https://www.theblock.co/post/223143/binance-details-from-cftc-complaint

The Commodity Future Trading Commission on Monday filed a civil complaint in U.S. federal court against crypto giant Binance, its founder and CEO Changpeng "CZ" Zhao, and executive Samuel Lim. The complaint largely focuses on allegations of unregistered commodities trading in the U.S., but could have broader implications for both Binance and the digital asset industry

As part of its suit, the CFTC wants injunctions that could effectively bar Binance and its affiliates, as well as Zhao and Lim, from the U.S. commodities industry, as well as disgorgement of salaries, profits and other benefits or earnings made. The request for a federal order doing this is on the grounds that Binance has violated several laws and regulations governing commodities in the U.S., including failure to combat money laundering on its platform — a charge that could be accompanied by criminal prosecution.

The CFTC cites a number of private communications and company documents throughout the complaint to support its argument

In response to the news Zhao initially tweeted "4", his code for reporting or "attacks" he does not agree with, followed by a statement on Binance’s website refuting much of the complaint. 

"The complaint filed by the CFTC is unexpected and disappointing as we have been working collaboratively with the CFTC for more than two years," a Binance spokesperson said in a separate statement provided to The Block. "We have made significant investments over the past two years to ensure we do not have U.S. users active on our platform, including increasing compliance personnel from "approximately 100" to "around 750 core and supporting compliance personnel today," the spokesperson said. 

The Securities and Exchange Commission has probed a related Binance product called Binance USD, which the exchange worked on with Paxos. It is not clear yet on whether the agency will bring its own charges.  

The Justice Department could decide to bring criminal charges against Binance. A person close to the CFTC investigation noted that Binance is also the subject of scrutiny by the DOJ.

Here are seven other major takeaways from the CFTC’s lawsuit against Binance.  

Binance may have known that it facilitates illegal transactions – and not cared.    

Some of the most most damaging allegations for Binance are buried in the CFTC’s filing: That Binance may have knowingly facilitated transactions by organized crime and terrorist organizations. The CFTC cites internal chat logs that include then-Chief Compliance Officer Lim and a money laundering reporting officer.  

“Internally, Binance officers, employees, and agents have acknowledged that the Binance platform has facilitated potentially illegal activities,” the complaint said. “For example, in February 2019, after receiving information ‘regarding HAMAS transactions’ on Binance, Lim explained to a colleague that terrorists usually send ‘small sums’ as ‘large sums constitute money laundering.’ Lim’s colleague replied: ‘Can barely buy an AK47 with 600 bucks.’ And with regard to certain Binance customers, including customers from Russia, Lim acknowledged in a February 2020 chat: ‘Like come on. They are here for crime.’ Binance’s [money laundering reporting officer] agreed that ‘we see the bad, but we close 2 eyes.’" 

In another instance, “a Binance employee wrote to Lim and another colleague asking if a customer whose recent transactions ‘were very closely associated with illicit activity’ and ‘over 5m USD worth of his transactions were indirectly sourced from questionable services’ should be off-boarded or if it was in the class of cases ‘where we would want to advise the user that they can make a new account.’”  

According to the CFTC, Lim advised via internal chat: “Can let him know to be careful with his flow of funds, especially from darknet like hydra,” adding, “He can come back with a new account But this current one has to go, it’s tainted.”  

‘I HAZ NO CONFIDENCE IN OUR GEOFENCING.’ 

Binance in 2019 updated its terms of use to include that Binance could not “provide services to any U.S. person.” That same year, Binance said it was beginning to block customers based on their internet protocol, or IP, address.  

“In reality, Binance simply added a pop-up window on its website that appeared when customers attempted to log in from an IP address associated with the United States,” the CFTC said.  

The pop-up did not stop customers from logging in to their accounts, making deposits or trading, the agency said, and instead asked them to “self-certify” that they were not in the U.S.  

Binance’s IP address compliance controls, also called “geofencing,” were not effective in preventing customers from “restricted jurisdictions,” including the U.S. That could be because Binance told U.S. customers to evade controls through using VPNs to hide their locations, the CFTC said.  

A “Beginner’s Guide to VPNs,” was published in 2019, which explained to customers how to use a VPN, the agency said.  

At one point, when Paxos asked Binance to go through a compliance audit, a “money laundering reporting officer” at Binance sent a message to Lim saying, “I HAZ NO CONFIDENCE IN OUR GEOFENCING.” 

The complaint claims that at least three U.S.-based or owned trading firms used Binance, meaning that the alleged violations went beyond normal consumer accounts. The firms are not directly identified, but described in some detail. 

VIP Program 

Binance maintains a “VIP” program for large accounts that includes quicker trades and prompt notification and advice if law enforcement asks about or targeted their funds, the CFTC alleged.  

“Binance is aware of its VIPs’ identities and geographic locations because Binance monitors its sources of transaction volume and fee-based revenue as a matter of course in conducting its operations,” the complaint said.  

An “important benefit” of the program is “prompt notification of any law enforcement inquiry concerning their account,” which the CFTC says Lim created on direction from Zhao.  

Binance’s VIP team was to, “contact the user through all available means (text, phone) to inform him/her that his account has been frozen or unfrozen,” as soon as the funds were frozen or unfrozen, the complaint said. “Do not directly tell the user to run, just tell them their account has been unfrozen and it was investigated by XXX. If the user is a big trader, or a smart one, he/she will get the hint.” 

