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The founder of Binance is set to be out of prison by the end of summer, after receiving a light-touch sentence that has stunned compliance professionals worldwide.
Changpeng Zhao, the former CEO of Binance, has been sentenced to four months in a US prison for one count of violating the Bank Secrecy Act.
Zhao, 47, whose net worth is estimated to be between $33bn and $43bn, must also pay a $50m fine.
Judge Richard Jones, passing the sentence, confirmed the court’s recommendation that Zhao be imprisoned at Federal Detention Center, SeaTac, about 25km (16 miles) outside Seattle.
Between 2017 and 2022, Zhao transformed Binance into a major financial institution that processed trillions of dollars in transactions for US users. But during that time, Binance had almost no anti-money laundering (AML) or know your customer (KYC) controls.
Binance did not register with the Treasury’s Financial Crimes Enforcement Network (FinCEN) as a money service business (MSB) and did not file a single suspicious activity report (SAR).
As noted by the Treasury, Binance became a hub for terrorist financing, sanctions evasion and for laundering the proceeds of scams, ransomware, child sexual abuse material, darknet markets, illegal drugs and other illicit activity.
From 2017 to 2022, the Treasury also found that Binance facilitated more than 1.67m transactions between US persons and sanctioned jurisdictions or users, including almost $600m in transactions between the US and Iran.
Industry reaction
The short sentence has surprised many followers of the case, particularly in light of a sentencing memorandum submitted by the Department of Justice (DOJ) last week, which called for Zhao to spend three years in prison.
Three years would have been double the sentencing guideline for Zhao’s one charge, but the DOJ argued that a longer sentence was justified due to Zhao’s knowledge of US law and his “wilful” violation of it.
Communications obtained by the DOJ showed Zhao telling colleagues that Binance “would not have had any US revenue” if it had complied with US law.
The DOJ also drew attention to the huge volumes of illicit finance that changed hands through Binance, and to the fact that these funds were closely tied to terrorism, serious organised crime and hostile state actors.
“Given this context and the significant harm caused by Zhao’s misconduct, any custodial sentence of less than three years would fail to reflect the gravity of his offense,” said the DOJ.
Compliance and AML professionals interviewed by Vixio said they were stunned by the leniency of Zhao’s sentence.
“It's a joke and it makes no sense to all the people who try hard to comply with the laws,” said Elena Salaverria, regional compliance manager for APAC at MoneyGram International.
Luke Raven, senior partner for financial crime compliance at Bank of Queensland, described the sentence as provoking a mixture of “irritation” and “depression” among compliance professionals.
“This sends an awful message to the fintech community that the difficult and important task of complying with laws is really not important,” he said. “Today, many in compliance will be asking themselves: why even bother?”
Dennis Kelleher, CEO of US financial reform group Better Markets, said the message sent by Zhao’s sentence is that “crime pays”.
“This is an egregious miscarriage of justice and sends exactly the wrong message to criminals worldwide,” he said.
“As Binance’s founder, owner and leader, Zhao willfully, knowingly and intentionally designed and ran Binance to be a crypto money laundering superstore for the most despicable global criminals.”
Kelleher noted that Zhao’s case was destined to be a “slap on the wrist” when he was charged not with money laundering but with “failure to maintain an effective AML program”.
“Binance didn’t inadvertently or negligently fail to monitor and stop money laundering: it was in the money laundering business,” he said.
In November last year, when the DOJ announced its plea deal with Zhao, the Treasury said that between 2017 and 2022, Binance should have filed “well over” 100,000 SARs.
SBF contrast
The contrast between Zhao’s sentence and that of Sam Bankman-Fried, co-founder and former CEO of FTX, is stark. Although Bankman-Fried was charged with a much more serious list of crimes, he could spend the next 25 years behind bars if he serves his entire sentence.
Bankman-Fried insisted on pleading not guilty, despite the fact that his FTX co-defendants all pleaded guilty and agreed to testify against their former boss.
Elizabeth Lopatto, a reporter at The Verge, was in Seattle for Zhao’s sentencing hearing earlier this week.
She too remarked on Zhao’s “pittance”-sized fine and his light custodial sentence, suggesting that Zhao may have secured these by trading valuable information with the DOJ.
“During his hearing, I was struck by repeated references to a sealed matter that was a mitigating factor on sentencing and significant emphasis on the word ‘cooperation’,” she said.
“The fact that Zhao managed to make a bargain where he copped to one charge — with a short sentence! — seems significant. It suggests he had some leverage.”
Over the coming months, as the US continues its crackdown against non-compliant crypto firms, we may learn what that leverage was.
