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In a major setback for the world’s largest cryptocurrency exchange, a federal judge has ruled that the bulk of the SEC’s lawsuit against Binance can move forward. A recent class action lawsuit was also filed by three cryptocurrency investors alleging AML failures.
In June 2023, the US regulator filed a lawsuit against the cryptocurrency exchange and its former CEO Changpeng Zhao. The SEC alleged that Binance violated US securities laws by operating an unregistered securities exchange and failing to comply with anti-money laundering (AML) regulations. The SEC claimed that Binance allowed US customers to trade cryptocurrencies that should have been registered as securities, without proper regulatory oversight. The regulator also alleged that Binance misled investors about the strength of its AML and know-your-customer (KYC) controls. In particular, Binance was being accused of several AML compliance failures including
- lack of effective KYC procedure
- inadequate transaction monitoring
- failure to file suspicious activity reports
- circumvention of geographical restrictions
- inadequate AML programme commensurate with its risk
This lawsuit represents a major escalation in the SEC’s crackdown on the cryptocurrency industry. The regulator has been increasingly assertive in applying securities laws to virtual assets, and this case against one of the world’s largest crypto exchanges is seen as pivotal.
Further AML complaints lining up
More recently, Binance and Zhao are also facing a class action lawsuit from three cryptocurrency investors who allege that the exchange failed to prevent money laundering. The lawsuit claims that stolen cryptocurrencies were deposited on Binance by thieves to obscure their origins, making them untraceable. The plaintiffs claimed that Binance was complicit in the money laundering process, violating the Racketeer Influenced and Corrupt Organizations (RICO) Act, stating that without such platforms, stolen crypto would be easier to track.
The lawsuit also alleges that under Zhao’s leadership, Binance operated as an unlicensed money-transmitting business, deliberately ignoring AML requirements and allowing illicit activities to flourish, making Binance a hub for laundering stolen cryptocurrencies.
Hong Kong regulator keeping a watchful eye on virtual assets
In Hong Kong, the SFC has said it will take a close look at an applicant’s global regulatory compliance record when evaluating licences for virtual asset service providers (VATPs). The ongoing legal battle between Binance and the SEC is likely to raise red flags for Hong Kong regulators. The SFC has also mentioned that AML is one of the key aspects they will look into for VATP applicants.
We advise VATPs should appoint an independent party to:
- conduct a comprehensive AML/CFT risk assessment
- review their AML programme implementation and effectiveness
- benchmark against regulatory requirements and industry best practices
- identify gaps and vulnerabilities in the AML programme and rectify the issues
- prepare regulatory filings and reports related to AML/CFT controls
How we’re supporting virtual asset exchanges
By conducting a thorough AML review and providing tailored guidance, we can help virtual asset exchanges strengthen their compliance posture, mitigate regulatory risks, and demonstrate a commitment to combating financial crime.
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