Author: John Reed Stark, former director of the U.S. SEC Office of Internet Enforcement; Translation: 0xjs@Golden Finance
A double blow for Binance. 1) The newly released US Department of Justice document may mean the end of Binance; 2) The US Securities and Exchange Commission (SEC) filed a supplemental complaint against Binance, greatly strengthening the SEC's lawsuit against Binance.
The U.S. Department of Justice (DOJ) has released a new set of documents related to Binance that reveal the broad and powerful oversight that the DOJ now enjoys over the cryptocurrency exchange.
Meanwhile, in pending enforcement actions related to Binance, the SEC has begun incorporating facts from the DOJ’s plea agreement into the SEC’s pending enforcement actions against Binance and Zhao Changpeng.
DOJ documents related to Binance
The public documents for the DOJ/Binance plea agreement include a wealth of extraordinary evidence that has not been previously released.
Of the newly obtained information, the three most interesting are: 1) Binance’s “Statement of Facts” admitted (Annex A to the plea agreement); 2) its “Commitment of Compliance” (Annex C to the plea agreement); and 3) its description of the Department of Justice’s “Compliance Oversight” role (Annex D to the plea agreement).
The breadth and scope of DOJ regulation, as well as the regulation implemented by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and the related compliance commitments of Binance cannot be underestimated — in fact, this level of DOJ/FinCEN regulation of a global financial company is simply unprecedented and without precedent. (
For example, the DOJ compliance commitment includes achieving a high level of compliance with mandates that has not heretofore existed, such as new programs related to: policies, procedures, and internal controls; customer and third-party relationships; anti-circumvention controls; periodic based review; appropriate oversight and independence; training and guidance; comprehensive reporting and investigation; enforcement and discipline; and monitoring, testing, and auditing.
Binance’s exhaustive list of new compliance commitments reads like a consulting firm’s wish list — and will cost millions to implement and enforce. Likewise, the mandate of the DOJ’s compliance monitor is so broad and comprehensive that the DOJ devotes almost 13 pages to outlining Binance’s obligations.
The DOJ’s comprehensive involvement with Binance following the guilty plea is particularly striking. The duties and powers of the DOJ monitor, and Binance’s obligations to the monitor, will be overseen by the DOJ’s Criminal Division (including the Money Laundering and Asset Recovery Sections); the DOJ’s National Security Division; the DOJ’s Counterintelligence and Export Control Sections; and the U.S. Attorney’s Office for the Western District of Washington. That’s basically everyone in the DOJ who can bring criminal charges for any form of financial fraud.
At the same time, the degree of cooperation required of Binance cannot be overstated. Binance must facilitate access to the company, documents, and resources and provide the Ombudsman with access to all information, documents, records, facilities, and employees upon reasonable request by the Ombudsman. Binance must also use its best efforts to provide the Ombudsman with access to the company, former employees, agents, intermediaries, consultants, representatives, distributors, licensees, contractors, suppliers, and joint venture partners.
In some cases, the Ombudsman may even choose not to notify Binance of its findings. In fact, in some cases the Ombudsman must immediately report potential misconduct directly to the government rather than to Binance. Along these lines, even in the Ombudsman’s good faith assessment, the presence of any of the following factors requires reporting the potential misconduct directly to the government: the potential misconduct: “1) poses a risk to the national security, public health or safety, or the environment of the United States; 2) involves senior company management; 3) involves obstruction of justice; or 4) otherwise poses a significant risk of harm.”
Under the express terms of the agreement, the Ombudsman is required to report the misconduct to the government if the Ombudsman believes that any potential misconduct or other improper conduct has occurred and could potentially constitute a criminal offence or regulatory breach in some way.
FinCEN Consent Order
What’s most incredible about DOJ oversight and regulation is that the DOJ is not the only oversight infrastructure imposed on Binance by the U.S. government. There is also regulation by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which is equally broad, powerful, and massive.
