S. customers, they must comply with the U.S. law, including anti-money-laundering laws.

What's next for Binance and cryptocurrency?

Binance named Richard Teng CEO to replace Zhao. In a blog post, Teng outlined his goals for Binance, emphasizing regulatory cooperation. Teng said the fundamentals are still solid and that Binance is still dedicated to providing value to its users. Additionally, he exhorts customers to have faith in the stability and strength of the business.

Teng said to overcome its past struggles, the company will redesign its compliance program and culture. He intends to collaborate with colleagues in the cryptocurrency sector to create a more uniform framework for consumer protection.

Among other non-USD exchanges, Binance's market share has dropped to less than 45%. At the start of 2023, Binance was at 70%, according to the digital asset information source The Block's data dashboard.

In addition to the Binance exchange, Teng also wants to support the adoption of Web3 and decentralized applications.

Binance's BNB token went down 13% after the settlement announcement but recovered a few days later.

As with any financial services, there are scams. Cryptocurrency also has several scams -- such as the pig butchering scam to gain someone's trust before taking their money. With increased regulation, consumers will also need to prepare and educate themselves to beware of scams. The value of cryptocurrency can fluctuate profusely depending on demand.

Learn more about the pros and cons of cryptocurrency.

Amanda Hetler is a senior editor and writer for WhatIs where she writes technology explainer articles and works with freelancers.