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Crypto-giant Binance kept weak money-laundering checks, reveals report Binance’s proposed relocation crowned the Maltese government’s strategy to turn Malta into a “Blockchain Island.” Zhao pledged that Binance would raise donations for local cancer patients. But soon the romance ended. Crypto-giant Binance kept weak money-laundering checks, reveals report (Photo: Reuters) Reuters Jan 21, 2022, Updated Jan 22, 2022, 4:39 PM IST
In the courtyard of a secluded limestone palace, Malta’s political elite welcomed a guest: Changpeng Zhao, chief executive of Binance, the world’s largest cryptocurrency exchange.
It was October 2018. Zhao was in Malta to find Binance a new home, having quit mainland China the year before when regulators there began cracking down on cryptocurrencies. Zhao praised Malta for opening its doors to crypto firms.
“Binance got really lucky,” Zhao told the audience, in filmed remarks. “Malta came at a time when regulatory clarity was very much needed.”
That same month Binance notified Malta’s financial regulator it planned to seek a license to operate its exchange from the island - an important step to mainstream legitimacy for the young firm. Zhao said the island would be Binance’s new base.
Binance’s proposed relocation crowned the Maltese government’s strategy to turn Malta into a “Blockchain Island.” Zhao pledged that Binance would raise donations for local cancer patients. But soon the romance ended.
As Zhao studied the license’s conditions, he grew nervous about their stringent anti-money laundering protocols and the level of financial disclosure required, according to four people with direct knowledge of the licensing discussions. The following year, Binance privately informed the regulator it had aborted its plan, the regulator told Reuters. A letter from Binance in 2020, seen by Reuters, shows donations to the charity were scrapped, too. Yet for several months Binance kept telling its millions of customers that its terms of use were “governed under the laws of Malta.”
Zhao’s dealings with the Mediterranean island fit a wider pattern, a Reuters investigation has found. In public, Zhao repeatedly said he welcomed regulatory oversight and Binance lauded its anti-money laundering programme. But at the same time, Binance was withholding information about its finances and corporate structure from regulators, at least eight of whom have warned consumers about the risks of using the exchange. Binance also maintained weak checks on customers, despite concerns raised by senior company figures, and acted against its own compliance department’s recommendations.
$914 billion Binance’s spot trading volume in November 2021
A Binance spokesperson said in a statement to Reuters: “As the leading cryptocurrency and blockchain ecosystem, we are both leading and investing in the future technologies and legislation that will set the crypto industry on the road to becoming a well-regulated, secure industry.” The company didn’t comment in response to detailed questions.
Reuters conducted dozens of interviews with former senior employees of Binance, advisers and business partners, and reviewed hundreds of documents, including confidential correspondence between Binance and national regulators, and internal company messages.
The reporting shows Binance has operated outside rules that govern traditional financial firms and many crypto rivals. An opaque corporate structure has enabled Binance to offer products that many national regulators don’t allow locally registered firms to sell. Binance has repeatedly declined to specify in which jurisdiction its main online exchange is based, complicating regulators’ efforts to oversee its activities. And it has minimised costly client background checks.
Other findings include:
• On at least four occasions, Binance declined to provide detailed answers about its operations when asked by financial authorities and business partners, according to regulatory filings and people with direct knowledge. • In encrypted Telegram messages seen by Reuters, Binance staff, including Chief Compliance Officer Samuel Lim and former Global Money Laundering Reporting Officer Karen Leong, raised worries about weak “know-your-customer” checks aimed at preventing money laundering. Three former senior Binance employees told Reuters they voiced such concerns to Zhao himself but he ignored them.
• Binance acted against its own compliance department’s assessment by continuing to recruit customers in seven countries, including Russia and Ukraine, judged to be of “extreme” money-laundering risk in an internal report circulated in early 2020 that was seen by Reuters.
• Last year, Binance watered down compliance rules arranged with a German business partner, causing disquiet among some Binance staff.
