Binance in court over alleged misappropriation

Binance, the prominent cryptocurrency exchange accused of mishandling customer funds, reportedly utilized the services of two American banks to transfer billions of dollars globally, according to the Securities and Exchange Commission (SEC). The regulatory body disclosed the details of extensive cash movements that involved transactions conducted through Silvergate Bank and Signature Bank, both of which experienced failures this year. The court filings by the SEC’s accountant, Sachin Verma, outlined how Binance executives, including its founder and CEO Changpeng Zhao, facilitated the transfer of hundreds of millions, and sometimes billions, of dollars to accounts associated with companies in various countries such as Kazakhstan, Lithuania, and the Seychelles.

Apart from revealing the banking activities, the SEC also estimated that Binance owed over $13 million in unpaid taxes with an accrued interest penalty. The regulatory authority did not disclose the exact amount the company had paid in taxes during the four-year period nor the expected tax liability. This week, the SEC initiated legal action against Binance in a federal court in Washington, D.C., alleging the mishandling of customer funds, deception of regulators and investors about its operations, and engagement in manipulative trading practices. The SEC requested a temporary freeze on assets connected to Binance’s US subsidiary, and the recently filed documents supported this request.

In addition to suing Binance, the SEC also filed a lawsuit against Changpeng Zhao, known as C.Z., asserting that he orchestrated the plan to transfer billions of dollars to an offshore entity under his control. Binance’s spokesperson stated that the transactions mentioned in the filings did not involve customer funds and were conducted as part of the regular business operations of the company. Binance has consistently denied any wrongdoing and has expressed its firm commitment to vigorously defend itself against the SEC’s allegations.

Although the filings did not offer a specific explanation for the unusual money transfers, experts in anti-money laundering highlighted that such large and swift transactions should have triggered suspicions among bankers. Financial institutions are obligated to submit a suspicious activity report (SAR) to federal regulators if they suspect a transaction involves money laundering or fraud. While the SARs are confidential, they can provide leads for investigations.

An example cited in the filings revealed that in February 2022, $20 million was deposited into one of Binance’s Silvergate accounts, followed by a $19.9 million withdrawal within a few days, resulting in a starting balance of $7.6 million at the beginning of the month and $7.7 million at the end. Another account at Signature reported $1 billion in deposits and $1.3 billion in withdrawals during the same month. The withdrawn funds were directed to Merit Peak, a company allegedly controlled by Changpeng Zhao, where the SEC claims customer funds were surreptitiously pooled together.

Louise Shelley, a professor specializing in money laundering at George Mason University, remarked on the magnitude of the financial misconduct described in the filings, expressing astonishment that the two banks had facilitated the movement of billions of dollars overseas for Binance over an extended period. Shelley emphasized the need for heightened scrutiny and detection of such activities to prevent illicit financial practices.

No information was provided regarding whether Silvergate or Signature reported the activities in Binance’s accounts to the authorities. While Silvergate voluntarily liquidated itself in March due to substantial losses from its cryptocurrency customers, it had closed some of Binance’s accounts in 2021 and 2022. Both Silvergate and Signature catered to customers involved in digital currencies, allowing swift transfers of funds in US dollars across the globe, which was a niche service offered when many US banks refused to engage with crypto trading firms.