LONDON, Sept 1 (Reuters) - U.S. federal prosecutors asked Binance, the world's largest cryptocurrency exchange, to provide extensive internal records about its anti-money laundering checks, along with communications involving its chief executive and founder Changpeng Zhao, according to a late-2020 written request seen by Reuters.
The Justice Department's money laundering section asked Binance to voluntarily hand over messages from Zhao and 12 other executives and partners on matters including the exchange's detection of illegal transactions and recruitment of U.S. customers. It also sought any company records with instructions that "documents be destroyed, altered, or removed from Binance's files" or "transferred from the United States."
The December 2020 request, which has not been previously reported, was part of a Justice Department investigation into Binance's compliance with U.S. financial crime laws that remains ongoing, four people familiar with the inquiry said.
U.S. authorities, the people said, are investigating whether Binance violated the Bank Secrecy Act. This 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 law, designed to protect the U.S. financial system from illicit finance, provides for jail terms of up to 10 years.
Reuters could not establish how Binance and Zhao, one of the most prominent figures in the crypto sector, responded to the request from the department's criminal division.
In response to Reuters' questions about the letter and investigation, Binance Chief Communications Officer Patrick Hillmann said, "Regulators across the globe are reaching out to every major crypto exchange to better understand our industry. This is a standard process for any regulated organization and we work with agencies regularly to address any questions they may have." Binance has "an industry leading global security and compliance team" with over 500 employees, including former regulators and law enforcement agents, Hillmann added.
He didn't say how Binance responded to the Justice Department request. A Department spokesman declined to comment.
The request reveals the broad scope of the U.S. investigation into Binance. The probe's existence was reported last year by Bloomberg but until now little has been known about it. A Binance spokeswoman told Bloomberg at the time, "We take our legal obligations very seriously and engage with regulators and law enforcement in a collaborative fashion."
The letter made 29 separate requests for documents produced since 2017, covering the company's management, structure, finances, anti-money laundering and sanctions compliance, and business in the United States. "Binance is requested to produce all documents and materials that are responsive to this letter in its possession, custody, or control," it said.
Binance was launched by Zhao, known as CZ, in Shanghai in 2017 and as of July controlled over half of the world's crypto trading markets, processing transactions worth more than $2 trillion that month. Born in China and educated in Canada, where he holds citizenship, Zhao told Bloomberg in March that he will be based for the "foreseeable future" in Dubai, which that month granted Binance a license to conduct some operations.
A series of Reuters articles this year revealed how Binance drove its explosive growth while keeping weak customer checks and withholding information from regulators. Reuters found that the gaps in Binance's compliance programme enabled criminals to launder at least $2.35 billion in illicit funds through the exchange, which also served traders in Iran despite U.S. sanctions. Until mid-2021, Binance customers could trade crypto by registering with just an email address.
Binance disputed Reuters' findings, calling them "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." It said it did not consider Reuters' calculations of illicit fund flows to be accurate.
Crypto exchanges are under increasing scrutiny in the United States, where top government figures including Treasury Secretary Janet Yellen this year have publicly backed greater regulation of the sector. In February, the Justice Department established a national cryptocurrency enforcement team to "tackle the growth of crime involving these technologies," with a focus on exchanges.
That month, the founders of another exchange, BitMEX, pleaded guilty to violating the Bank Secrecy Act and were later sentenced to up to two and a half years of probation. BitMEX agreed to pay a $100 million fine to settle separate charges for breaching the Act. BitMEX now says it "fully committed to operating its business in compliance with all applicable laws" and has made "substantial investments" in its compliance programme.
The Justice Department's 2020 letter was addressed to Binance Holdings Ltd., a company in the Cayman Islands, and to Roberto Gonzalez, a Washington-based attorney at law firm Paul, Weiss. Binance Holdings owns the Binance trademark and, according to regulatory filings, is owned by Zhao. Gonzalez and Paul, Weiss did not respond to requests to comment.
Binance has an opaque corporate structure. It has declined to give details of the ownership or location of its main Binance.com exchange, which has not accepted customers in the United States since mid-2019. Clients there are instead directed to a separate U.S.-based exchange called Binance.US, which also is controlled by Zhao, regulatory filings show. Binance.US registered with the Treasury in 2019; the main exchange never did so.
Since last year, over a dozen financial regulators around the world have issued warnings about Binance, saying it was either serving users without licenses or violating anti-money laundering rules. In July, the Dutch central bank said it had fined Binance over 3 million euros for operating in breach of its financial crime laws. A Binance spokesperson said at the time that the fine marked a "pivot in our ongoing collaboration" with the central bank.
In the 2020 request, the Justice Department sought all documents that identified Binance employees responsible for compliance with the Bank Secrecy Act, details of its policies to combat illegal finance, and any reports of suspicious financial activity it had filed to authorities. Binance was asked to provide information on any transactions between the exchange and users involved in ransomware, terrorism and darknet marketplaces, along with those targeted by U.S. sanctions.
The department also requested documents related to the "business rationale" for establishing Binance.US. It asked for communications involving the 13 executives and partners – including Zhao, his co-founder Yi He, and his chief compliance officer, Samuel Lim – on the subject of "the creation of Binance.US and its relationship to Binance." Lim and He are still at Binance.
Reuters reported in January that Lim and other senior employees were aware that Binance's money-laundering checks were not rigorous, according to company messages reviewed by the news agency. Neither Lim nor Binance has commented on the messages.
In addition to the Justice Department request, the Securities and Exchange Commission issued a subpoena to Binance.US's operator, BAM Trading Services, that same month. The subpoena, reviewed by Reuters, required BAM to hand over documents showing whether any employees also worked for the main Binance exchange and what services it was providing the U.S. company.
Binance.US did not respond to Reuters' questions. The SEC said it does not comment on possible investigations.
((reporting by Angus Berwick and Tom Wilson; editing by Janet McBride))
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