Blockchain & Cryptocurrency , Cryptocurrency Fraud , Fraud Management & Cybercrime

Former Binance CEO Changpeng Zhao Sentenced to Four Months

Prison Time Is Far Less Than the 3 Years Sought By US Prosecutors
Former Binance CEO Changpeng Zhao Sentenced to Four Months
Former Binance CEO Changpeng Zhao Sentenced to Four Months Former Binance CEO Changpeng Zhao speaking at a November 2022 conference (Image: Web Summit/CC BY 2.0)

A federal judge sentenced former Binance CEO Changpeng Zhao to four months in prison for money laundering violations.

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U.S. District Judge Richard Jones of the Western District of Washington heard from prosecutors and Zhao's attorneys Tuesday, more than five months after the former crypto trading heavyweight pleaded guilty to one felony count for "willfully" violating the Bank Secrecy Act by failing to maintain an anti-money laundering program at Binance.

"This wasn't a mistake; it wasn't a regulatory oops," said prosecutor Kevin Mosley at the sentencing hearing, according to The Verge reporting from the Seattle courtroom. Prosecutors wanted a three-year sentence. Incarceration was necessary to reflect the seriousness of the offense, Mosley told the court, since Zhao violated the law on a massive scale to make an extraordinary amount of money.

The billionaire in November stepped down as the CEO of the world's largest crypto exchange and agreed to pay a $50 million fine in a plea deal with prosecutors. Binance agreed to pay $4.3 billion in a settlement that ended civil litigation from federal agencies, except a Securities and Exchange Commission lawsuit (see: Binance Exits US in Deal Settling Money Laundering Charges).

Prosecutors last week pushed for a longer time in prison, saying that Zhao preached a philosophy "of better to ask for forgiveness than permission" when it came to Binance's compliance with U.S. law.

"Zhao's willful violation of U.S. law was no accident or oversight. He made a business decision that violating U.S. law was the best way to attract users, build his company, and line his pockets," U.S. attorney Tessa Gorman and others said in a sentencing memorandum.

Prosecutors said Zhao turned a blind eye to illicit actors using Binance's exchange to launder stolen funds, transact money made through ransomware attacks and move proceeds of darknet market transactions, crypto exchange hacks and other internet-related scams.

The outcome of Zhao's case is being closely watched in the cryptocurrency trading sector, especially because he ran the largest and most lucrative digital assets trading company. Zhao incidentally was the first investor in Sam Bankman-Fried's FTX - the subject of another closely watched legal drama in the crypto space - and also set the ball rolling on his downfall (see: Cryptohack Roundup: Sam Bankman-Fried Gets 25-Year Sentence).

The case will have a "big impact" on the anti-money laundering aspect of crypto, said Mark Bini, a former assistant U.S. attorney in the Eastern District of New York. Both cases are "very significant, but for very different reasons," he told Information Security Media Group. "While SBF was the biggest crook in crypto, who literally stole billions of dollars from FTX to prop up Alameda, CZ is the most successful person in crypto who has been prosecuted," he said.

The memo by Gorman and others also says that a strong sentence would "send a message" to the world. "Zhao reaped vast rewards for his violation of U.S. law, and the price of that violation must be significant to effectively punish Zhao for his criminal acts and to deter others who are tempted to build fortunes and business empires by breaking U.S. law," it said.

The case shows that no one is too big to be brought to justice, said Paul Cottee, director of Nice Actimize's compliance line of business. It sends a message to industry players that "no matter how big you are or how small you are, if we can go after these guys, we can go after you. No matter how cool or edgy you might think you are, you're not above the law," Cottee told ISMG.

Zhao's case will likely have an impact on how the entire industry operates. Binance had agreed to set up an anti-money laundering system supervised by an independent outside party reporting to federal regulators.

The "first such arrangement in crypto" is more significant than the monetary penalty, as it looks to transform Binance "from a scofflaw into a watcher and enforcer on behalf of the U.S. government," political scientists Henry Farrell and Abraham Newman said in the Wall Street Journal. The writers said that the situation was akin to the government's crackdown on big banks about a decade ago, when regulators imposed massive fines and closely monitored them, forcing other financial institutions they did business with into "rapid and widespread compliance."

It's not nearly as new for traditional financial institutions, where monitorship is a common practice. A part of the monitorship agenda is to try and change the company's culture, Cottee said. "If the monitor is asking certain questions, then maybe that means that someone internally or a few people internally start learning to ask those questions. So it helps to change the culture a bit," he said.

Zhao wrote a letter to the court in February, apologizing and acknowledging his voluntary surrender in the case. "There is no excuse for my failure to establish the necessary compliance controls at Binance," he said. "I want to make things right, close the chapter, turn the page, and focus on the next chapter of my life."

Zhao was free to remain in the United States on a $175 million bond, but the judge denied several attempts by his legal team to allow him to visit family in the United Arab Emirates.

Bini said that the Zhao case will likely be a push for the industry's growth. "When a top Wall Street executive is convicted of a crime rather than when a crypto robber baron case like FTX where SBF plundered billions of dollars, it sends the vibe of, 'This is a serious case, but crypto is real and here to stay,'" he said.

Binance continues to operate in several jurisdictions. Despite having fairly big issues that are reflected in the hefty fines and the regulatory proceedings against the company, CZ is still "a pretty wealthy individual, and he has not been asked to relinquish his ownership stake," Cottee said.


About the Author

Rashmi Ramesh

Rashmi Ramesh

Assistant Editor, Global News Desk, ISMG

Ramesh has seven years of experience writing and editing stories on finance, enterprise and consumer technology, and diversity and inclusion. She has previously worked at formerly News Corp-owned TechCircle, business daily The Economic Times and The New Indian Express.




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