• German police and lawyers representing over 30 suspected fraud victims sent Binance dozens of letters, seen by Reuters, seeking information about several million euros that they suspect were laundered through the exchange. Several of the letters’ senders told Reuters that Binance responded saying it could not help. Reuters has been unable to review most of Binance’s written responses.
• German federal police sought information from Binance last year about two men suspected of assisting an Islamist gunman who killed four people in Vienna in November 2020. One of the men made unspecified transactions on Binance, a letter from police said.
The Binance spokesperson said the company is driving higher industry standards. He noted that when Binance was founded in 2017, “the crypto industry was still in its infancy. There was relatively little guidance on how crypto should be regulated, Know Your Customer (KYC) technology was yet to be fully developed, law enforcement agencies were not educated on crypto, and policies such as those that govern anti-money laundering were broadly not fit-for-purpose for the crypto space.”
The spokesperson, without going into details, said Reuters’ information was “wildly outdated and - in several places - flatly incorrect.” Legal representatives for Binance said documents reviewed by Reuters were “partial and do not accurately reflect the full picture in relation to how decisions relating to very serious issues have been made by our client.”
Zhao, Lim and Leong didn’t respond individually to requests for comment.
Binance has become emblematic of governments’ attempts to tame the crypto sector. Top regulators in the United States and Britain have called on lawmakers to grant them greater powers over the industry.
While Binance’s business boomed during the COVID-19 pandemic, with retail and institutional investors alike warming to crypto, over a dozen national regulators issued warnings about the firm. Some said it was operating without a license in their jurisdictions. Others cautioned people against using its services. Britain’s regulator said in mid-2021 that a UK unit of Binance was “not capable of being effectively supervised,” after it refused to answer questions about the exchange’s global business.
Zhao told Reuters in an interview in October: “We have never intentionally withheld information from regulators.” The Binance spokesperson said, “it is categorically false to claim that Binance is knowingly withholding information about its corporate structure from inquiring regulatory bodies.”
Power of bitcoin
Born in China and educated in Canada, Zhao is a prominent figure in the crypto world, preaching to his 5 million Twitter followers about the liberating power of bitcoin. Most people know the 44-year-old by his initials, CZ.
Since he established Binance in Shanghai in 2017, his exchange has ventured into every corner of the crypto market, from spot and derivatives trading to non-fungible tokens. In November, Binance’s monthly spot trading volumes were $914 billion, up more than five-fold from the year before and over five times the amount smaller rival Coinbase processed, according to data from analytics firm CryptoCompare. Binance’s derivatives trading volumes were $1.8 trillion.
For a corporation of its scale, Binance discloses little public information. It says it does not have a headquarters and does not identify which entity controls its main exchange, although Zhao has said in recent months he wants to establish a number of regional headquarters. An internal organisational chart which Binance submitted to Liechtenstein’s financial regulator in April 2020 may shed some light. The chart, which has not been previously reported, shows Binance at the time was composed of 30 entities, many of them owned by Zhao personally.
According to another previously unreported document which Binance sent to the regulator, Binance held over $100 million in assets in a Cayman Islands holding company at the end of 2018, when bitcoin’s value and Binance’s trading volumes were a fraction of those today.
The new insights into Binance’s operations come as international authorities voice growing concerns about the use of cryptocurrencies in money laundering and other crimes. Top policymakers, including U.S. Treasury Secretary Janet Yellen and European Central Bank President Christine Lagarde, have said cryptocurrencies generally could be used by criminals because of the high degree of anonymity they afford users and often-patchy regulation. The Dutch central bank warned in August that Binance was not in compliance with laws aimed at preventing money laundering and terrorist financing. The U.S. Internal Revenue Service is also conducting an investigation into possible money laundering at Binance, said two people familiar with the probe, first reported by Bloomberg. The IRS declined to confirm any investigation.
