Regulators and even other digital asset exchanges are turning up the legal heat on Binance. The popular exchange was this week targeted in a money laundering complaint by Japan’s Fisco, alleging Binance allowed over US$9 million in stolen funds from Fisco’s subsidiary Zaif to be washed through its accounts in 2018. Additionally, the international Financial Action Task Force (FATF) issued a report on money laundering and terrorist financing that referred to Binance in all but name.
The Fisco/Zaif case
According to news reports, Fisco Cryptocurrency Exchange, Inc. filed a complaint on Monday in the U.S. District Court of the Northern District of California San Jose, seeking damages and restitution. The complaint claims US$9.4 million worth (at the time) of BTC, part of the proceeds from a hack on the exchange Zaif in 2018, ended up in a single address belonging to Binance.
Osaka-based Zaif was only a recent entrant to the Japanese digital asset industry when hackers stole almost US$60 million in BTC, BCH and Monacoin from its wallets in September 2018. Fisco stepped in to take over the company soon after, in a JPY5 billion (US$47.3 million) bailout.
Moreover, the complaint alleges Binance was either well aware or negligent of the fact that proceeds of the crime were being laundered on its platform. It described the company’s KYC/AML policies as “shockingly lax” and not measuring up to industry standards, and claimed the thieves had chosen Binance for this reason. The company had failed to take any action to freeze the accounts or stop them being exchanged and leaving the platform, it added.
It’s not the first time Binance has been accused of being money launderers’ exchange of choice. Nor is it the second. Just last week, independent researchers reported over $1 million in proceeds from the “Ryuk” ransomware passed through Binance. Dr. Craig S. Wright has claimed in the past that Binance may be responsible for laundering around $2.1 billion in criminal proceeds each year.
The company’s status as one of the world’s most active trading platforms (in both customers and assets listed) and its comparatively relaxed KYC/AML requirements for new accounts are often cited as reasons for this.
FATF is watching for ‘red flags’
As if all that weren’t enough, international regulators are also watching Binance closely. The Financial Action Task Force (FATF) published a report this week titled “Virtual Assets: Red Flag Indicators”. It highlighted signs of money laundering risk in the digital asset industry, providing case studies that didn’t name any company by name, but one of which closely mirrors Binance’s story.
The case study detailed a VASP (virtual asset service provider) that has hopped between various jurisdictions, relocating operations as the previous jurisdiction’s KYC/AML laws became stricter:
“Ahead of the implementation of a policy to prohibit VASP operation in Jurisdiction A in Asia in 2017, a VASP (exchange) established in Jurisdiction A transferred its operation to Jurisdiction B in the same region. In 2018, Jurisdiction B stepped up its AML/CFT legal regime on VAs following significant hacks of some major VASPs (exchanges). In March 2018, the VASP announced its intentions to relocate its headquarters to Jurisdiction C in Europe (a jurisdiction which had not yet introduced a comprehensive AML/CFT regime in relation to VAs and VASPs at the time). Later in November 2018, Jurisdiction C introduced certain regulations on VASPs, and in February 2020, it confirmed that no authorisation was given to the corresponding VASP to operate. More recent reports in 2020 indicated that the VASP had already relocated its registration and domicile status to Jurisdiction D in Africa.”
The report added that “the indicators included in this Report are specific to the inherent characteristics and vulnerabilities associated with VAs”. However there is no other company in the industry whose narrative matches the description above as closely as Binance’s, meaning the authorities most likely see Binance as a risk—and one they’re keeping an eye on.
Sooner or later, any exchange engaging in jurisdiction-hopping to avoid regulation will find itself out of options. Chances are that will be sooner. There have been many implicit and explicit warnings about these companies and particularly Binance—staff and customers alike would be advised to heed them.
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