Pursuant to the FinCEN Consent Order, Binance shall retain an Ombudsman for a period of five years to:
“(i) evaluate and monitor Binance’s compliance with the terms of the Consent Order, including completion of the commitments set forth in Section VI to specifically address and reduce the risk of Binance’s misconduct recurring; (ii) evaluate Binance’s effectiveness in complying with the relevant BSA provisions and related implementing regulations applicable to MSBs, except that with respect to transactions effective on and after the date of the Consent Order (i.e., such exceptions to reporting obligations to MSBs do not apply to reports Binance is required to file pursuant to the SAR Review described in Section VI.C); (iii) evaluate and monitor senior management’s commitment to and effective implementation of Binance’s anti-money laundering and sanctions compliance programs; and (iv) evaluate and monitor Binance’s compliance with applicable provisions of the Settlement Agreement between Binance and OFAC, the Consent Order between Binance and the CFTC, and the plea agreement between Binance and the Department of Justice (collectively, the DOJ) (the “Authorization”).”
Binance faces unprecedented government scrutiny
Binance’s settlement requires it to provide the Department of Justice, FinCEN, and various financial regulators and law enforcement agencies with immediate access, audits, examinations, and inspections for several years, exposing the company and its customers to a 24/7, 365-day-a-year financial “colonscopy”.
At the same time, these multiple oversights will undoubtedly create extraordinary and unique opportunities for law enforcement and regulatory investigation and litigation teams to identify and exploit a steady stream of newly discovered incriminating evidence.
Along these lines, there is nothing to stop any other government agency (particularly the US SEC, which remains engaged in contentious and active litigation with Binance and CZ) from contacting the various monitors, asking questions, seeking documents, obtaining testimony, and even presenting the monitors as witnesses in relevant judicial proceedings. Meanwhile, the monitors could provide a constant flow of information to FinCEN, which in turn could provide any information it sees fit to other government agencies.
Indeed, the FinCEN consent order appears to contemplate both enforcement and regulatory referrals, stating:
"[Various surveillance] reports may include proprietary, financial, confidential, and competitive business information. Moreover, public disclosure of the reports could undermine the objectives of surveillance by discouraging cooperation or impeding pending or potential government investigations. For these reasons, among others, the reports and their contents are intended to: (i) be provided only to FinCEN, OFAC, the CFTC, and the Department of Justice; and (ii) remain nonpublic unless the parties otherwise agree in writing or FinCEN determines in its sole discretion that disclosure of the information would assist FinCEN in fulfilling its duties and responsibilities or is otherwise required by law." (Authorized in its entirety)
U.S. SEC Supplemental Complaint
The SEC has quickly begun referencing the facts alleged in the SEC’s enforcement actions against Binance/CZ and Binance’s $4.3 billion settlement with the DOJ, FinCEN, and the Commodity Futures Trading Commission (CFTC). These settlements have significantly strengthened the SEC’s pending cases against Binance and CZ.
Specifically, despite not being part of the DOJ/FinCEN/CFTC guilty plea/settlement, the SEC filed a “Supplemental Authorization Notice” yesterday stating that the federal court in Washington hearing the case should weigh the admissions made by Binance and the company’s former CEO Changpeng CZ in the Nov. 21 settlement. (Binance and CZ have asked the court to dismiss the SEC’s lawsuit.)
Specifically, the SEC has now asked the judge to take “judicial notice” of a series of new guilty facts in Binance’s plea agreement (which means the SEC wants the judge to declare the facts presented as evidence to be true without formally presenting the evidence). Many of the facts and admissions related to Binance not only strengthen the SEC’s allegations, but also strengthen the SEC’s arguments against Binance’s current motion to dismiss the SEC’s action.
First, contrary to CZ and Binance’s argument that they lacked “fair notice,” their plea agreement acknowledges the SEC’s allegations that they were aware of and intentionally took steps to subvert U.S. law. CZ and Binance implemented a publicly stated plan to not serve U.S. customers on the Binance platform, while secretly allowing at least larger U.S. customers to trade on the platform, and creating U.S. entities (defendants BAM Trading Services Inc. and BAM Management US Holdings Inc.) to “reduce regulatory pressure on Binance.”
Second, the plea agreement and consent order further undermine CZ and Binance’s argument that the SEC’s claims related to the Binance.com platform involve non-prosecutorial extraterritorial conduct. Binance admits that it “intentionally sought out and served millions of customers located in the United States” and “intentionally maintained close ties with the United States from which it generated its web traffic, user base, trading volume, and profits, among other things.”
Binance further admitted that it intentionally conspired to fail to comply with U.S. law “because it determined that doing so would limit its ability to attract and maintain U.S. users.” U.S. customers are “critical” to Binance because they provide market liquidity on the Binance.com platform, helping to grow its business.
