Xiao Za Team: Zhao Changpeng may become the richest inmate in federal prison, how complicated is virtual asset anti-money laundering compliance?

Author: Xiao Za lawyer

At the end of last month, Zhao Changpeng (hereinafter referred to as "CZ"), the former actual controller of Binance, the world's largest cryptocurrency exchange, was charged by prosecutors for allegedly facilitating money laundering through the Binance platform after accepting a record $4.3 billion settlement. The charges primarily include "violating the Bank Secrecy Act and multiple sanctions programs" and "failing to report suspicious transactions."

Currently, the case has largely settled—CZ was sentenced to four months in prison by the U.S. Federal Court in Seattle for violating U.S. anti-money laundering laws. It is reported that Judge Richard A. Jones stated in court: "No matter how rich, powerful, or high one's status, no one has immunity from prosecution or can stand above the law." Today, the Xiao Za team will use this case as an example to explain the anti-money laundering compliance obligations for partners striving to enter the U.S. market and share a piece of the cryptocurrency pie.

01 The System and Relevant Provisions of U.S. Anti-Money Laundering Laws

U.S. anti-money laundering laws are primarily composed of three acts: the earliest being the 1956 Narcotic Control Act, the 1970 Organized Crime Control Act, and the currently most widely applied 1970 Bank Secrecy Act. After the 9/11 attacks, the U.S. passed the famous PATRIOT Act (full name: Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) in just 45 days. The PATRIOT Act amended and strengthened the provisions of the Bank Secrecy Act, directly expanding anti-money laundering responsibilities to all financial institutions and detailing a series of anti-money laundering obligations for these institutions, summarized as follows:

1. Customer Identification (KYC)

The Bank Secrecy Act requires financial institutions to establish a written customer identification program to verify the identity of account holders and assess all relevant risk factors. When it is not reasonably possible to verify a customer's true identity, the account application should be denied or the transaction stopped, and the regulatory authorities should be notified.

2. Reporting System for Large and Suspicious Transactions

The threshold for the large transaction reporting system is generally $10,000. When currency or financial instruments are transferred (including but not limited to land transport, mailing, shipping, etc.), amounts exceeding $10,000 must be reported to the Customs General Administration, while foreign bank accounts must be reported to the Treasury Department.

The suspicious transaction reporting system refers to the obligation of financial institutions to report suspicious transactions to regulatory authorities when they discover potential criminal activity or employees using their positions for criminal activities.

It is worth mentioning that Section 317 of the PATRIOT Act formally established the controversial "long-arm jurisdiction over foreign money launderers" in the field of U.S. anti-money laundering regulation. Section 317 specifies that the U.S. can exercise long-arm jurisdiction if any of the following conditions are met: (1) all or part of a financial transaction occurs within the U.S.; (2) a foreign person or foreign financial institution converts property that has been ordered forfeited by a U.S. court for the purpose of misappropriation; (3) a foreign financial institution has opened a bank account in a financial institution located in the U.S. This is the basis for why the U.S. can exercise jurisdiction over Binance, which is registered abroad.

In terms of actual enforcement, it is primarily the responsibility of U.S. administrative agencies such as the Treasury Department, the Securities and Exchange Commission (SEC), the Internal Revenue Service, and the Federal Bureau of Investigation. They have established an anti-money laundering intelligence system centered around the Financial Crimes Enforcement Network (FinCEN). After verifying relevant money laundering criminal activities, the case is generally handed over to the Department of Justice for prosecution.

02 CZ—The First Person in History to Go to Jail for Violating the Bank Secrecy Act?

The Xiao Za team noted that, according to public information, during CZ's trial, his defense attorney and the prosecutor made two interesting statements: Defense attorney Mark Bartlett stated, "There has never been a precedent in U.S. history of someone being sentenced to prison for violating the Bank Secrecy Act." The prosecutor responded, "If CZ does not have to go to prison for violating the Bank Secrecy Act, then no one else will go to prison for similar crimes in the future, and the law would be ineffective."

Ultimately, while the court found that CZ's actions violated the relevant provisions of the Bank Secrecy Act and he should bear criminal responsibility, it accepted his defense attorney's argument that "there is no evidence showing that Zhao Changpeng knew specific transactions violated U.S. laws or sanctions," and ultimately set the sentence at four months instead of the three years sought by the prosecution.

Regarding CZ's sentence, the Xiao Za team believes this is mainly related to CZ's good attitude toward pleading guilty and his prior acceptance of the expensive settlement conditions, as well as his resignation from specific positions at Binance. During the trial, the prosecution repeatedly cited CZ's famous saying: "It's better to ask for forgiveness than to ask for permission," in an attempt to prove that CZ had subjective intent or indirect intent regarding Binance's violations of the U.S. Bank Secrecy Act (knowing and allowing). Setting aside the facts that this statement might prove, it has actually always been the core of CZ's business philosophy: to boldly develop and bravely admit mistakes, believing that as long as he develops quickly enough, he can cover the costs of violations with industry growth. Under the guidance of this life creed, if we compare CZ's approach with that of Sam Bankman-Fried (SBF), who resisted to the end, we can see the differences in their situations (of course, CZ's case is not as significant as SBF's, which is also key).

03 Warnings for Cryptocurrency Industry Practitioners

In previous articles, the Xiao Za team mentioned that in the last couple of years, major economic active regions around the world have focused their regulatory efforts on anti-money laundering and counter-terrorism financing, and have implemented a series of anti-money laundering rules that have reduced small, anonymous transactions to a much smaller scale. As a result, methods such as large-scale money laundering and decentralized laundering using cryptocurrency are becoming more exposed to regulatory scrutiny.

The Xiao Za team believes that the most important compliance obligation for partners operating in the global cryptocurrency market, industry, and community is to establish a firewall system that complies with the anti-money laundering regulatory standards of most economically active regions. Given the decentralized and cross-border nature of cryptocurrency assets, traditional anti-money laundering compliance frameworks are gradually becoming unsuitable for large cryptocurrency entities like Binance. As of now, due to the complexity of laws in various countries, there has not yet been a low-cost and rapid solution. In this situation, the Xiao Za team suggests considering the establishment of a strong legal compliance department and collaborating with external lawyers from multiple jurisdictions to address this issue. In short, if there is not enough confidence to cover the costs of violations with business growth in a short period, in today's regulatory environment, the priority of "preventing problems before they arise" should be higher than that of development, and at least should not be neglected.

04 Final Thoughts

If nothing unexpected happens, CZ is likely to become the wealthiest person in federal prison, which also indicates that the regulatory intensity of major countries around the world towards the virtual asset sector will gradually increase, and the space for using virtual assets for money laundering and terrorist financing activities will become smaller.

The resolution of the CZ incident reminds the Xiao Za team of two other recent hot topics: the first is media speculation that a Bitcoin spot ETF may be included in the Shanghai-Hong Kong Stock Connect, and the second rumor is that China may relax its trading restrictions on virtual currencies, potentially legalizing virtual assets in mainland China. From the perspective of the overall trend of virtual currency regulation, the second rumor is unlikely to come true. Given the current global development trends of virtual assets, the legalization of virtual asset businesses and related transactions must be predicated on establishing a strict and comprehensive anti-money laundering and counter-terrorism financing system for virtual currencies, while also incorporating virtual currencies into the regulatory framework for securities or other financial instruments. The construction and improvement of this legal regulatory framework is not something that can be achieved overnight. For this reason, the Xiao Za team speculates that the major policy direction regarding virtual currencies in mainland China will not change, and the red line risks outlined in the "9·24" notice will not change in the short term.

This concludes today's sharing. Thank you to our readers!