Changpeng ‘CZ’ Zhao, founder of the Binance digital asset exchange, has been ordered to remain in the U.S. until his sentencing in February on charges of violating anti-money laundering laws.
On December 7, U.S. District Court Judge Richard Jones rejected CZ’s request to be allowed to return to his family in Dubai until his sentencing hearing on February 23, 2024. CZ pleaded guilty last month to violating the U.S. Bank Secrecy Act as part of a $4.3 billion settlement he and Binance reached with the Department of Justice (DoJ) and other federal agencies.
CZ faces guaranteed prison time as part of his plea deal, but how much is undetermined. CZ has agreed not to appeal any sentence shorter than 18 months, although prosecutors could theoretically seek a prison stint of up to 10 years. The possibility that CZ could be looking at years behind bars has played a major role in how both parties have approached the parameters of CZ’s bail conditions.
CZ agreed to put up $15 million in cash and a relative’s house in California as part of a larger $175 million bond to secure his release and the chance to return to Dubai. But prosecutors argued this was a drop in the bucket compared to CZ’s overall wealth, all of which is stored overseas. And with the United Arab Emirates (a) lacking an extradition treaty with the U.S. and (b) granting CZ citizenship, prosecutors expressed doubts that CZ would return to face the possibility of years behind bars.
Judge Jones took his time arriving at his decision, but in a late Thursday filing, Jones stated that “[t]he absence of an extradition treaty, the defendant’s extraordinary financial capabilities, the unusual circumstance that the defendant appears to have favored citizen status by the fact the UAE granted him citizenship complicate the willingness of this Court to have complete confidence that he will return to the United States for sentencing.”
Jones added that while CZ’s bail package “is substantial, if not unprecedented, it is a package that appears to be largely comprised of assets beyond the government’s reach.” Jones agreed with prosecutors that CZ was “not facing an insignificant sentence” and, while CZ did fly to the U.S. to enter his plea, “pleading guilty and actually returning to the United States where he may face a sentence of 18 months pose significantly different risks.”
Jones appeared to have few nagging doubts about his decision, stating that “oral argument is unnecessary.”
CZ won’t have to spend the next few months in a holding cell, as prosecutors are convinced “there are certain ways” to ensure he shows up for his sentencing provided he remains in the U.S. Regardless, this will be a far less festive holiday season than CZ likely envisioned when he agreed to plead guilty.
Thursday also brought news that Binance had scrapped a plan by one of its subsidiaries to manage a collective investment fund in the UAE’s capital, Abu Dhabi. Reuters reported that Binance’s BV Investment Management unit had applied for a license a year ago but withdrew its application on November 7, two weeks before its U.S. settlement was made public. A Binance spokesperson claimed the withdrawal was “unrelated” to the settlement.
Under the microscope
As part of his plea, CZ was required to step down as Binance’s CEO for at least three years. Binance named its regional head of markets, Richard Teng, as its new CEO, and Teng has been making the rounds trying to spread the message that Binance has turned over a new leaf in compliance terms.
But Teng’s frosty interview on Monday with Financial Times blockchain reporter Scott Chipolina didn’t help sell that preferred narrative. Teng repeatedly declined to answer several questions—at least, not to Chipolina’s satisfaction—regarding the location of Binance’s headquarters, whether Binance would undergo an audit of its reserves and liabilities, and other regulatory matters.
Very serious repercussions await should Binance be found to be engaging in the kind of regulatory avoidance that was the exchange’s brand prior to November’s settlement. The U.S. government secured the right to wade through all Binance transactions dating back to 2018, while an independent monitor will oversee all future transactions for the next five years.
Wired did a major piece this week on what Binance can expect from its new federal monitors that contained this memorable line: “What was once a haven for anarchic crypto commerce is about to be transformed into the opposite: perhaps the most fed-friendly business in the cryptocurrency industry.”
