Author: 肖飒 lawyer

At the end of last month, Zhao Changpeng (referred to as "CZ" hereinafter), the former controlling shareholder of Binance, the world's largest cryptocurrency exchange, accepted a record-breaking $4.3 billion settlement and was subsequently accused by prosecutors of allowing money laundering on the Binance platform, and was suspected of committing crimes (mainly including "violating bank secrecy laws and multiple sanction programs" and "failing to report suspicious transactions").

Currently, the case has basically been settled—CZ was sentenced to four months in prison by the federal court in Seattle, United States, for violating the US anti-money laundering law. It is reported that during the trial, Judge Richard A. Jones stated, "No matter how rich, powerful, or high in status, no one has immunity from prosecution, nor can they override the law." Therefore, today, the team led by Xiao Sa will use this case as an example to explain the anti-money laundering compliance obligations for those who want to venture abroad and carve out a piece of the cryptocurrency market in the United States, starting with the relevant provisions of US anti-money laundering laws.

01 System and Relevant Provisions of US Anti-Money Laundering Laws

US anti-money laundering laws are mainly composed of three acts, namely the earliest 1956 "Narcotics Control Act," the 1970 "Organized Crime Control Act," and the currently most widely applied 1970 "Bank Secrecy Act." After the 9/11 attacks, the US passed the famous "PATRIOT Act" within 45 days, amending and strengthening the provisions of the "Bank Secrecy Act," directly expanding the anti-money laundering responsibility to all financial institutions, and detailing a series of anti-money laundering obligations for institutions, as briefly described below:

1. Customer Identification (KYC)

The "Bank Secrecy Act" requires financial institutions to establish a written customer identification system, confirm the identity of account-opening customers, and assess all related risk factors. When the customer's true identity cannot be reasonably confirmed, the application for account opening should be refused or transactions should be stopped, and reported to the regulatory authorities.

2. Large Transactions and Suspicious Transaction Reporting System

The threshold for large transaction reporting is generally $10,000. When currency or financial instruments are transferred (including but not limited to land transportation, mailing, shipping, etc., of any form of currency, financial instruments, etc.), amounts exceeding $10,000 need to be reported to the Customs Service, and foreign bank accounts need to be reported to the Department of the Treasury.

The suspicious transaction reporting system refers to when financial institutions discover potential criminal activity in transactions, or employees abusing their authority for criminal activities, they should report suspicious transaction reports to the regulatory authorities.

It is worth mentioning that Section 317 of the PATRIOT Act officially established the controversial "long-arm jurisdiction over foreign money launderers" in the field of anti-money laundering regulation. Section 317 clearly stipulates that the US can exercise long-arm jurisdiction if: (1) the financial transaction in question occurs entirely or partially within the US; (2) the foreign person or foreign financial institution involved converts property that has been determined by a US court to be confiscated and forfeited for the purpose of embezzlement; (3) the foreign financial institution has opened a bank account in a financial institution located within the US. This is also the basis for the US to exercise jurisdiction over Binance registered overseas.

In terms of actual enforcement, it is mainly the responsibility of the US Department of the Treasury, the Securities and Exchange Commission (SEC), the Internal Revenue Service, the Federal Bureau of Investigation, and other administrative agencies, and a core anti-money laundering intelligence system centered around the Financial Crimes Enforcement Network (FinCEN) has been established. After verifying related money laundering criminal activities, the Department of Justice is generally responsible for prosecuting the criminal suspects.

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

The team led by Xiao Sa noticed that, according to public sources, during CZ's trial, his defense lawyer and the prosecutor made two interesting statements: Defense lawyer Mark Bartlett: "There has never been a precedent in US history of anyone being sentenced to prison for violating the 'Bank Secrecy Act'." Prosecutor: "If CZ is not sentenced to prison for violating the 'Bank Secrecy Act,' then no one will be imprisoned for similar crimes in the future, and the law will be ineffective."

In the end, although the court found that CZ's actions violated the relevant provisions of the "Bank Secrecy Act" and should bear criminal responsibility, it accepted his defense lawyer's argument that "there is no evidence that Zhao Changpeng knew that specific transactions violated US regulations or sanctions," and ultimately sentenced him to four months, rather than the prosecution's request for three years.

Regarding CZ's sentence, the team led by Xiao Sa believes that this is mainly directly related to CZ's good attitude of pleading guilty, accepting the record-breaking settlement conditions in advance, and resigning from specific positions at Binance. During the trial, the prosecution repeatedly used CZ's statement, "Applying for forgiveness is better than asking for permission," to try to prove CZ's subjective intent of knowingly or indirectly allowing Binance to violate the US "Bank Secrecy Act" (knowingly allowing it). Let's set aside the facts that this statement can prove for now. In fact, this statement has always been the core of CZ's operation, that is, bold development and brave admission of mistakes. As long as I develop fast enough, I can cover the cost of violations with industrial increment. Guided by this life motto, if we compare the attitude and situation of CZ with that of Sam Bankman-Fried (SBF), the former controlling shareholder of FTX, we can actually see who is better (of course, the scale of CZ's affairs is not as large as SFB's, which is also crucial).

03 Warning for Cryptocurrency Industry Practitioners

In previous articles, the team led by Xiao Sa has mentioned that in the past year or two, the major economic active areas in the world have mainly focused on regulating cryptocurrency assets in the areas of anti-money laundering and combating the financing of terrorism. They have already reduced small and anonymous transactions to a smaller scale through a series of anti-money laundering rules, making it easier to expose large-scale money laundering and decentralized money laundering activities to regulatory scrutiny.

The team led by Xiao Sa 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 economic active areas. Given the decentralized nature and cross-border transaction attributes of cryptocurrency assets, traditional anti-money laundering compliance architecture designs have gradually become inadequate for large-scale cryptocurrency entities like Binance. As of now, due to the complexity of laws in various countries, a low-cost and rapid solution has not yet emerged. In view of this situation, the team led by Xiao Sa believes that it may be considered to establish a strong legal compliance department and cooperate with external lawyers in multiple jurisdictions to solve this issue. In short, if there is not enough confidence to cover the cost of illegal activities with industrial increment in a short period of time, in today's regulatory environment, the priority should be on preventing illness rather than development, at least not neglecting it.

04 Conclusion

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

The conclusion of the CZ case reminds the team led by Xiao Sa of two other recent hot topics: first, there are rumors in the media that Bitcoin spot ETF may be included in the Shanghai-Hong Kong Stock Connect, and the other rumor is that China is likely to relax restrictions on cryptocurrency trading, and the legalization of virtual assets in mainland China may be realized. From the perspective of the overall trend of cryptocurrency regulation, the second rumor is unlikely to come true. Based on the current global development trend of virtual assets, the premise for the legalization of virtual asset businesses and related transactions is to establish a strict and comprehensive virtual currency anti-money laundering and anti-terrorism financing system, and to incorporate virtual currencies into the regulatory framework of securities or other financial instruments. The construction and improvement of all these legal regulatory frameworks is not a matter of overnight. It is for this reason that the team led by Xiao Sa speculates that the major policy towards 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.

The above is today's sharing, thank you, readers!

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