Binance kept weak money-laundering checks even as it promised tougher compliance | Hacker News Reader

Binance kept weak money-laundering checks even as it promised tougher compliance

reuters.com

160 points2OEH8eoCRo099 comments

> Binance said documents reviewed by Reuters were “partial and do not accurately reflect the full picture

I believe that, having worked with many lawyers over a variety of crypto projects over the last half decade most of the information is with different attorneys under attorney client privilege.

They know the law better than the public sector agencies do, spending months on a rationale from a variety of case law, journals, and less binding private opinions from the same regulators. and law firms may even accept liability on behalf of their client.

Even if its not “better”, as it is inconvenient for a regulator to disagree with you at any point, it is more expensive for a regulator by orders of magnitude for two reasons:

1) The regulator doesnt know how you’re structured or what legal rationale you are relying on. They dont know what exemption or compliance you are relying on. And there are many possibilities, sometimes infinite permutations.

2) They dont get to know even because of the attorney client privilege.

They cant assume you’re doing something wrong just because Reuters decided to use some negative adjectives for things likely currently legal.

Regulators are stuck with a high expense to most likely just embarrass themselves. Its better for them to go after lower hanging fruit.

Binance is accurate in that legislatures have not made a specific encompassing law. So regulators are flying blind. Legislatures also dont know what to pass since nobody will talk to them either, the firms most effected dont want anything on the piblic record because then an overzealous regulator will know about any weakness in the company’s regulatory strategy. Legislatures are also at a place where they could neuter the regulator agency, its not a specific anti-crypto future that people think “governments” are heading towards.

So literally everyone is flying blind, while the well funded fiat-interfacing crypto service has the most comprehensive view of the law because of their expensive lawyers.

> So literally everyone is flying blind, while the well funded fiat-interfacing crypto service has the most comprehensive view of the law because of their expensive lawyers.

This is literally the case with anything. Well funded tech monopolies have the most comprehensive view on...everything.

Yep. A lot of crypto detractors levy standards at crypto things that they seem to not know apply to things they respect or ignore.

So its just worthwhile spelling out whats happening and how its happening. Many people don't know that the crypto space is and has been so comprehensive already behind the scenes, since its more of an entertainment sector in front of the scenes, so people underestimate it.

The solution to that conundrum is you tell the lawyer "come talk with us". It's Administrative Law. It is what the regulator says it is. And no, an attorney cannot with old that information. That is what they call, "bad faith".

The tough part is actually sitting down, combing through the paperwork, and coming up with questions. Regulation is as much a descriptive as a prescriptive exercise.

Or don't bother at all. Binance made it to $90 billion in liquid-enough assets before this Reuters article over the course of 4 years.

This is without any revenue multiple applied or anything. The hit pieces are coming out because of admissions that Binance is considering an IPO and now people are surprised at how big it already is, while being effectively stateless. Binance has to fix the statelessness to provide confidence to stock investors. Other people are open to hampering their ability to find anywhere comfortable.

Binance is going to zero, the bubble has already started to burst and after it’s all over the truth will come out. They will never IPO because an IPO would involve conforming with securities law.

An entity can conform with securities laws for listing, which are mostly just accounting practices, while being in violation of other securities laws around the assets they hold and trade do not.

They cannot survive that level of scrutiny.

So guilty whenever the bureaucrat wants you to be?

Is this an actual stance that you hold?

The flip side of that it is: Allowable as long as no specific law spells out it is illegal. That's great for civil liberties of individuals. In finance, that's how crashes happen.

In finance, crashes happen because large numbers of people are putting their money into something without realizing that it's overvalued, and then they all find out at once.

The 2008 housing crisis was caused by banks buying insurance against borrowers defaulting. They used a bunch of banking words to make it sound complicated, but that was it. Just nobody thought about what it would do to the bank's incentives. Not the insurance companies, not the regulators.

So the banks lent money to a bunch of uncreditworthy people because they were insured, and inflated a housing bubble. Then when they all started to default, the bubble popped and bankrupted the insurance companies and therefore the banks.

The Savings and Loan Crisis in the 1980s was caused by the government propping up failed banks. The banks were then insured by the government (sound familiar?) so they took on a bunch of bad risks because if they paid off they made money and if they didn't it was the taxpayer on the line.

The theme here isn't banks doing creative accounting, it's moral hazard. They do just what you'd expect them to do if you insulate them from risk.