Binance employees also use Signal to communicate, which the agency said Zhao and others used “with its auto-delete functionality enabled” for business communications, “even after Binance received document requests from the CFTC and after Binance purportedly distributed document preservation notices to its personnel.” The complaint noted that the auto-delate function may allow users “to cover their tracks after communicating about inculpatory matters.” 

Regulators aren’t convinced that Binance.US is separate from Binance 

Count the CFTC among those skeptical that Binance and Binance.US are all that different.  

California-based BAM Trading operates Binance.US. BAM Trading also is owned and controlled by Zhao and has never been registered with the agency, the complaint said.  

“When he hired BAM Trading’s first CEO, Zhao described Binance as a pirate ship and explained that he wished for Binance.US to be a navy boat,” the CFTC said.  

A spokesperson for Binance.US declined to comment.  

The marketing and branding of both Binance.US and Binance.com were similar, the agency added.  

Binance also relied “on a maze of corporate entities,” in a way that appears to echo FTX’s complex international structure, which came to full light following that crypto giant’s failure. The agency argues Binance’s wide range of corporate entities was deliberate to hide the location of the Binance platform and confuse outsiders.   

“Binance is so effective at obfuscating its location and the identities of its operating companies that it has even confused its own Chief Strategy Officer,” the CFTC said.  

Locations were also muddied when the agency tried to find Lim’s address as part of issuing him a subpoena.  

Trading against customers 

Binance kept approximately 300 “house accounts” that traded on the platform and were “directly or indirectly owned by Zhao,” in addition to accounts owned by two other entities controlled by him, Merit Peak and Sigma Chain, and two other Zhao-managed individuals accounts on the platform.  

“Binance does not disclose to its customers that Binance is trading in its own markets in its Terms of Use or elsewhere,” the CFTC said. “Consistent with its apparent attempt to keep its proprietary trading activity on its own markets top secret, Binance has refused to respond to Commission-issued investigative subpoenas seeking information concerning its proprietary trading activity on Binance, including transaction data and communications among the members of the Binance ‘quant desk.’” 

The CFTC could not find information or reason to believe that Binance ran any of those “house accounts” through any anti-fraud or anti-market manipulation surveillance or controls, and the accounts are considered exempt from a “relatively new ‘insider trading’ policy.” 

In a statement issued late Monday EDT, Zhao said: "Binance.com does not trade for profit or ‘manipulate’ the market under any circumstances. Binance ‘trades’ in a number of situations. Our revenues are in crypto. We do need to convert them from time to time to cover expenses in fiat or other cryptocurrencies. We have affiliates that provide liquidity for less liquid pairs. These affiliates are monitored specifically not to have large profits."

With regards to his personal activity, he added: "Personally, I have two accounts at Binance: One for Binance Card, one for my crypto holdings. I eat our own dog food and store my crypto on Binance.com. I also need to convert crypto from time to time to pay for my personal expenses or for the card."

CZ is directly implicated in multiple ways 

Zhao is named as a defendant and singled out repeatedly throughout the complaint.  

The agency said Zhao has directly or indirectly owned all of Binance’s corporate entities and “answers to no one but himself” as Binance has no board of directors.  

At points some of the 120 entities, including Binance Holding and holding companies Binance IE and Binance Services, had commingled funds and shared infrastructure, the CFTC said, and that in addition to controlling the Binance network, Zhao “directly approves products.” 

Zhao has even paid for some of Binance’s Amazon Web Services accounts with his personal credit card, the CFTC said. “Zhao also involves himself in the minutiae of Binance’s operations. For example, Zhao personally approved an approximately $60 expense related to office furniture in January 2021, a month in which Binance earned over $700 million in revenue.” 

As Binance grew, Zhao hired a senior management team, but he continued to be involve himself in and retain control “over all critical decisions for the enterprise,” the complaint said, “including which products to offer and whether and how to implement and enforce anti-money laundering (“AML”) controls and Know Your Customer (“KYC”) procedures.” 

“Zhao is ultimately responsible for evaluating the legal and regulatory risks associated with Binance’s business activities, including those related to the launch of Binance.US, and has been directly involved in discussions with compliance consultants and lawyers concerning legal and regulatory issues implicated by Binance’s business activities,” the CFTC argued.  

Zhao, Lim, and other members of Binance management received periodic updates that included information about Binance’s U.S. customers “and the effectiveness of Binance’s efforts to capture the U.S. market,” the CFTC alleged.  

CFTC says Binance USD and Litecoin are commodities  

The agency named several digital assets traded on Binance as commodities, including Litecoin, ether, USDT and Binance USD.  

Binance USD, or BUSD, came under scrutiny more than a month ago after crypto service provider Paxos received notice of an investigation into a joint stablecoin offering it had with Binance.  

Paxos also was mentioned in the complaint on Monday. The CFTC said Binance tried to hide how ineffective its compliance program was from its business partners, including Paxos. In 2020, Binance went through a compliance audit to “satisfy a request from Paxos.”  

“But according to Lim, Binance purposely engaged a compliance auditor that would ‘just do a half assed individual sub audit on geo[fencing]’ to ‘buy us more time,’” the CFTC wrote in the complaint.  

Litecoin has been less in the spotlight as to whether it is a security or a commodity, but the CFTC seems to conclude that it is a commodity.  

Ether, in particular, has been met with diverging views from other regulators. Securities and Exchange Commission Chair Gary Gensler, along with New York Attorney General Letitia James have implied that ether is a security. James said ether was a security in a lawsuit against crypto exchange KuCoin earlier this month. However, CFTC Chair Rostin Behnam has said it is a commodity.  

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