International Tax Panorama

Now the world’s biggest crypto exchange Binance and its CEO and founder Changpeng Zhao were sued by the U.S. Commodity Futures Trading Commission (CFTC) for operating what the regulator alleged were an “illegal” exchange and a “sham” compliance program.

The CFTC sued Binance, Zhao and its former top compliance executive with “willful evasion” of U.S. law, “while engaging in a calculated strategy of regulatory arbitrage to their commercial benefit.”

What is the CFTC’s Complaint:

The CFTC said in its complaint on Monday that from at least July 2019 to the present, Binance “offered and executed commodity derivatives transactions on behalf of U.S. persons” in violation of U.S. laws.

Binance’s compliance program has been “ineffective” and the firm, under the direction of Zhao, told employees and customers to circumvent compliance controls.

Binance did not require customers to submit information verifying their identity before trading and “failed to implement basic compliance procedures designed to prevent and detect terrorist financing and money laundering,”

Binance flouted compliance with U.S. laws by asking the U.S. crypto traders to use Virtual Private Networks (VPNs) to change their location. The complaint revealed that Binance KYC had significant loopholes and also mentioned the exchange’s non-effort for stopping money laundering activities.

Using Shell Companies

With a holding company based in the Cayman Islands, Binance has never revealed the location of its core exchange. The CFTC charged the holding company and two other Binance units. 

Retaining US Customers through de-facto subsidiary

The CFTC’s complaint detailed Binance’s efforts to retain U.S. customers even after the company, in partnership with a purportedly independent American firm, launched a U.S. exchange in 2019 to serve American customers in compliance with U.S. regulations. However this American firm, BAM Trading, was in fact controlled by Zhao and managed by Binance as a de-facto subsidiary.

Binance traded on its own platform through some 300 “house accounts,” directly or indirectly owned by Zhao, though the exchange had not disclosed this activity in its public terms of use or elsewhere, according to CFTC. The house accounts were exempt from Binance’s “insider trading” policy, the CFTC said.

Serving the US Based “VIP Customers” 

Though Binance’s global business publicly said it was restricting U.S. customers from trading on its platform, the CFTC said Binance told its commercially valuable U.S.-based “VIP customers” how to evade its compliance controls.

Role of founder Changpeng Zhao and CFO Samuel

The CFTC also accused Binance’s former Chief Compliance Officer Samuel Lim of “aiding and abetting” Binance’s violations.

Zhao kept information reflecting Binance’s U.S. customer base secret from some senior managers, CFTC said. In October 2020, Zhao directed Binance personnel to replace the U.S. value for some data fields in Binance’s internal database with “UNKWN”, it said.

Earlier cases against Binance:

Since 2018 the U.S. Justice Department had been investigating Binance for possible money-laundering and sanctions violations. Binance has processed at least $10 billion in payments for criminals and companies seeking to evade U.S. sanctions.

Binance was banned in the United States in 2019 over regulatory issues. 

Role of CFTC and future course of action:

The CFTC is responsible for oversight of commodities and derivatives markets, including for Bitcoin. Firms such as brokers that facilitate U.S. customers’ trading of such products are required to register with the agency.

The regulator is seeking an undisclosed sum of fine from the exchange and to ban Zhao and other Binance associates mentioned in the suit from participating in trading commodities in the United States.