But importantly, none of this has anything to do with KYC/AML regulations, which aren't supposed to prevent financial crashes. They're high cost low benefit regulations that don't even do the thing they're intended to do: https://www.icij.org/investigations/fincen-files/

That's pretty much what a regulator does. Using the pejorative "bureaucrat" doesn't change that.

Regardless of what you call the person, doesn’t that seem a bit on the “rule of man” side (as opposed to the “rule of law” side) ?

I recognize that in the end decisions need to be made by people, but, under the principle of the rule of law, it should be feasible to understand the laws relating to your likely activities to a sufficient degree that one can determine what things won’t get one in legal trouble? (Of course, some things might be somewhat ambiguous, but, still.), right?

That is Administrative Law sadly. One of the saddest realizations of my life. Congress ceded fine-grained lawmaking to executive agencies established under statute for that purpose. It's just how it works.

Regulators won't ruin your day during onboarding, unless you're not even trying to be legit. Even then, they'll evaluate where you are at, and help you develop a compliance roadmap consistent with best practices.

Now if you fail to meet that or drag your feet...

This is... how Administrative Law works.

Don't shoot the messenger. I don't like it, but it is what it is. If it's any comfort, I don't find it comforting or desirable at all. Unfortunately, this is just the way Congress settled on doing things at the Federal level.

The funny thing is that regulators pull the same stunts with lawyers. Not finance/crypto, but I’m battling a regulator to release the legal opinion they’re (suspectedly) using to deny a service that the law clearly (to me) requires them to provide.

Yeah thats true I’ve seen that periodically too, in non finance/crypto contexts.

Wasn’t enough to fool Singapore’s MAS, who are likely the most capable regulator in this space.

It’s no surprise the vast majority of companies who applied for a license ended up silently withdrawing or having it rejected, even Binance.sg who have significant investment from Temasek (state linked investment arm)

Re #1: in theory, could we require companies like Binance to disclose how they are structured, and to declare a priori the legal rationale for why this is allowed? The idea here is that they would be bound to that particular legal theory in the event of regulatory investigations.

Or does this run afoul of some constitutional issues?

Its more of a business decision of the government, as well as risking the need for a complete overhaul of contract law.

Jurisdictions are in competition with each other. While the business can always form a local subsidiary shielded from the rest while pooling most processes. Binance already has Binance US, for example.

A lot of people dont like the idea of governments having overlapping conditions of a business, but it is something you can rely on.

They can shoot themselves in the foot all they want.

A no action letter from the SEC, for example, does limit a business to a specific unchanging structure and circumstances. But people arent going to risk going to the regulator to find out. I get that you are thinking of a requirement in advance. Bye bye businesses if you try that.

That would simply be ridiculous.

It’s the governments job to explain why something you are doing is illegal, not the other way around.

Suppose the company needs to get regulators to approve something. Couldn't they just say "no" to anything new that they don't understand?

All I know about it is what I learn from reading Matt Levine, but it's my understanding that for most finance companies, cooperation with regulators is important.

Binance has Binance US a local subsidiary for that purpose.

Everywhere else, it depends, as usual on any legal matter. I could talk all day about what happened in Malta. Every jurisdiction is different, and at that point in time.

I'll bite, what happened in Malta?

Summary: Microstates within new monetary unions have higher masters. Eurozone’s masters are in Brussels and Frankfurt who are both skeptical of Malta and also into heavy regulation and not into crypto. So Malta would be down for whatever but they also have to try remain in the graces of their masters. Malta is also not a competent jurisdiction, its a pirate den with sovereignty, so whenever they bandwagon jump on an industry they try to attract they mess up the regulations because they dont know what a comprehensive approach looks like. Their crypto regulations fell into a mixture of incompetence and appeasing brussels.

Other microstates like Leichtenstein, for example, are not Eurozone and also competent. They are in a monetary union with Switzerland who is also very crypto friendly at all public sector levels except the incumbent banking private sector. So Malta dropped the crystal ball and is in a less geopolitical circumstance to repair it.

"For a corporation of its scale, Binance discloses little public information. It says it does not have a headquarters and does not identify which entity controls its main exchange..."

I don't see the point of giving them the benefit of the doubt. Their outfit is clearly designed to avoid the kind of regulation that would discourage money laundering.

If you believe regulators are out to get you, this is rational behavior regardless of whether you are breaking the law or not.

This seems like a thought process that can easily rationalize any kind of illegal or immoral activity as "rational," given what you can get away with.

Seems that if society at large thinks this way then we are all much worse off.

Is not having a corporate headquarters illegal or immoral?

