Earlier this week, former Binance chief Changpeng Zhao (CZ) pleaded guilty in a Seattle court to a number of felony charges related to violations of the Bank Secrecy Act, failure to register as a money services business, and failure to maintain an effective anti-money laundering program.
As part of CZ’s plea, he has agreed to step down as the exchange’s CEO, pay a $50 million fine, and will be formally sentenced next year.
In addition, Binance itself has been ordered to pay a $4.3 billion fine, and the company’s former chief compliance officer Samuel Lim has agreed to pay $1.5 million in civil penalties to the Commodity Futures Trading Commission (CFTC). Binance will also be watched by “an independent compliance monitor.”
However, all of this could seemingly have been avoided if only Binance and its people had adhered to CZ’s Principles, the former chief’s well-documented recipe for business success.
CZ published his ‘Principles’ in October last year, describing them as “how I do/view things.” As such, the document takes in numerous business-related areas such as decision-making, hiring, leadership style, and communication.
However, there are a number of points that are directly contradicted by Binance and CZ’s conduct over the past few years.
For example, according to CZ’s indictment, he “wilfully violated the Bank Secrecy Act (BSA) by causing Binance to fail to implement an effective anti-money-laundering (AML) program.” This, it says, includes failing to verify know-your-customer information, failing to monitor transactions, and failing to file suspicious activity reports.
Apparenty, CZ okayed this because he felt that asking clients to provide too much information would put them off using Binance and stifle growth.
On the face of it, this sounds more than a little negligent, but it sounds even worse when you consider that CZ’s own principles state very clearly that the business should always behave in an ethical manner (otherwise it “comes back to bite you”), always do the right thing, not the easiest thing, and always, where possible, gather sufficient information.
Three big red crosses there.
CZ apparently doesn’t think ISIS are ‘toxic’
The indictment also states that Binance knew that certain users were involved in illegal activity but allowed them to keep using the platform because they were so-called ‘VIPs.’ It even went as far as to advise them against transferring funds from sources identified as “high risk.”
This would appear to fly directly in the face of CZ’s own Principle 1.3: Avoid bad relationships. “There are unethical/toxic people,” he wrote. “People who don’t share your values or mission. And people that waste a lot of your time. Let them go. Move them out of your life.”
After all, “unethical” and “toxic” would be pretty tame words to use when describing organizations such as Hamas, for example. However, Lim himself acknowledged way back in 2019 that the group was using Binance to move funds, claiming that “terrorists normally sent small sums.”
Other terror groups that are known to have used the platform include Al Qaeda, Palestinian Islamic Jihad, and ISIS.
CZ also claims in his principles that it’s important to ask “Do I have the expertise?” He writes, “If it is something I know well, or have background information, things like tech, product, then I can make decisions more quickly.
“In areas I don’t know well, like marketing, I would either have to delegate or involve other experts or make the decisions more carefully.”
However, as detailed in the indictment, when an unnamed Binance employee repeatedly informed CZ — presumably from a position of some authority — that it was essential to “block trades by users who were logged in using an IP address associated with a comprehensively sanctioned jurisdiction,” they were ignored.
Finally, we come to Principle 1.7 titled simply ‘Own it.’ This principle states clearly that “If you are going to do something, own it… Be responsible for the outcome, and be accountable for results, success or failures.”
Whether or not a $50 million fine — given that at the height of the last bull market, he’d reportedly amassed a personal fortune somewhere in the region of $96 billion — and a potential 18-month prison sentence will be seen by many as true accountability remains to be seen. Particularly given that Sam Bankman-Fried, another disgraced exchange chief, could reportedly be facing up to 100 years behind bars.
However, whatever sentence is eventually handed down to CZ, he’ll no doubt be wishing he’d heeded his own words just a little more closely.