Changpeng Zhao’s Sentencing: AML Compliance Challenges For Crypto

The founder and former CEO of Binance, Changpeng Zhao commits money laundering offences

The founder and former CEO of Binance, Changpeng Zhao, better known as ‘CZ’, was sentenced to four months behind bars on Tuesday, 30th April 2024, after pleading guilty to money laundering offences he committed last year. 

Zhao is now the second major crypto executive to be sentenced in recent times, following the case of FTX’s Sam Bankman-Fried, who received a 25-year prison sentence. 

The stark contrast in the sentencing of Changpeng Zhao and Sam Bankman-Fried, with one executive receiving a 25-year sentence and the other just four months, has left the crypto world in disbelief. This disparity raises profound questions about the U.S. legal system and its approach to regulating the cryptocurrency industry. 

Who is Changpeng Zhao?

The Chinese-Canadian coder laid the foundations for his rise to the top by building high-frequency trading systems for Wall Street’s flash boys. 

Zhao founded Binance in 2017 after raising $15 million (£12 million) through an initial coin offering, and flourished in daily trading volume. This success may not have come as a shock to Zhao, who made it no secret he was an avid Bitcoin enthusiast, amassing his fortune in cryptocurrency. Still, most of his net worth was within his stock at Binance Holdings Ltd.1.

From flipping burgers at McDonald’s to working late-night shifts at petrol stations, Zhao seemed to complete his own underdog story by being included in Forbes’s top 50 billionaire list.

This is followed by Binance dominating the crypto market. In 2023, the company facilitated roughly half of all spot trades processed by centralised crypto exchanges.

Later the same year, it all came crashing down. On November 21 2023, Zhoa pled guilty to fraud and money laundering-related charges, which led to his resignation from his position within Binance and agreement to pay a penalty of $50 million (£39 million).

What leads to the crypto billionaires’ sentencing? 

On 30th April 2024, Judge Richard Jones of the Western District delivered the ruling following Zhao’s plea of guilt. The charges alleged that Binance had focused on growth and profits over compliance with U.S. laws and regulations. 

According to an investigation by the Justice Department, Binance has been accused of facilitating the transfer of funds for criminal activities. The company has reportedly become a popular hub for terrorist organisations, hackers, and human traffickers seeking to conduct illegal activities, significantly impacting the cryptocurrency industry. 

The Justice Department wrote, “Breaking U.S. law was critical to the company’s success and profitability”, while also stating, “Zhao committed serious crimes in a deliberate scheme to grow Binance as quickly as possible and then to maintain its dominance as the largest cryptocurrency exchange.”

Binance had disregarded its legal obligations, looking to achieve curveball compliance in pursuit of financial gain. Interestingly enough, the company started out located in Singapore but relocated multiple times due to regulations and decided to become a headquarters-less company.

During the hearing, authorities clarified that Binance and Zhao intentionally broke U.S. laws, claiming their actions threatened the country’s financial system and national security.

The investigation found that Binance aided its users in bypassing sanctions, resulting in an order for the company to pay $4.3 billion (£3.4 billion) in penalties. Additionally, Zhao, the founder of Binance, has been sentenced to four months in prison.

Following the sentencing, Binance made a hasty announcement that Richard Teng was taken over as CEO with immediate effect. Richard was previously the company’s global head of regional markets.

Sentencing length: Changpeng Zhao vs Sam Bankman-Fried

As highlighted earlier, the widely known ‘crypto king’, Sam Bankman-Fried, was sentenced to 25 years of imprisonment compared to Zhao’s four months, a staggering difference which has left many scratching their heads and asking the question ‘why’?

FTX Trading Ltd, or FTX, a widely recognised cryptocurrency exchange, was once a leading player in the crypto market. However, its downfall was caused by fraudulent activities associated with its cryptocurrency exchange and crypto hedge fund.

In 2022, rumours about the company’s financial instability led to a rush of withdrawals, which eventually caused the firm to collapse. As a result, Bankman-Fried’s illegal activities were brought to light.

A New York jury found Bankman-Fried guilty of wire fraud and conspiracy to commit money laundering. The trial revealed that he had unlawfully obtained over $8 billion (£6.3 billion) from his clients, which he had then utilised to purchase properties, make political donations, and invest in other ventures.

Across the two sentences, there are a number of factors that hinged the difference for a time scale of imprisonment, but many believe the biggest factor was that Bankman-Fried and his defence team maintained his innocence while Zhao admitted his fault and turned himself in.

In fact, after the judge announced the 25-year sentence, Bankman-Fried said, “I never thought what I was doing was illegal.” He completely disregards the fact that he had stolen money from clients and used it for his own gain with extravagant expenses, resulting in Bankman-Fried receiving a much longer sentence than Zhao.

While Zhao’s open acceptance of his actions clearly contributed to a significantly reduced sentence, it can still only be described as a slap on the wrist, which undermined the financial regulations in place.

The importance of implementing AML (Anti-Money Laundering) controls for the crypto industry

In light of Changpeng Zhao’s case, Wall Street regulators have raised red flags, emphasising the urgent need for the industry to comply with longstanding market rules and implement robust AML controls.

Within the case itself, a letter to the judge highlighted the poor decision-making and said that the Binance platform had implemented strict anti-money laundering controls.

It’s all well and good now, but what should have happened originally? What controls should Binance have in place? And what could have been prevented by implementing them? 

  1. Customer Due Diligence (CDD): Binance could have taken steps to ensure that their users’ identities were verified and that the risks associated with their transactions were assessed. They could have also performed a more detailed due diligence process on high-risk customers or transactions.
  2. Transaction Monitoring: The implementation of sophisticated transaction monitoring could have aided in detecting any strange behaviour or suspicious patterns that might suggest illicit activities such as money laundering.
  3. Know Your Customer (KYC) Requirements: Requiring stringent KYC measures would guarantee that all users provide authentic identification documents, such as government-issued IDs or passports, before accessing the platform.
  4. Risk-Based Approach: Binance had the option to implement a risk-based strategy for AML compliance, in which the distribution of resources is determined by the degree of risk posed by customers, transactions, and jurisdictions.
  5. Training and Awareness: Regularly providing training sessions for staff to educate them on AML regulations and how they can contribute to the prevention of money laundering could significantly improve compliance efforts.
  6. Internal Controls and Audits: Whether internally or externally, performing routine internal audits and reviews of AML controls is crucial in detecting any weaknesses or gaps in the system, allowing for prompt remediation.
  7. Collaboration with Regulators: To maintain compliance with AML regulations, it is advisable to establish transparent communication channels with regulatory authorities and proactively cooperate with them.

For many organisations, conducting all of these compliance methods would undoubtedly stretch time, resources, and money, but with AML Compliance Management software, these challenges are relieved. In Binance’s case they would have been able to mitigate the risk of being used for money laundering activities and avoid legal repercussions like Zhao’s sentencing.

If anything is to go by, companies need to be more alert, from all evidence across these two cases; authorities are out to catch players of all sizes who are not complying with regulations and anti-money laundering controls.

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