KYC is already hard to deal with, I dread the day I mistakenly log into my Binance account from a US exit point, because my account could just get frozen.

I prefer they keep being like this instead of things being even harder.

And them doing everything to avoid governments getting data from their customers would suggest me that their loyalty lies with their customers first, and governments last, as it should be.

Ah, the wonders of FATCA.

As long as they don’t suspect you of being a US person, they don’t need to take action. Which is great for all parties involved, as long as you don’t slip up.

Their loyalty is to making as much money as possible. It’s simply greed.

My loyalty is to making oversight by regulators as difficult as possible. And if Binance makes a lot of money doing that in the process, I am happy to see it.

That's a weird goal in itself.

It's no weirder than wanting to tattle on Binance to people who demonstrably do not have my best interest at heart.

I mean yeah, it's finance

Yes, Binance are greedy capitalists unlike any other stock companies. Oh wait...

I see this so often with many FinTechs.

First thing that FinTechs fail to address early is risk/fraud. They learn pretty quickly to address this.

Second area regulatory and compliance (ie KYC/AML).

Binance.us is a joke (as a “free” US citizen, I am of course not permitted [ed: by my government’s regs] to use the original site.)

I recently tried to change my email address. I failed. It’s a customer support interaction, because who would want to change their email address, right?

So they sent me back through their KYC verification Whig was unable to accommodate the fact that I have moved to another state since I initially registered and have a different driver’s license (because who would move, and who would get a new drivers license, amiright?)

Actually there’s plenty of international financial organizations that just don’t want to deal with US persons because of FATCA.

Try opening something more than a most basic bank account in any European country. There’s a fair chance that they simply won’t want you as a customer.

This is the same for most exchanges Ive used its really a hassle to change email..

Kucoin with a VPN is the way to go until everything moves to decentralized exchanges and we don’t have to deal with this nonsense anymore.

Same thing happened to SWIM when doing the binance.com one.

So called anti-money laundering laws, which are properly described as warrantless financial surveillance laws, are an absolute travesty and violate the core principles of liberal democratic societies.

Historically, the state being required to obtain a warrant before conducting a search was seen as striking the right balance between the need to maintain reasonable checks on the power of the state, and the need to investigate crime. And in one summit, of the G7 in 1989, all of that was cast aside, as the FATF, and its global financial mass-surveillance mission, were instituted.

What's important to know about AML laws is that they are redundant; any incident of actual money laundering involves some underlying crime that generated the illicit revenue. To prove money laundering occurred, you need to prove that the underlying crime occurred.

In other words, any actual money laundering that is proven would land the party involved in prison, for the underlying crime.

But existing 'AML' laws do not require proving money laundering occurred. They only require proving that a person did not comply with the AML-related disclosure requirements, i.e. not complying with warrantless mass-surveillance. The crime being prosecuted is not surrendering privacy.

Ron Pol has written a paper that makes the case for AML laws being the least effective policy in history, and I strongly recommend any one who cares about maintaining a free society to read it:

https://www.tandfonline.com/doi/full/10.1080/25741292.2020.1...

Of course they did. Crypto and NFTs are some of the easiest ways to money launder now of days. This represents some of their biggest clientele.

Terrorists love crypto.

> Terrorists love crypto.

Please keep such low-effort hyperbole off HN. It's just so unnecessary and contributes so little.

[some group you dislike uses thing everyone has access to] is just not a useful statement.

What do we do now, ban all crypto currencies to force 'Terrorists' back into using cash?

Has terrorism gone up since cryptocurrencies came around? Did Bin Laden have access to crypto?

I'm not even a big fan of cryptocurrencies and think that the environmental impact of BTC is a heck of a lot worse than 'terrorists' possibly, potentially using it.

But I just don't understand what you were trying to achieve by throwing such an incendiary statement into the discussion with so little evidence to back it up.

I would imagine that OPs could be thinking of the recent story (https://www.bbc.co.uk/news/business-59990477) about North Korean stealing $400m of crypto.

It seems reasonable to suggest that groups who want to avoid scrutiny by various authorities would make use of a system which isn't covered well by standard regulators who are under the control of those authorities.

Additionally there are a number of crypto currencies who provide anonymous transactions (e.g. Monero) which is obviously going to attract people who want to move money covertly.

Terrorists would be one example of such groups of people.

A more accurate view would be that crypto cannot conform to laws that prevent terrorists from making transactions, so it's a good method for terrorists to transfer funds

Or paying cash in germany for a house.

