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How Binance CEO Changpeng Zhao and aides plotted to dodge regulators in U.S. and UK

The new insights come as the Justice Department is investigating whether Binance violated the Bank Secrecy Act, which requires crypto exchanges to register with the Treasury Department and comply with anti-money laundering requirements if they conduct “substantial” business in the United States

The new insights come as the Justice Department is investigating whether Binance violated the Bank Secrecy Act, which requires crypto exchanges to register with the Treasury Department and comply with anti-money laundering requirements if they conduct “substantial” business in the United States

As 2022 dawned, Changpeng Zhao was riding high. In less than five years, the founder and chief executive of Binance had turned his young company into the world’s largest crypto exchange, accounting for more than half the trading in the trillion-dollar market.

(For insights on emerging themes at the intersection of technology, business and policy, subscribe to our tech newsletter Today’s Cache.)

True, global authorities were scrutinising crypto exchanges ever-more closely. But the Chinese-born billionaire, known to staff and fans by his initials, CZ, had that covered. He told customers in a blog post in January that Binance “embraces regulations” and “has always worked collaboratively with regulators all over the world.”

Behind the scenes, however, trouble loomed.

For at least a year before that post, the U.S. Justice Department had been pursuing a money laundering investigation into Binance, seeking extensive records on Binance’s policies and the conduct of Zhao and other top executives, Reuters reported on September 1. Binance called such requests a “standard process” and said it works with agencies worldwide to address their questions.

Now, new reporting by Reuters reveals fresh details about Binance’s strategy for keeping regulators at arm’s length and continuing disarray in its compliance programme. The reporting includes interviews with around 30 former employees, advisers and business partners and a review of thousands of company messages, emails and documents dated between 2017 and early 2022.

It shows that in 2018, Zhao approved a plan by lieutenants to “insulate” Binance from scrutiny by U.S. authorities by setting up a new American exchange. The new exchange would draw regulators’ attention away from the main platform by serving as a “regulatory inquiry clearing house,” according to the proposal. Executives went on to set the plan in motion, company messages show.

In public, Zhao said the new U.S. exchange – called Binance.US – was a “fully independent entity.” In reality, Zhao controlled Binance.US, directing its management from abroad, according to regulatory filings from 2020, company messages and interviews with former team members. An adviser, in a message to Binance executives, described the U.S. exchange as a “de facto subsidiary.”

This year, Binance.US’s compliance operation has been in turmoil. Almost half the U.S. compliance team quit by mid-2022 after a new U.S. boss was appointed by Zhao, according to four people who worked at Binance.US. The staff left, these people said, because the new chief pushed them to register users so swiftly that they couldn’t conduct proper money laundering checks.

The new insights come as the Justice Department is investigating whether Binance violated the Bank Secrecy Act, which requires crypto exchanges to register with the Treasury Department and comply with anti-money laundering requirements if they conduct “substantial” business in the United States.

“The Binance structure in the U.S. raises questions about the degree to which the parent company is willing to comply with U.S. laws and regulations,” said Ross Delston, an independent lawyer, former banking regulator, and expert witness on anti-money laundering issues.

In Britain, too, Binance sought ways around regulatory scrutiny, company messages show. Zhao signed off on a plan in 2020 by a Binance executive to backdate a company document to avoid a review of a Binance UK unit under new illicit finance rules.

“I am fine with it,” he wrote in an exchange discussing the plan.

Reuters sought comment for this article from Zhao, Binance and Binance.US.

Binance Chief Communications Officer Patrick Hillmann said that over the past two years, Binance has “worked with global law enforcement to seize assets of some of the most prolific criminal organizations” in the world. He didn’t address Reuters’ detailed questions.

After this article was published, Zhao said in a blog post that he “personally rejected” the 2018 plan to insulate Binance from U.S. regulators. Binance.US was set up “based on advice from leading US law firms,” he said.

A spokesperson for Binance.US said Reuters’ questions presented a “biased narrative,” providing a “distorted depiction of Binance.US based on inaccuracies, misrepresentations, and outright falsehoods that simply do not square with reality.”

Binance.US was founded “with the express purpose of operating as a licensed and regulated entity in the United States,” the spokesperson said. “In the last year, under current management, we have invested in talent, technology and financial resources to maintain the highest standards for compliance,” substantially increasing headcount and budget. “All Binance.US users, no exceptions, go through the same rigorous screening and validation process.”