In August, Binance said it would tighten customer checks designed to prevent laundering - a major shift for the exchange, where many users had previously been able to trade with just an email address. “Appetite for risk” Zhao launched Binance in July 2017. In a paper aimed at raising funds from investors, Zhao said Binance heralded a “new paradigm” in world finance. Binance, he wrote, would be a global marketplace for smaller cryptocurrencies created in the wake of bitcoin’s growth. Flush with $15 million raised in an initial coin offering (ICO), in which crypto start-ups issue and sell virtual tokens to investors, Zhao planned his global expansion from a small Shanghai office with a close-knit team. Bobby Lee, a Shanghai-based crypto entrepreneur and friend of Zhao, told Reuters he was struck at the time by Zhao’s ambition, persistence and “appetite for risk.” The exchange quickly gained steam, notching 120,000 users by late August, many of them in the United States, China and Japan. For a basic Binance account, traders could sign up with an email address, without entering personal information. Binance charged them a small fee on each trade and withdrawal. But Binance’s debut, among a flurry of other Chinese ICOs, drew unwanted attention from Chinese authorities. In September 2017, Beijing banned token issuances in a broad crackdown on cryptocurrencies. Without naming Binance, the Chinese central bank said recent ICOs “seriously disrupted the economic and financial order.” Zhao moved Binance away from mainland China. In late September, he set up a new Binance company in Hong Kong, controlled by a Cayman Islands holding company, corporate records show. Zhao and his team relocated to Tokyo, he later told interviewers. From its new base in Japan, Binance’s growth exploded as bitcoin’s value raced to a then-record of almost $20,000. Income surged, giving Binance profits of about $208 million for the six-month period since its launch, a company blog post said. Zhao also started marketing Binance globally. He enlisted hundreds of so-called Binance Angels as volunteers in some 50 countries to promote the exchange to local crypto traders. The Angels spread Zhao’s thoughts on crypto via local Telegram groups, receiving discounts in return. “CZ is here to make us all rich,” an Angel in the Philippines group told customers. In March 2018, Binance became the world’s largest exchange by trading volumes, with almost 8 million users.
Zhao expanded into the “fiat-to-crypto” market, where people buy crypto with government-issued “fiat” currencies, such as the U.S. dollar.
Zhao’s move involved setting up local exchanges in different countries to receive deposits. Under banking regulations in most countries, such trading is normally subject to stricter background checks on users. The market had enormous potential, though, because Zhao could target the legions of people who didn’t already own crypto.
In a blog post that month titled “Benefits of Crypto,” Zhao made a pitch to governments to open their doors to his company. “Favorable regulations” that attracted Binance, he wrote, would lead to a “huge influx of funds to the local economy” and “handsome tax income revenue.”
Then a new hitch appeared. Japan’s regulator said that Binance was offering crypto exchange services to residents of the country without being registered and issued a public warning against it.
Around that time, then Maltese Prime Minister Joseph Muscat’s government was drafting one of the first laws to regulate blockchain-based companies. In late March, Zhao flew in to meet Muscat’s crypto policy adviser, a young parliamentary secretary called Silvio Schembri.
At his office, Schembri gave Zhao a presentation outlining Malta’s plan to become “The Blockchain Island,” Schembri recalled in an interview with Reuters. Crypto firms could obtain a license, and thus legal certainty, by meeting disclosure requirements set out by the regulator, Schembri explained to Zhao.
The following day, Binance said in a press release that Zhao was impressed by Malta’s “healthy regulatory framework” and would hire up to 200 people once the Maltese parliament passed its Virtual Financial Assets Act.
That day, Muscat welcomed Binance and hailed Malta as “global trailblazers” in a tweet. Schembri, speaking in parliament, told lawmakers there would be a “ripple effect” on the local economy from Binance’s massive profits. Zhao registered a local company and continued on his travels.
He visited Uganda to kickstart Binance’s Africa business. He attended a dinner at Britain’s parliament to discuss digital currencies. He hiked in the Alps in Liechtenstein with the owner of a local crypto exchange. As Zhao jetted around the globe, signs of trouble emerged.
