On December 8, the U.S. Department of Justice published a set of documents laying out the oversight requirements for Binance, after which the Securities and Exchange Commission (SEC) sought to reconsider the case based on new facts.
Former SEC official John Reed Stark forecast tough times for the trading platform, as audit and legal costs may prove prohibitive.
Breaking News: A Binance Double Whammy. 1) Newly Unsealed US DOJ Filings Could Mean the End of Binance; and 2) SEC Files Supplemental Pleading Against Binance, Strengthening the SEC Binance Lawsuit Exponentially
There’s been a flurry of newly released Binance-related filings… pic.twitter.com/igN2I9Y7cP
— John Reed Stark (@JohnReedStark) December 9, 2023
DOJ Pressure
The released documents contain several previously undisclosed pieces of evidence and admissions of guilt by Binance and its former CEO Changpeng Zhao (CZ). The harshest are the Department of Justice’s oversight requirements and the Financial Crimes Enforcement Network (FinCEN), which Stark called “unprecedented.”
These provisions obligate the platform to cooperate with authorities, granting access to any documents, records and other materials. Binance must also provide information about former employees, agents, brokers, consultants, licenses, suppliers and partners.
In addition, the exchange will implement additional procedures regarding internal controls, customer interactions and third parties. Binance will be expected to monitor for potential sanctions evasion and provide full reporting on the measures taken.
“The exhaustive list of new Binance compliance obligations reads like a consultant’s wish list — its implementation will cost tens, if not hundreds of millions of dollars,”
The company will be supervised by several DOJ divisions. Meanwhile, the monitor may choose not to inform the platform of findings from the inspections.
Under the terms of the agreement, if the regulator detects improper actions, it must report them to the relevant authorities.
Binance also agreed to report under separate rules to FinCEN. Various monitoring reports are likely to include “private, financial, confidential and business information.”
“The agreement requires the company to provide immediate access, audits, analytical expertise and inspections to the Department of Justice, FinCEN and all types of financial regulators and law enforcement agencies for several years, subjecting the company and its clients to 24/7 financial colonoscopy, 365 days a year,” Stark emphasized.
SEC Wants to Be Involved
Despite Binance’s settlement with U.S. authorities, under which the firm will pay $4.3 billion in fines, the Commission intends to continue the litigation.
On June 5, the SEC filed suit against the exchange and Zhao, bringing 13 counts, including the selling of unregistered securities.
In a recent filing, the regulator noted that the court should take into account the new facts in the admissions by the company and CZ, which could lead to additional criminal charges.
For example, in the DOJ agreement the crypto exchange stated deliberate violations of the law while in the SEC case the firm argued there was no “fair notice” of possible securities-law violations.
In addition, the platform did not directly serve US clients, but secretly allowed trading by major American partners, creating in the jurisdiction entities like BAM Trading to “reduce regulatory pressure.”
The SEC’s allegations directly concern CZ as well. In the agency’s view, Zhao personally participated in money laundering and led a strategy aimed at secretly encouraging US clients to trade on the platform.
“The Commission now has a treasure trove of fresh and comprehensive prosecutorial evidence related to Binance, drawn from various lawsuits, orders, schedules and other accusatory documents,” Stark said.
This state of affairs complicates Binance’s position in the court’s consideration of its motion to dismiss the SEC’s suit.
The expert noted that no firm had previously entered into such a comprehensive agreement with the government, one that prescribes such stringent oversight.
In his view, Binance will find it difficult to endure audits by the Treasury, FinCEN and other financial regulators. The company is likely to attempt to terminate the agreement and adopt a defensive posture, given the enormous costs such a move would entail.
“In my view, this is only a matter of time before the whole plea deal collapses, leading to additional charges for Binance, additional charges for CZ and new charges against others (partner, client, joint venture, employee, etc.), all entangled with the criminal enterprise,” the former SEC lawyer concluded.
As a reminder, Zhao posted a $175 million bail to stay free, but prosecutors, fearing his flight, opposed this possibility. Later, CZ was barred from leaving the United States until the February 2024 hearing.
Earlier, a Seattle district judge accepted the guilty plea of the ex-Binance CEO to charges related to money-laundering controls violations.