The U.S. Justice and Treasury departments and Britain’s regulator, the Financial Conduct Authority, declined to comment. The FCA warned consumers in June 2021 that Binance doesn’t hold “any form” of permission to offer services regulated by Britain.

Reuters earlier this year revealed how Binance drove its explosive growth while maintaining weak anti-money laundering controls and withholding information from regulators. The gaps in its compliance programme enabled hackers, drug traffickers and fraudsters to launder crypto worth at least $2.35 billion in funds through the exchange.

Binance disputed the reports, calling the illicit-fund calculations inaccurate and the descriptions of its controls “outdated.” The exchange said it is “driving higher industry standards” and seeking to “further improve our ability to detect illegal crypto activity on our platform.”

There are signs that gaps remain in Binance’s compliance, however. Since August 2021, when Binance tightened customer checks, two Iranian crypto exchanges called Wallex and Sarmayex have used Binance to move crypto worth at least $29 million despite U.S. sanctions on Iran, according to data compiled by two major blockchain analysis firms. Such activity puts Binance at risk of being hit with so-called secondary sanctions, which aim to prevent foreign firms from doing business with sanctioned entities or helping Iranians evade the U.S. trade embargo.

Wallex and Sarmayex did not respond to requests for comment.

The crypto sector is at a critical juncture. Prices have crashed, falling even harder than stocks as central banks tighten credit to fight inflation. Governments are seeking to tame an industry constrained by few guardrails during its evolution from internet niche to mainstream investment. Their actions will likely shape the fate of the empires built by moguls such as Zhao.

So far, Binance appears to be weathering what traders term a “crypto winter.” Zhao pledged $500 million in May to join Elon Musk’s bid to buy Twitter and has expressed an interest in investing across the media, retail and gaming sectors.

In an open letter to customers in July, Zhao wrote, “Like any young company we have made mistakes in our past.” Binance, he said, now operates “at the same level as a financial institution that has been around for 200 years.”

“Larger than Google”

At the heart of Binance’s troubled history with compliance stands its charismatic founder, Zhao. The 45-year-old entrepreneur built the company around himself, the interviews and documents show – a powerful leader committed to secrecy, focused on market domination, and attentive to minute operational details, although in public Zhao has said he doesn’t micromanage employees.

“We want to take over the entire market!” Zhao told staff in a company chat group in late 2017, the year he launched the business in his native China.

Described on its website as an “ecosystem” with over 120 million users, Binance has set up at least 73 companies across the world, according to corporate filings and company organisation charts. Zhao owns or partly controls at least 59. He declines to give details of the location or entity behind the main exchange, which makes money by charging fees on crypto trades.

After Binance’s launch, Zhao assigned top jobs to an inner circle of associates, many of whom had worked or studied in China. Among them was co-founder Yi He, a former host of a Chinese TV travel show. For several years, Zhao and Yi He were in a romantic relationship, according to four people who knew the couple. They have a son who was born in the United States, the people said. Companies commonly have policies in place regarding such relationships, with some requiring one of the people concerned to leave the organisation.

Yi He, who didn’t comment for this article, now is one of Zhao’s most powerful deputies and is seen by some former senior employees as a potential successor. This August, Zhao named her head of Binance’s $7.5 billion venture capital arm, adding to her key roles that include marketing chief. Two weeks earlier, Zhao told an interviewer that Yi He had been “integral to Binance’s success” and would be an “integral part of our continued growth.”

Binance spokesman Hillmann said that “two consenting adults starting a family together is not news. Media have known about their relationship (which pre-dates Binance) for years.”

As Zhao grew Binance, he told employees in messages the company would be “larger than Google.” He encouraged them to read “Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies,” a book about fostering breakneck growth at start-ups, noting it was “very applicable to us.”

A company guide explained Binance’s mission for new employees. Rapid results were essential. Instead of conducting in-depth research or data analysis, employees should make decisions by trusting their “good-feel,” it said. If they weren’t encountering problems, it meant “we are not advancing fast enough,” an emphasis on speed that raises questions about Binance’s focus on compliance.

Zhao’s preference for secrecy pervaded the company.

In Binance’s early days, Zhao was driving its growth from two countries – first in China, and later Japan – in which it held no operating licence. Zhao told employees in messages not to publicly disclose who they worked for or where their offices were. On one occasion in 2018, a San Francisco-based cybersecurity firm called Bugcrowd asked Binance for its headquarters’ address. After Binance executives warned in the chat group against disclosing this, Zhao instructed staff to…

Read More: How Binance CEO Changpeng Zhao and aides plotted to dodge regulators in U.S. and UK

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