U.S. Case Details Binance’s Knowledge About Criminal Users

For years, the Binance founder Changpeng Zhao and other senior employees at the cryptocurrency exchange knew that some of its users were criminals. Yet, despite regular warnings from some of its own employees that some transactions on Binance.com were violating anti-money-laundering laws, the firm was reluctant to cut them off.

Those allegations, which were made public on Tuesday in a sweeping federal case against Binance and Mr. Zhao, show how thoroughly he and his deputies understood that criminals were using their trading platform — and how little they did to stop them.

In many cases, they worked hard to keep the Financial Crimes Enforcement Network, an arm of the Treasury Department that fights money laundering and other illicit financial transactions, from learning about their most notorious users, according to a regulatory filing by FinCEN. Mr. Zhao and Binance pleaded guilty on Tuesday to violations of the Bank Secrecy Act and agreed to pay hefty fines.

In April 2019, representatives from a technology company working with Binance reached out to one of Mr. Zhao’s deputies to report that Hamas’s military wing, the Qassam Brigades, was fund-raising for what it described as “Palestinian resistance” by soliciting Bitcoin donations, and that it had received funds through transactions on Binance.com. The Binance official acknowledged the report, then tried to persuade the tech company’s representatives to downplay Binance’s role in the transactions, according to the filing, which FinCEN posted on its website on Tuesday.

In July 2020, another company working with Binance pointed out users on Binance.com, the trading platform, associated with Hamas as well as others from the Islamic State. A senior Binance employee acknowledged that these customers were “extremely dangerous for our company,” but told subordinates to check whether one of them was considered a V.I.P. — a user who did enough business on the exchange to warrant special treatment — before closing his account.

“Let him take his money and leave,” the employee wrote, according to the filing, “tell him that third-party compliance tools flagged him.”

Mr. Zhao’s lawyers and a Binance spokeswoman did not respond to requests for comment.

Carl Tobias, a professor at the University of Richmond School of Law, said the government’s actions against Binance were designed in part to send a message to the rest of the crypto industry about the consequences of failing to follow U.S. laws. While it was a smart move, Mr. Tobias said, it is unlikely to completely fix the problem.

Ordinary people who tried to participate in the industry recently suffered big losses and watched as one of crypto’s most prominent figures, Sam Bankman-Fried, the founder of the FTX exchange, was outed as a fraudster.

“The question is: Is there potential for crypto to regain any public trust?” Mr. Tobias said.

Not everyone sees such a large crisis of confidence in the industry.

“There are many other smaller businesses that are seeking to adhere to the letter of the law in the United States without taking on this assumption that the U.S. is powerless to protect its citizenry,” said Ron S. Geffner, a partner at Sadis & Goldberg who leads the law firm’s Financial Services group.

Mr. Geffner said the illicit activity on Binance’s trading platform was part of the natural evolution of the industry, which grew too quickly for early participants to handle. Binance was founded during a period of “hypergrowth,” he said, before a concern for U.S. laws was widely held, and before anyone really understood how to build the necessary controls into their businesses to weed out bad behavior. It was the perfect environment for criminals to thrive.

Mr. Geffner said other companies, like the U.S.-based exchange Coinbase, took U.S. laws more seriously. They employed people with more traditional financial industry experience and a different attitude toward following the rules, he added.

Still, Coinbase has also settled claims by regulators that it violated anti-money-laundering laws, but it has not faced criminal charges.

“Some of the people at Coinbase came out of broker-dealers and had a sense of the regulatory regime,” Mr. Geffner said. “It wasn’t somebody sitting in another country saying: ‘Well, the U.S. — who do they think they are? Why are they governing me when I’m sitting in another part of the world?’”

Court papers filed in the U.S. case against Binance on Tuesday illustrated the tension that Mr. Geffner described. At times, Mr. Zhao seemed to want to avoid having to deal with U.S. regulators at all, such as when he directed his employees to figure out how to classify users in the United States as being somewhere else in the world so that they did not come under the scrutiny of American authorities. But at other times, the documents show, Mr. Zhao appeared to agree with his deputies’ suggestions that Binance should try to block access to its platform by users from countries or organizations that were under government sanctions.

The people still hoping to profit from crypto seem to have already moved on from troubled firms like Binance. Mr. Geffner said that he had attended a monthly “crypto salon” on Tuesday night in New York, where around 25 gather to discuss a topic related to the industry — “catered,” he added — and that no one had even mentioned the Binance case.

“Binance is old news,” Mr. Geffner said. The topic for Tuesday’s salon was “the development of quantum computing and the security of data.”