FTC v. Binance: Binance Allegedly Directed Its VIP Customers to Evade Compliance

FTC v. Binance Court Filing, retrieved on March 27, 2023, is part of . You can jump to any part in this filing . This is part 17 of 31. HackerNoon’s Legal PDF Series here V. FACTS I. Binance Has Directed Its VIP Customers to Evade Compliance Controls, Including Through Submission of “New” KYC Documents 123. In addition to instructing retail customers located in the United States to use VPNs to avoid IP address-based compliance controls, Binance has also created special policies and procedures to help its VIP customers evade Binance’s compliance controls so Binance could continue to access and derive profits from U.S. customers. Binance designed these special policies and procedures to help VIP customers evade both IP address-based compliance controls and KYC documentation-based compliance controls. 124. In February 2019, Lim and Zhao met in person to discuss how to address the regulatory risk stemming from Binance’s U.S. customers that access Binance via API. These customers are generally institutional market participants and include VIPs. In advance of their meeting, Lim sent Zhao a numbered list of “Compliance parameters,” including that “US API users (identified through IP) will have 2 options. They can remain on main exchange or move over to US exchange,” while “US API users (identified through KYC) have to move over to US exchange, they don’t have a choice. We will notify them through Email.” 125. Right after meeting with Lim, Zhao sent the compliance parameters to other senior managers, one of whom replied to Zhao that “[US users, with US, non international KYC] is [where] we will get nailed.” The senior manager asked Zhao if Binance had to “enforce” the contemplated block of US API users identified through KYC “in the matching engine? That’s the only way to guarantee this doesn’t break. [It] is not a hard thing to enforce in the matching engine.” Zhao replied: “let’s worry about enforcement in a later stage, think we may have to do it by users.” 126. On June 13, 2019, Binance released a press release that “announced its partnership with BAM Trading Services Inc. to begin preparation to launch trading services for users in the United States.” While outwardly preparing for the launch of Binance.US, internally, Zhao, Lim, and other key Binance personnel remained focused on retaining U.S. VIP customers, and the liquidity and revenue they supplied, on Binance. 127. In and around June 2019, Zhao, Lim, and other key Binance personnel engaged in a series of strategy sessions concerning the retention of U.S. VIPs on the Binance platform. One method discussed was to instruct U.S. VIP customers to submit “new” KYC documentation in connection with a “new” account. This approach would allow VIP customers to continue to trade on Binance and maintain their preferential VIP status and benefits that resulted from their historical trading activity on Binance. During one meeting that Binance recorded, a senior employee proposed that Binance instruct U.S. customers to submit “new” KYC documentation over social media—but Lim corrected the employee and mandated that such instructions should only occur in secret. 128. Binance’s plan to instruct U.S. VIP customers to submit “new” KYC documentation was devised by Zhao. During a June 24, 2019 meeting with senior management, Zhao stated: “We do need to let users know that they can change their KYC on Binance.com and continue to use it. But the message, the message needs to be finessed very carefully because whatever we send will be public. We cannot be held accountable for it.” In a meeting the next day, a senior VIP team member and Zhao engaged in the following colloquy: VIP team member: We don’t tell them explicitly because that’s marketing. But they [referring to U.S. VIP customers] understand . . . they know to send [their digital assets] the blockchain, then that’s their own control. And then so they send it to themselves, but we just help them expedite. As we speed up the account of the corporate account of the BVI or Cayman entity. Zhao: Okay, so is this them creating a new account, but we talked about having them change KYC has that ever been done? . . . . VIP team member: We quietly mentioned to them that, you know, US, you know, it could be an issue and you know, if they have any offshore entities, maybe they should open another one as well for their offshore entities. That’s how, that’s how we, that’s how we’ve been telling them. We haven’t really sent anything blasting because that’s, that’s sensitive. That’s marketing. I mean, [a U.S.-based compliance consultant] can comment on that. 129. Binance personnel began assisting U.S. VIP customers in creating “new” accounts using “new” KYC documentation as early as June 2019, and reported directly to Zhao on their efforts. For example, in a Binance group chat dated June 12, 2019, a Binance employee directed the following message to “@czhao,” which is a handle used by Zhao: Today our VIP team talked with three VIP8 users, we didn’t talk too much details and they all satisfied that we can help them onboarding their new non-US corporate accounts. That’s a good start, we’ll contact more VIPs tmr. Zhao responded in the same chat: “cool.” 130. At some point before October 2020, Binance formalized its processes for instructing U.S. VIP customers on the best methods to evade Binance’s compliance controls in a corporate policy titled “VIP Handling.” Zhao contributed ideas that were incorporated into the VIP Handling policy. Pursuant to the VIP Handling policy, once a customer service representative “hands the affected user over to VIP,” the VIP team would “[m]ake sure the user has completed his/her new account creation with no U.S. documents allowed.” U.S. VIP customers often followed these instructions by submitting “new” KYC documentation associated with a shell company incorporated in a jurisdiction other than the United States, such as the British Virgin Islands, to act as the nominee for the “new” account. 