Binance knowingly ignored AML, KYC checks and Changpeng Zhao knows it: report

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Binance has been flouting financial laws for years as it pursued profitability despite the cost—this much has been clear for quite some time as more regulators crackdown on the cryptocurrency exchange. However, a new investigative report has revealed the extent of the rot at the exchange, and how CEO Changpeng Zhao has made it explicitly clear that he doesn’t care about the legal expectations, as long as he keeps the money flowing in.

Zhao launched Binance in July 2017, armed with the $15 million he had raised via an initial coin offering. At the time, the exchange was based in Shanghai. According to one person who knew Zhao at the time, he was “ambitious, persistent and had a great appetite for risk.”

This appetite for risk saw Zhao allow users to open accounts with just their email address without any personal information. This attracted several traders, and in its first six months, Binance had generated $208 million in profits.

The exchange would be forced to move from China to Hong Kong after the country cracked down on ICOs and digital currencies. Despite having offices in Hong Kong, Binance was owned by a holding company that was incorporated in the Cayman Islands. Since then, Binance tried moving to other jurisdictions and ended up lacking regulators who would be accommodating of its wayward ways. It now claims not to have any physical address.

An investigative report by Reuters has uncovered some of the maleficence that Zhao and his exchange have been committing since 2017, a lot of which has been going on in the inner circles and are unknown to many.

No KYC, Zhao reportedly told Binance staff

Binance processes around $15 billion worth of digital asset trades across its spot and derivatives platforms every day. However, for such a behemoth, its anti-money laundering (AML) and know your customer (KYC) checks are surprisingly lax.

Zhao has always been very vocal about the need for regulations and pledged to champion compliance at the exchange. However, it never went beyond the talk, Reuters reported.

Some of the instances the outlet uncovered include the refusal to provide detailed answers to regulators and business partners about its opaque corporate structure. The exchange’s compliance team has also consistently raised questions about its lax AML and KYC, including with Zhao, but the CEO has waved them away. 

Reuters accessed some Telegram messages between the top brass at Binance, revealing that the exchange is fully aware that it’s defying laws. Messages by compliance chief Samuel Lim and money laundering reporting officer Karen Leong show they were aware that the AML and KYC checks were not rigorous enough.

In one message, Lim told employees that Zhao wanted no KYC and also wanted “users to be able to trade within 10 minutes of signing up.” Lim, who remains the compliance head at Binance, added, “Reduce KYC. Raise Limits. BEST COMBO,” summarizing the exchange’s “make-money-at-all-costs” approach.

When Zhao started to push for fiat-to-crypto on-ramps, Lim expressed doubts about their viability, acknowledging that Binance isn’t compliant enough for it. 

“Damn why touch fiat if dont wanna be compliant. So ironic LOL. Just stay full crypto man. Jizzus,” he wrote, according to the Reuters report.

Zhao, or CZ as some call him, is known to have a stranglehold on the leadership of the exchange. Former senior employees and advisers likened his leadership style to having a personal fiefdom. They claimed to have been afraid of raising some of their concerns with him as “everyone is terrified of CZ.” The CEO even explicitly warned them against raising these issues, telling his top lieutenants, “Don’t bring me problems.”

No way home—China, Hong Kong, Malta, Germany, Japan

Launched in China, Binance moved within months to neighboring city-state Hong Kong. Soon after, Zhao started roaming the world looking for a new jurisdiction where he could hoodwink authorities with fake promises and generous philanthropic gestures.

He landed in Japan, a country that was quickly growing to be one of the biggest digital asset markets at the time. Here, he oversaw Binance shooting up to become the world’s biggest exchange. During this time, he listed every other new digital asset and enlisted Binance Angels, who spread his gospel around the world and made a cut from new clients in their jurisdictions.

He didn’t stay long. Japanese regulators soon alleged that Binance was offering its services illegally and issued a public warning about it amid other accusations in Japan. Zhao took off to his next home—Malta.

Zhao was soon warming up to Malta Prime Minister Joseph Muscat and pledged to set up offices there. Binance would hire 200 people for its operation, but only after Malta passed the Virtual Financial Assets Act, which the country did.

“Binance got really lucky. Malta came at a time when regulatory clarity was very much needed,” the Chinese-born, Canadian-educated computer scientist said in October 2018.

But even before he settled in Malta, Zhao reportedly became uneasy at the level of regulatory scrutiny that Binance was being subjected to in the country. According to four insiders who spoke to Reuters, CZ aborted the plan months later.

Binance sought to get into the local market by purchasing local companies in countries like the U.K. and Germany. In Germany, the deal went sour quickly.

Binance partnered with CM-Equity, a Munich-based regulated financial services firm. Since it would offer stock tokens, the exchange was required to have stricter background checks on its clients. In this case, it would scrutinize any deposit above $11,000.

Binance arbitrarily changed the rules a few months later and updated the threshold balance to $100,000. While this saw German customers flock to Binance, CM-Equity wasn’t impressed. Its CEO would later regret partnering with Binance, telling Reuters that if he knew what Zhao’s plan was, “we would definitely not have given Binance the opportunity to work with us.”

Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—a from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple, Ethereum, 
FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.