Wired quoted John Reed Stark, former director of the U.S. Securities and Exchange Commission (SEC) enforcement division, saying Binance needed to brace for a “24/7, 365-days-a-year financial colonoscopy.” As one anonymous U.S. prosecutor observed, the fact that Binance agreed to such panoptic oversight strongly suggests that “[t]he other option must have been really bad.”
Much has been made of the fact that customer funds are once again flowing back into Binance following the outflow of several billion dollars worth of assets in the immediate aftermath of the settlement. But that transaction monitor won’t be installed until after that February sentencing, so Binance customers appear to have a window of opportunity to carry on as normal.
The evidence that led to Binance’s record financial penalty included senior Binance compliance staff joking about knowingly processing transactions on behalf of criminals, including terrorist groups, money launderers, and sanctions evaders. In other words, Binance knows who the bad guys are. Are they willing to proactively prevent these customers from using Binance to commit further crimes?
Stark expressed skepticism that Binance would be able to honor its compliance commitments. “It’s like taking someone who’s been a drug addict for a decade and drug-testing them every day and thinking that they’re not going to try to sneak something in.”
Corporate crime’s ‘frequent fliers’ on notice
Should Binance experience a bout of recidivism, the blowback could be severe. Apart from the raft of charges that will undoubtedly be filed against Binance customers based on their transactions over the past five years, there’s the very real possibility that fresh charges could be filed against Binance, CZ, and other executives that weren’t covered under last month’s settlement.
One of the DoJ officials who spoke at last month’s press conference announcing Binance’s settlement was Deputy Attorney General Lisa Monaco. Last year, Monaco gave a speech on corporate criminal enforcement in which she noted that “between 10% and 20% of large corporate criminal resolutions have involved repeat offenders.”
Monaco noted that when it came to judging prior misconduct by the “frequent flyers” of corporate crime, “the most significant types of prior misconduct will be criminal resolutions here in the United States, as well as prior wrongdoing involving the same personnel or management as the current misconduct … We will also consider the nature and circumstances of the prior misconduct, including whether it shared the same root causes as the present misconduct … We will not shy away from bringing charges or requiring guilty pleas where facts and circumstances require.”
Since Binance’s settlement, word has leaked of a September meeting in Singapore between exchange staff and some ‘VIP’ market-makers. At this meeting, Binance reportedly alerted those in attendance to the upcoming settlement and assured them that Binance would survive the multi-billion-dollar penalty. Richard Teng was reportedly among the Binance staff who attended this dinner.
How U.S. authorities might view this sharing of material non-public information is anyone’s guess, particularly given the impact it appears to have had on the broader digital asset market.
Within a day or two of that dinner, the Tether (USDT) stablecoin minted another $1 billion worth of its tokens. A further $6 billion has been minted since, accompanied by a nearly two-thirds rise in the price of the BTC token, while other prominent tokens have enjoyed similar surges.
From Russia with precedent
It’s worth remembering that CZ’s settlement required him to abdicate his CEO position but didn’t require him to divest his majority shareholder control of the company. Moreover, CZ’s time in the Binance management penalty box was capped at three years, creating the very real possibility that he’ll be back running the show in 2026. Unless, of course, he never really stops running Binance.
Perhaps it’s because of Binance’s fond embrace of all things Russian, but we can’t help but recall how Vladimir Putin circumvented the term limits on Russian presidents by stepping down in favor of a loyal lieutenant (Dmitry Medvedev) who dutifully spent one term as President while Putin temporarily accepted the lesser role of Russia’s Prime Minister. Putin returned as President immediately after Medvedev’s first term was up and Medvedev took over as Prime Minister. Putin is expected to run again in Russia’s 2024 ‘election,’ the date of which was announced this week.
One would think that CZ, Teng, and everyone else at Binance wouldn’t be so foolish as to tempt fate in this fashion. The DoJ was able to obtain CZ’s personal communications once. They could probably do so again. The slightest hint that CZ is directing things behind the scenes would prove devastating, particularly if some shenanigans were to come to light before CZ’s February sentencing. It wouldn’t take a judge 10 days to decide whether CZ deserved the benefit of the doubt.
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