131. Acting pursuant to the VIP Handling policy, Binance’s VIP team would then “coordinate the transfer” of the VIP customer’s “Referral Bonuses, VIP level, Withdrawal Limits etc.” to the “new” account from the VIP customer’s pre-existing account. Thus, if the VIP team followed the VIP Handing policy correctly, from the customer’s perspective nothing about their trading on Binance would be disrupted—the “new” account would be the same as the old account with the exception of the name of the accountholder. 132. Recognizing the evasive nature of the procedures and strategies memorialized in the VIP Handling policy, the document required Binance employees to “[m]ake sure to inform user to keep this confidential.” In line with the intent to keep any “new account creations” by U.S. VIPs a secret, Zhao instructed during his October 13, 2020 “daily call” that any communications about the “US ban” should be done over the Signal messaging application. Thereafter, Lim circulated Zhao’s directive to a senior compliance staff member in a chat, explaining: “we do all U.S. comms via signal as mandated by cz.” 133. Binance’s VIP Handling policy also established methods for Binance personnel to troubleshoot for U.S. customers that were identified as such through their IP address (as opposed to KYC documentation). For these customers, Binance instructed its personnel to “[i]nform the user that the reason why he/she cant use our www.binance.com is because his/her IP is detected as US IP. If user doesn’t get the hint, indicate that IP is the sole reason why he/she can’t use .com” [emphasis in original]. Lim flagged a passage in the VIP Handling policy for his colleagues that further explained: “We cannot teach users how to circumvent the controls. If they figure it out on their own, its fine.” 134. Displaying the ecosystem’s tone at the top, Zhao helped manage the implementation of Binance’s VIP Handling policy. On October 9, 2020, around the time Binance began sending emails to U.S. customers pursuant to the policy, Zhao had the following exchange with an employee who would ultimately become Binance’s head of institutional sales: VIP team member: Hi CZ . . . I went through list of affected API clients, it includes a number of large strategic accounts including [a Chicago-headquartered trading firm] who is currently is a top 5 client and 12% of our volume Zhao: Give them a heads up to ensure they don’t connect from a us Ip. Don’t leave anything in writing. They have non us entities. Let’s also make sure we don’t hit the biggest market makers with that email first. Do you have signal? 135. At least until August 2021, over two years after Binance updated its Terms of Use to “restrict” U.S. customers, Binance employees continued to observe customers they had previously identified as U.S. VIPs trading on the platform. In an August 14, 2021 chat, members of the VIP and Compliance teams discussed the issue: Compliance employee: We have two corporate clients . . . which were detected as US nexus (US UBOs > 50%). Considering they are big clients, our compliance team wants to further check with you if we need to talk with the clients and give them a period before going offboard. Please advise. Thank you. VIP team member 1: we’ve gone through multiple offboarding exercises how is this coming up again? VIP team member 2: I guess because they’re a big client so there were delays here and there previously . . . there are still transactions going on during the month of august hahaha scary indeed. 136. Binance’s efforts to hold itself out as “compliant” while at the same time taking steps to assist customers in submitting “new” KYC documents has continued. For example, on August 5, 2021, Binance posted an announcement to Binance.com titled “Updates to API Services” that states: To ensure a safe and fair trading environment for all users and remain compliant with the latest industry requirements, Binance is updating its API services to limit new API key creation by accounts that have only completed basic account verification. This update is effective starting 2021-08-09 03:00 (UTC). For accounts that have not completed intermediate verification, any existing API keys will be changed to “read only” after 2021-08-23 00:00 AM (UTC). Trading functions via relevant API keys will be deactivated. Users can complete intermediate verification to reset API access and resume trading functions. But internal documents confirm that Binance was still up to its old tricks as of August 5, 2021. In a presentation concerning business operations that occurred during the week of August 9 through August 15, 2021, Binance personnel noted that they had made progress “Follow[ing] up [with high] value users KYC projuect [sic].” Continue Reading Here. About HackerNoon Legal PDF Series: We bring you the most important technical and insightful public domain court case filings. This court case 1:23-cv-01887 retrieved on September 4, 2023, from is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction. docdroid.net