According to Binance’s plea agreement, as of August 2017, Binance estimated that more than 23% of its 122,729 users were from the United States, a number that was greater than any other country it served. Over time, its number of U.S. customers continued to increase, and as of March 2018, Binance had approximately 3 million U.S. customers, accounting for more than a third of the total number of customers on its Binance.com platform. Around June 2019, CZ estimated that 20% to 30% of Binance’s website “traffic was from the United States,” and that the U.S. market accounted for approximately 20% to 30% of its potential revenue.
All in all, the total volume of U.S. market transactions on Binance.com is staggering: U.S. customers conducted trillions of dollars in transactions on Binance.com between August 2017 and October 2022, generating approximately $1.6 billion in profits for Binance. This activity included more than $65 billion in deposits and withdrawals from U.S. customers.
In addition, Binance admitted that it used a U.S.-based technology service provider to store its data, host its website, and operate Binance.com, which also demonstrated the domestic jurisdiction of transactions on the Binance.com platform. In addition, the over-the-counter (OTC) market maker for the Binance.com platform (a CZ-owned entity called Merit Peak Limited) settled approximately $1.2 billion in transactions through U.S. banks and U.S. customers, who were identified as Customer A.
Merit Peak also acted as a market maker on the Binance.US platform and served as a “conduit” for certain trades between the two platforms, “while exploiting Binance.us’ corporate governance weaknesses to avoid scrutiny of this activity.”
Third, a number of facts contradict CZ’s argument that the court has no jurisdiction over him because he lacks sufficient engagement with the United States. CZ exercises “day-to-day” control over Binance, which includes “making strategic decisions for Binance.” Among other things, he “authorized and directed” Binance’s strategy to secretly encourage U.S. customers to trade on the Binance.com platform. The SEC argues that this was important to CZ because he knew that U.S. customers “were critical to Binance’s growth, were a significant source of revenue, and had a large network effect.” CZ “pursued these benefits for the company while ignoring his legal obligations to implement an effective [anti-money laundering] program.” More SEC action is expected as a result of Binance and CZ’s plea agreement. The SEC now has access to a wealth of fresh and comprehensive evidence of Binance-related culpability gleaned from various complaints, orders, attachments, and other Binance-related charging documents.
Indeed, the new evidentiary record of extensive allegations and assertions will now provide the SEC with a powerful arsenal for SEC investigators and litigators to bolster their allegations and contentions related to Binance.
The Future of Binance
The harsh reality is that no other large cryptocurrency company (or any financial company in the world) has ever signed a DOJ/FinCEN plea agreement before Binance, which requires the government to impose such broad, powerful, and all-encompassing government regulation on Binance, which Binance has agreed to and paid for.
The surveillance and oversight that Binance faces in the future is like installing body cameras on every member of a global criminal drug cartel, providing 24-7 video surveillance, and having the drug cartels bear the cost of a large, experienced, and well-credentialed team of former and current government agents.
My take is that, like drug cartels, secretive and opaque financial companies like Binance cannot suddenly transform into traditional, law-abiding, open, transparent, obedient, compliant, government-friendly financial companies. For troubled coins, passing the SEC is difficult enough, but facing the DOJ/FinCEN review - well, it seems almost impossible.
To me, it’s only a matter of time before the whole Binance plea deal collapses, resulting in additional charges against Binance, additional charges against CZ, and new charges against anyone else (partners, customers, joint ventures, collaborators, etc.) who was intertwined with the Binance criminal enterprise.
Links to newly released DOJ/SEC Binance-related complaints
1. Binance Plea, Appendix A: Statement of Facts
https://johnreedstark.com/wp-content/uploads/sites/180/2023/12/Attachment-Statement-of- Facts.pdf
2. Binance Plea, Appendix C: Compliance Commitment
https://johnreedstark.com/wp-content/uploads/sites/180/2023/12/Compliance-Commitments.pdf
3. Binance Plea, Annex D: Independent Compliance Oversight
https://johnreedstark.com/wp-content/uploads/sites/180/2023/12/Independentcompliancemonitor.pdf
4. November 21, 2023 DOJ/Binance Plea Agreement (including all attachments)
https://johnreedstark.com/wp-content/upl oads /sites/180/2023/12/TotalPlea.pdf
5. SEC’s Supplemental Memorandum Regarding the SEC’s Enforcement Actions Against Binance and CZ:
https://johnreedstark.com/wp-content/uploads/sites/180/2023/12/SECSupplemental.pdf