On Sept. 14, 2018, hackers broke into a Japanese crypto exchange called Zaif and stole $63 million of cryptocurrency. They transferred a $10 million portion to Binance to “launder” it, according to a civil complaint Zaif filed against Binance in January last year in San Francisco Superior Court in California. Blockchain data cited in the complaint shows the hackers split the funds into thousands of separate transactions each worth two bitcoins, the limit a Binance account could trade with just an email on file.
According to the complaint, Zaif asked Binance to freeze the transactions shortly after the hack, but Binance “failed to take action.” Binance denied wrongdoing and told the court Zaif was at fault for not preventing the hack. In a September 2021 order, the judge wrote that Binance and Zaif were engaged in settlement discussions. Zaif later dismissed its action. Contacted by Reuters, both Binance and Zaif’s owner, Tokyo-based Caica Digital Inc, declined to comment on any settlement.
Telegram messages among Binance staff indicate that some senior employees, including Samuel Lim, the compliance chief, and Karen Leong, then global money laundering reporting officer, were aware that background checks on users were not rigorous. Reuters reviewed the communications, which were sent in mid-2019. Lim remains in charge of compliance and Leong is Director of Compliance for the firm.
In one message, Leong said Zhao wanted “no kyc,” referring to know-your-customer checks that verify clients’ identities. Leong said Zhao wanted “users to be able to trade within 10 minutes” of signing up.
In the same exchange, Leong messaged, “Reduce KYC. Raise Limits. BEST COMBO,” appearing to refer to limits on the amount of money users could deposit or withdraw. Leong then posted an emoji showing sadness.
Lim expressed doubts about Zhao’s plan for fiat-to-crypto exchanges. “Damn why touch fiat if dont wanna be compliant. So ironic LOL,” Lim wrote. “Just stay full crypto man. Jizzus.”
Lim, a Singaporean, became Binance’s chief compliance officer in early 2018. On his Facebook profile, he once listed his interests as “Money, lots of it” and said he did stints at several banks.
Lim and Leong’s private remarks about Binance’s compliance policies differed from Binance’s public statements at the time. In April 2019, Lim told Fortune magazine, “We want to keep standards of anti-money laundering and compliance at a high level.” In October, Binance said it would comply with stringent know-your-customer rules introduced that June by the Financial Action Task Force, a global watchdog which sets anti-money laundering standards for governments and companies.
Five people who worked with Lim said he lacked the experience to manage compliance at a company the size of Binance. He routinely acquiesced to Zhao’s requests to keep loose compliance controls, three of the people said. The company had at its disposal sophisticated tools to track the movement of coins on the blockchain. Yet with weak background checks, such technology could not prevent unidentified funds from reaching the exchange, these five people said.
Zhao maintained tight control over the company, which former senior employees and advisers likened to a personal fiefdom. His lieutenants were reluctant to raise difficult questions with him because “everyone is terrified of CZ,” said one former senior staffer. Zhao told deputies he didn’t want them “bringing me problems,” the person said.
In at least seven countries, Binance acted against its own internal risk ratings, according to internal documents seen by Reuters. A risk rating document, produced by the compliance department and circulated internally in mid-2020, shows that 33 countries and territories, including Russia and Ukraine, were considered to have “extreme” risk levels. Under Binance’s own rules, that rating meant the firm should not accept customers in those countries. A separate document circulated by the department at the same time said the assessment was “to assist the Management in understanding” how to apply anti-money laundering measures.
That year, Zhao said in public that Binance was continuing to tighten its know-your-customer checks and was investing more in compliance. In a December letter to Binance’s customers, he wrote, “We take our compliance standards very seriously.”
However, according to the risk rating document, which has not been previously reported, the assessments for Russia and Ukraine were “manually adjusted” down from “extreme” to “high,” enabling Binance to continue accepting customers from those countries.
Reuters couldn’t determine who made the adjustment, which the risk rating document said followed “legal opinions on crypto operations from legal firms of the respective countries.” Zhao and Ukraine’s government the year before had announced an agreement to increase cooperation on crypto. Ukraine’s Ministry of Digital Transformation said it has no information about Binance’s risk assessment.
