Binance faces probe by US money-laundering and tax sleuths

Cayman Islands

BINANCE Holdings is under investigation by the US Justice Department and Internal Revenue Service (IRS), ensnaring the world's biggest cryptocurrency exchange in US efforts to root out illicit activity that's thrived in the red-hot but mostly unregulated market. As part of the inquiry, officials who probe money laundering and tax offences have sought information from individuals with insight into Binance's business, according to sources.

Led by Zhao Changpeng, a charismatic tech executive who relishes promoting tokens on Twitter and in media interviews, Binance has leap-frogged rivals since he co-founded it in 2017.

The firm, like the industry it operates in, has succeeded largely outside the scope of government oversight. Binance is incorporated in the Cayman Islands and has an office in Singapore but says it lacks a single corporate headquarters.

Chainalysis, a blockchain forensics firm whose clients include US federal agencies, concluded last year that among transactions that it examined, more funds tied to criminal activity flowed through Binance than any other crypto exchange.

"We take our legal obligations very seriously and engage with regulators and law enforcement in a collaborative fashion," Binance spokeswoman Jessica Jung said in an e-mailed statement, while adding that the company doesn't comment on specific matters or inquiries. "We have worked hard to build a robust compliance programme that incorporates anti-money laundering principles and tools used by financial institutions to detect and address suspicious activity."

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Spokespeople for the Justice Department and IRS declined to comment.

US officials are concerned that cryptocurrencies are being used to conceal illegal transactions, including theft and drug deals, and that Americans who've made windfalls betting on the market's meteoric rise are evading taxes. Such worries have been a hindrance to the industry going mainstream, even as Wall Street increasingly embraces Bitcoin and other tokens amid a global investing frenzy.

This month's cyber attack against Colonial Pipeline that's triggered fuel shortages across the Eastern US is the latest sign of what's at stake. Colonial paid Eastern European hackers a nearly US$5 million ransom in untraceable cryptocurrency within hours of the breach, Bloomberg News reported on Thursday, citing two sources.

While the Justice Department and IRS probe potential criminal violations, the specifics of what the agencies are examining couldn't be determined, and not all inquiries lead to allegations of wrongdoing. The officials involved include prosecutors within the Justice Department's bank integrity unit, which probes complex cases targeting financial firms, and investigators from the US Attorney's Office in Seattle.

The scrutiny by IRS agents goes back months, with their questions signalling that they are reviewing both the conduct of Binance's customers and its employees, another source said.

The US Commodity Futures Trading Commission (CFTC) has also been investigating Binance over whether it permitted Americans to make illegal trades, Bloomberg reported in March. In that case, the authorities have been examining whether Binance let investors buy derivatives that are linked to digital tokens.

US residents are barred from purchasing such products unless the firms offering them are registered with the CFTC.

Mr Zhao has said Binance closely follows US rules, blocks Americans from its website, and uses advanced technology to analyse transactions for signs of money laundering and other illicit activity. Last year, the firm warned that US residents would have their accounts frozen if they were found to be trading, crypto trade publications have reported.

The inquiries follow a Chainalysis report on criminal transactions involving digital tokens. The firm tracked Bitcoin worth US$2.8 billion that it suspects crooks moved on to trading platforms in 2019. Chainalysis determined that roughly 27 per cent, or US$756 million, wound up on Binance. Binance responded by saying that it adheres to all anti-money laundering regulations in the jurisdictions in which it operates and works with partners like Chainalysis to improve its systems.

In the US, the authorities have been cracking down on exchanges for flouting laws that are meant to prevent financial crimes, with officials citing the platforms use by terrorists and hackers. Tax violations have also been a priority, with the government recently winning a court order as it seeks to unmask US clients of Kraken, a San Francisco-based exchange.

Along with the CFTC, the Justice Department is likely to examine steps that Binance has taken to keep US residents off its exchange. One source familiar with Binance's operations said that prior to the establishment of Binance US, Americans were advised to use a virtual proxy network, or VPN, to disguise their locations when seeking to access the exchange.

Ms Jung, the Binance spokesperson, said the exchange has never encouraged US residents to use VPNs to get around its rules, as doing so would be something "that has always been contrary to our company's principles".

In January, Mr Zhao tweeted that Binance's security systems block Americans even if they try to connect through one of the networks. "We have implemented strong access controls that have been tested via external audit and are under continuous review and evaluation by Binance to ensure that the appropriate restrictions are in place and are effective," Ms Jung said. BLOOMBERG