Inmate CZ & Binance Faces Alleged Money Laundering Lawsuit
Binance and its former CEO Changpeng Zhao (CZ) are the targets of a new class action lawsuit filed by three crypto investors who claim they were unable to recover stolen assets due to the exchange's failure to prevent money laundering.
The lawsuit, filed on 16 August in the United States (US) District Court for the Western District of Washington, Seattle, alleges that the plaintiffs' cryptocurrency was stolen and then sent to Binance by the thieves to obscure the connection between the ledger and their digital assets, making them untraceable.
The plaintiffs, who were former exchange users, Philip Martin, Natalie Tang, and Yatin Khanna, argue that the permanent record of transactions on the blockchain should make crypto permanently and accurately traceable.
The class action suit alleges:
"Therefore, without a place to launder crypto, such as Binance.com, if a bad actor steals someone else's crypto, there is a risk the authorities would eventually track them down by retracing their steps on the blockchain.”
The complaint underscores that Binance's willful disregard for important laws and regulations turned it into a hub for criminals, terrorists, and other bad actors, making it a preferred destination for illicit activities.
It describes Binance as the "Crypto-Wash Empire" and alleges that it played an essential role in the money laundering process, violating the Racketeer Influenced and Corrupt Organisations (RICO) Act.
The plaintiffs contend that Binance's rapid ascent to become the world's largest crypto exchange was fuelled by its deliberate evasion of US regulations, which would have otherwise limited its access to the American market.
They also allege that Zhao, who founded Binance in 2017, prioritised profits over legal compliance, creating an environment where US users were encouraged to bypass the platform's minimal compliance checks.
The plaintiffs claim that Binance's failure to implement robust AML (Anti-Money Laundering) and Know Your Customer protocols turned the exchange into a hub for laundering cryptocurrency, often stolen through hacks and other illicit activities.
Binance in a Tough Spot if Lawsuit Goes to Trial
Bill Hughes, senior counsel and director of global regulatory matters at Ethereum development firm Consensys, expressed scepticism about the new class action lawsuit against Binance.
In a 20 August post, Hughes described the suit as a "natural, predictable follow-on civil action" that aims to capitalise on government prosecutions and enforcement actions.
He noted that the plaintiffs are well-funded, with reputable lawyers, but also acknowledged that the lawsuit places Binance in a "tough position" and could have substantial implications for the crypto industry if it proceeds to trial.
He noted:
"If this case goes far into discovery and even to dispositive pre-trial motions, then the efficacy of blockchain analytics itself and on-chain asset recovery will be on trial."
Despite the plaintiffs' resources, Hughes remains doubtful about whether the suit will be able to substantiate its allegations.
Binance Boasts Over $2 Billion in Potential Fraud Losses Prevented Since January 2024
Despite the looming lawsuit, Binance, one of the largest crypto exchanges by trading volume, has revealed that it has prevented the potential loss of $2.4 billion in users' funds this year.
From January to July, the exchange halted the withdrawal of funds suspected of being related to crypto scams and frauds, protecting over 1.2 million users globally.
The crypto trading platform explained that it took an active approach to detect and stop suspected malicious actors, ensuring the security of its customers and their assets.
To achieve this, Binance employs a "powerful risk engine" that utilises a combination of Artificial Intelligence (AI) and manual reviews to monitor transactions in real-time.
This system reportedly allows the detection of suspicious transactions across all of Binance's verticals, enabling rapid action.
The exchange also detailed the flagging process, noting that irregular transactions are flagged at the crypto withdrawal stage.
This is where "criminals attempt to funnel potential victims' funds away from Binance's security and risk control systems."
According to the report, over $1.1 billion in withdrawals linked to suspected crypto scams were prevented this year, making up approximately 45% of the total prevented losses.
Rohit Wad, Chief Technology Officer at Binance, emphasized the exchange's efforts to build and maintain "industry-leading technological tools and processes that enable us to protect our users and their assets around the clock."
Besides the risk engine, the trading platform uses various tools and measures to protect users' funds from crypto scams.
These measures are arranged across eight levels based on the severity of the risk, ensuring a balance between security and user experience.
As a result, Binance's security team recently announced it had secured millions of users' funds stolen from external parties.
By 31 July 2024, Binance had recovered or frozen over $73 million in stolen funds, surpassing the $55 million secured throughout 2023.
The exchange noted that recovered funds increased by 40% in the first seven months of this year, thanks to the different security tools and measures.
Additionally, it has successfully aided users in recovering misplaced and lost digital assets, with approximately 80% of recoveries related to external hacks, exploits, and theft.
CZ's Release Date Delayed
The latest class action lawsuit is part of a series of legal challenges faced by CZ and Binance.
In November 2023, CZ pleaded guilty to violating US money laundering laws and stepped down from his role as CEO of Binance as part of a settlement with authorities.
Binance agreed to pay $4.3 billion in fines for "civil regulatory enforcement actions."
Additionally, he was personally fined $50 million for his role in the company's violations, which included conducting transactions with users in sanctioned jurisdictions such as Iran and North Korea.
In April, a federal judge sentenced CZ to four months in prison, a term shorter than the three years federal prosecutors had sought.
The Securities and Exchange Commission (SEC) also filed a suit against Binance in June 2023, alleging that the exchange and CZ were misleading about its market surveillance controls and artificially inflating trading volumes.
On 28 June, a court allowed most of the case to proceed.
Initially, it was speculated that CZ's release date would be 30 August, but contrary to earlier assumptions, he will not be leaving the Federal Correctional Institution Lompoc II on that date.
CZ is scheduled for release on 29 September from the low-security facility located approximately three hours north of Los Angeles.
This date extends his stay beyond what some of his supporters on X had anticipated.
Many had mistakenly believed CZ would complete his sentence by the end of August, based on the assumption that his incarceration began immediately after his sentencing.
However, due to successful negotiations by his legal team—including firms like Quinn Emanuel Urquhart & Sullivan, Davis Wright Tremaine, and Latham & Watkins—the start of his prison term was delayed, which in turn pushed back his release date.
A review of the prison administration database confirms that CZ is currently housed at FCI Lompoc II, with his release slated for 29 September, barring any unforeseen circumstances.
Upon release, CZ plans to re-enter the cryptocurrency industry, focusing on managing his assets and exploring passive investment opportunities.
He views this time as a transition into a new phase of his career, emphasizing the need for strict adherence to regulatory standards in the evolving landscape of digital finance.
With CZ's freedom just a little over a month away, will the new class action lawsuit potentially delay his release and how will it affect his life-after-prison plans?
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