Among the other countries ranked “extreme” by the compliance department, Binance currently runs Telegram community channels for some 50,000 crypto enthusiasts in Myanmar, Pakistan, Uganda, Cambodia, and Mongolia, its website shows. In recent months, Binance has posted on its YouTube channel educational videos for its users in Pakistan.
Binance told Reuters it has “one of the most sophisticated approaches” to enforcing anti-money laundering and counter-terrorism financing “in the financial sector, let alone the blockchain industry.” It said its internal risk ratings “continuously change based on a number of variables.” A global base In October 2018, Binance appeared to be riding high. That month, Zhao returned to Malta after the passing of the blockchain law that allowed crypto companies to apply for a license to operate from the island. Zhao met with Muscat at his office and told him Binance would make Malta its “global base,” Muscat recalled in an interview with Reuters. That evening, at the party at the San Anton Palace, Zhao spoke alongside the chairwoman of Malta’s national charity. Following a signed agreement, Binance said on its website it raised donations in cryptocurrency to support the charity’s work helping terminal cancer patients. The sum was equivalent to almost $200,000 at the time.
Binance, through an agent, notified the Maltese financial watchdog of its intention to seek a license, the regulator told Reuters. Binance then updated its terms of use agreement to say it was “governed by the law of Malta.” Zhao began giving a Maltese address when setting up new companies in other countries, corporate filings show.
At the time, many customers were raising questions about where the exchange was based. In a dozen countries, Binance Angels started telling customers that Binance now had its main office in Malta, according to a review of the firm’s Telegram chat groups. In the Kazakh group, which has thousands of members, one Angel told traders in a public message that their accounts were held by Binance’s Malta headquarters, and as a result, “No one can close them.” Their money was safe. Binance’s legal representatives said such messages were “patently not indicative of a wilful attempt to deceive users en masse by senior management.”
At a crypto summit in Malta that October, Zhao praised the new law because it “protects investors.” He committed to spending “most of my time in Malta going forward.” Catching the eye of Europe’s regulators But after 2018, Zhao’s interest in Malta waned. The license application required Binance to provide the Maltese regulator with all its transactions and accounting records. Licensees were barred from enabling the trading of assets unless the holder could be identified. In October 2019, Binance informed Maltese authorities it didn’t plan to proceed with a license application, according to the regulator. Four people with direct knowledge of the decision said Zhao was spooked by the requirements. Binance only removed the mention of Malta in its terms of use early the following year.
In an interview, Muscat said Binance was “surprised” by Malta’s “thorough” licensing process. “It wasn’t just a rubber stamp saying, ‘Welcome to Malta, have a nice day’,” he said. Schembri told Reuters that Binance “didn’t understand compliance” as they were “tech guys, not financial.”
Binance’s legal representatives said it is a matter of public record that Binance has considered relocating to a number of different jurisdictions. “This is demonstrative of the rapid development of the regulatory environment for cryptocurrency exchanges in various jurisdictions, not that our client has engaged in deceitful conduct by seriously considering Malta as a possible base for its operations.”
The head of Binance’s charitable arm later terminated its agreement with the Maltese national charity in a letter dated November 2020 seen by Reuters. The charity told Reuters it never received the funds. In a statement last July, Binance said it was keeping the funds safe and wanted to work with the charity to resolve how disbursements could be made to patients directly. “We wish to find mutually beneficial ways to achieve our common goals of benefitting Maltese patients, but we must do this based on the Memorandum of Understanding that was signed to ensure clarity and transparency,” the statement said.
Zhao’s project in Liechtenstein also was breaking down. In October 2019, Zhao’s business partner in the tiny country, Monty Metzger, sent a resignation letter to the board of their joint venture, Binance LCX, accusing Zhao of failing to fulfill “any diligence obligations or regulatory requirements.” Metzger wrote that Zhao made “material misstatements” to local officials and exhibited “unusual and erratic” behaviour.
