In its filing, the CFTC said that the crypto giant had breached eight provisions of the Commodity Exchange Act – and requested that an Illinois court place monetary costs on the exchange, as well as ban it from registering and trading in the US.
Binance has denied the CFTC's allegations. A spokesperson for the exchange told Insider on Tuesday that it has hired 650 compliance staff and spent $80 million to help with transaction monitoring, "know your customer" rules, and other compliance programs over the past two years, pointing to efforts to block US residents from trading on the exchange.
Here are seven shocking claims the CFTC made in its lawsuit against the crypto exchange:
1. Binance encouraged its US-based customers to use VPNs.
Binance was banned in the US in 2019 – but the CFTC claims that the company actively encouraged US-based crypto traders to use a VPN, or virtual private network, to obscure their IP addresses so they could use the exchange.
Binance published "A Beginner's Guide to VPNs" on its site in April 2019 – and the CFTC's complaint alleges that the crypto exchange prodded users by reminding them that the mechanism can "unlock sites that are restricted in your country".
Internal conversations obtained by the CFTC appeared to show Binance executives telling subordinates to encourage US traders to use VPNs to obscure their IP address.
"They can use VPN but we are not supposed to tell them that... it cannot come from us," the exchange's compliance chief Lim told another employee in July 2019.
2. Staff acknowledged that compliance efforts were merely "for show".
Binance has regularly highlighted its efforts to comply with US regulations when talking with the press, including an $80 million splurge to help with transaction monitoring and KYC rules and embarking on a hiring spree that saw it add 650 compliance personnel.
But another conversation between Lim and Binance's staff obtained by the CFTC appears to show the head of the exchange's compliance department acknowledging all those efforts were merely "for show".
"As Lim—at the time Binance's CCO—recognized in an October 2020 chat with other Binance compliance personnel, Binance's compliance environment has amounted to "email sending and no action . . . for media pickup . . . I guess you can say its fo sho"," the government agency said in its complaint, citing messages sent by Lim.
3. Binance's head of anti-money laundering wrote fake reports for a fake board of directors.
Partner company Paxos, which issued the Binance-branded stablecoin BUSD until last month, asked Binance to undergo a compliance report in October 2020, according to the CFTC's complaint – and that required the exchange to submit an anti-money laundering report to its board of directors.
Binance boss CZ "answers to no one but himself", so CCO Lim instead asked the crypto firm's money laundering reporting officer to write a fake report for a fake board of directors, the CFTC said.
It's fair to question how that report ever made it past a compliance auditor – but messages seen by the CFTC showed Lim acknowledging that Binance deliberately looked for a firm that would "just do a half assed individual sub audit" to "buy [Binance] more time."
4. Employees knew that the exchange was facilitating transactions for criminals.
In December, Reuters reported that the US Justice Department has been investigating Binance since 2018 for possibly laundering money, while separate investigations by the publication found it had processed over $2 billion for criminals and nearly $8 billion for Iranian firms seeking to avoid US sanctions.
Lim and other Binance personnel appear to have known the platform was being used for criminal activities and turned a blind eye, according to the CFTC's complaint.
In February 2019, Lim appears to have received information regarding transactions made by Hamas, a Palestinian group that the US defines as a terrorist organization, according to the CFTC complaint. He then proceeded to explain to a colleague that terrorists tend to send "small sums" because "large sums constitute money laundering."
"Can barely buy an AK47 with 600 bucks," the colleague joked in response, according to CFTC.
In February 2020, Lim said in a chat that he knew certain Binance customers from Russia were "here for crime" – and the exchange's previously-mentioned money laundering specialist replied: "We see the bad, but we close 2 eyes."
5. CZ and other Binance staff used Signal and auto-deleted their messages.
The CFTC also said that many of Binance's staff – including its CEO CZ – use the encrypted messaging app Signal to communicate with each other, as well as customers and other business partners.
Signal's disappearing messages feature allows users to turn on an auto-delete function that'll wipe all their messages after a certain period of time – and the CFTC has alleged that CZ and other Binance executives used this function to hide their communications, despite requests not to do so from the regulator.
"Zhao and others acting on behalf of Binance have used Signal - with its auto-delete functionality enabled - to engage in business communications, even after Binance received document requests from the CFTC and after Binance purportedly distributed document preservation notices to its personnel," the government agency said in its lawsuit.
6. Nobody, including Binance's CSO, seems to know where the exchange is based.
Regulators have struggled to crack down on Binance in the past because it refuses to disclose where its headquarters are. The exchange was reportedly founded in China and has offices across the world, but it's always said it's an "international company" that doesn't need to be registered in one place.
Even Binance's chief strategy officer appears to have been unsure where the exchange is based, according to the CFTC.
The government agency noted that in September last year that Binance's CSO was quoted as saying "Binance is a Canadian company" – before a spokesperson quickly clarified it's actually an "international company".
"Binance is so effective at obfuscating its location and the identities of its operating companies that it has even confused its own chief strategy officer," the CFTC said.
7. CZ is so in control that he signs off on $60 furniture expenses.
The CFTC said that Binance CEO CZ has total control over his crypto empire – and that extends from not answering to a board of directors to approving budgetary decisions surrounding office furniture.
CZ "has been responsible for all major strategic decisions, business development, and management of the Binance enterprise. Zhao also involves himself in the minutiae of Binance's operations," the government agency wrote.
It noted CZ personally approved a $60 office furniture expense requested in January 2021 – a month when Binance earned over $700 million in revenue.