Martin Wachter, a former Binance LCX board member, said he did not agree with Metzger’s allegations and was not aware of the failings he described.
Meanwhile, Binance was catching the eye of Europe’s regulators. Liechtenstein’s regulator rejected an application by Binance to take a controlling stake in a local bank. The regulator, according to its report, based its decision partly on a “legitimate assumption” that Binance “could be involved in money laundering activities and terrorist financing.” The regulator said its analysis failed to trace the origin of Binance’s funds.
In mid-December, the Italian market regulator Consob wrote to Binance’s Maltese entity asking it to ensure Binance’s services complied with Italy’s securities law. Binance, at the time, was offering “stock tokens,” a form of cryptocurrency that represents traditional equities. Consob viewed these as financial instruments which companies require a license to market, according to correspondence between Consob and Binance. Binance had no such license in Italy. A Consob spokesman declined to comment on the correspondence.
Samuel Lim, the compliance chief, wrote back to Consob, denying Binance provided “investment services.”
He told Consob that, in any case, the Binance exchange’s operations were managed by a Swiss unit, not its Maltese unit. However, a spokesman for Switzerland’s financial regulator told Reuters Binance’s Swiss entity “has no authorisation” there under financial market law. The spokesman declined to comment on any interactions with Binance. The Binance spokesperson said, “any suggestion that we intentionally misled Consob is categorically false.” Consob went quiet. “Crypto for all” In early 2020, opportunity struck. As countries imposed lockdowns, investors stuck at home with cash to spare embraced crypto on an unprecedented scale. Binance saw monthly spot trading volumes soar from $64 billion in March to $220 billion nine months later. As it gained legions of new users, Zhao looked to set up local units in major European markets.
In Britain, Zhao bought a firm already regulated by the country's financial watchdog, allowing Binance to offer digital assets under regulatory oversight – a badge of credibility sought by many crypto companies. It also looked to establish itself in another country increasingly open to cryptocurrencies: Germany.
A month after its UK purchase, Binance unveiled a partnership with CM-Equity, a Munich-based financial services firm registered with Germany's regulator. This model was the “fastest way” for Binance to enter the German market without pausing its recruitment of new customers, said Alireza Siadat, a lawyer hired by the exchange in 2020 to explore avenues to enter Germany.
Binance’s deal with CM-Equity to offer stock tokens demanded tight background checks on clients, according to three people with direct knowledge of the matter. A copy of the agreed rules, reviewed by Reuters, said Binance’s compliance team would scrutinise a user more closely if they deposited over 10,000 euros ($11,000) in one go.
The German venture launched in spring 2021. In June, Binance sent CM-Equity an updated compliance document: Binance would only review an account if it received at least $100,000 in one go, said the document, which was seen by Reuters. Asked to comment on this change, CM-Equity CEO Michael Kott told Reuters that if CM-Equity had known about it in advance “we would definitely not have given Binance the opportunity to work with us.”
German customers flocked to Binance. Downloads of its app jumped to 243,000 in May from 6,000 a year earlier, according to mobile app download tracker Sensor Tower.
Behind the scenes, Binance’s German team were worried, according to the three people and internal Telegram messages. They were regularly receiving letters from German police, prosecutors, and law firms about suspected money laundering on the platform. German police and the state prosecutor’s office declined to comment.
Between May and July, the enquirers sent 44 letters, all reviewed by Reuters, asking Binance to provide information about transactions worth a total of at least 2 million euros. This money, they said, had been stolen from German residents and laundered through Binance. European regulators previously had issued public warnings about a number of these alleged frauds.
Binance’s German team forwarded copies of the letters to Binance’s compliance and legal departments.
One of the letters received by the team cited 791,000 euros in allegedly laundered funds. The letter, from a lawyer, said alleged fraudsters had split his client’s missing money into 24 transfers during April and May, citing a list of transactions through Binance. Almost all these transfers were above Binance’s 10,000-euro threshold for an alert at the time.
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22 Jan 2022
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