Mafias love this

There are laws about large sums of money.

tiert mit der Frage, warum der Immobilienkauf in bar nicht endlich verboten wird, antwortete Scholz: Bargeld sei eben beliebt. Und zwar zu Recht. Es reiche, dass Immobilienmakler verdächtige Bargeldtransaktionen bei der zuständigen Financial Intelligence Unit (FIU) melden müssten. Dabei weiß auch der Minister: Dort stapeln sich 46 000 unbearbeitete Geldwäscheanzeigen. Die Prüfung einer Verdachtsmeldung kann Monate dauern. Bis dahin ist das verdächtige Geld längst verschwunden.

That's a different matter. I don't think the money actually disappears, does it? In a real estate transaction, it simply changes hands. It might be harder to trace, but if there's no trace, it can be assumed illegal.

Houses leave a trail, and they can be easily seized at a later date if evidence turns up. Not saying it doesn't happen (obviously it does) but there's more to catch than with crypto currency.

This is flat wrong, Crypto is one of the hardest places to launder money. This comment betrays a lack of understanding of how it works at even the most basic level..

So in this weeks crypto.com hack the attackers appear to have moved $30m through tumblers to launder the money (https://cointelegraph.com/news/crypto-com-breach-may-be-wort...), doesn't feel like they found it that hard to do.

To put that in context laundering $30m in a country with even semi-decent Financial regs, like the (mainland) UK would take some doing. It's possible but it'd require more work than that.

Sending crypto through a mixer isn't money laundering. You still need to effectively launder it afterwards to say - buy a house from it. Mixing is just the first step to cover the tracks after committing a financial crime.

Why do you need to move it out of crypto to launder it? Laundering is concealing the source of funds to avoid it being associated with a criminal activity. You can run it through a tumbler then use the proceeds to buy an NFT, the coins used will appear to be clean.

If you're feeling fancy you could then re-sell the NFT, no need to touch fiat.

You need to provide origin of funds for purchases exceeding a few thousand bucks (depending on jurisdiction). At some point you would wanna sell the NFT to buy something from it.

I mean sure, there is the dark web, or face to face trading... If you're into that.

I'm guessing that very much depends on the jurisdiction. Those people that took $30m this week and all the previous thefts this year alone, they all had a plan for how to move that money and I've not seen many of them get caught...

According to https://blog.chainalysis.com/reports/2021-crypto-scam-revenu... - scammers took in $7.7b in 2021 alone, if they couldn't do anything with those funds, doubtful they'd go the effort of stealing them :)

Say you have controll of wallet A that's clean and never used, and wallet B that has 30M of dirty crypto.

You 1. mint a NFT with wallet A. Then 2. Sell the NFT to wallet B. You then deposit the proceeds into coinbase as its legitimate earnings on your NFT artwork.

If you want to get creative you can do multiple buy and sells between a collection of wallets to reduce suspicions.

Laundering is

* Placement

* Layering

* Integration

A mixer is layering and integration as a service

This isn't particularly true, there are a lot of details to how KYC/AML for crypt works under the hood for that escape the discussion usually and leave gaping laundering holes. Crypto has its own equivalent of trad-fi shell companies to enable laundering, and it's a bit of a miracle for the space that these details haven't surfaced yet. I'm hoping they don't until the space is much more meshed into regulated finance, such that not much can be done about it.

"in 2017 [...] Know Your Customer (KYC) technology was yet to be fully developed"

This is laughably wrong to anyone with exposure to banking or securities infrastructure.

seems like a vested interest for them to launder here, then come back and say "oops" were fixing our gaps if/when it becomes a PR storm

The article doesn't come out and say it, but what they really want is for Binance to "de-risk." This could mean any or all of the following:

- Banning users from 2nd and 3rd world countries ("high risk jurisdictions")

- Banning VPN/Tor users

- Banning users with funds associated with gambling, darknet markets, or anything the FATF complains about

- Implementing opaque procedures to "deter criminals"

    -> Holding funds hostage until adequate "source of funds" is provided

        -> Note that even if source of funds is proven they will still cut off communication in about a third of cases for no reason whatsoever

    -> Randomly requiring reverification (of course with selfies and maybe even over Zoom)

- Removing smaller coins

Good. Crypto was not meant to be regulated. Good to know that there’s a crypto exchange that won’t ask stupid questions when buying or selling crypto for fiat.

That is to say, crypto is built for fraud, and shouldn't be trusted for transactions

Self-regulation in the finance industry is a joke I'd have thought everyone learned that by now. They'll do whatever they can get away with.

I'm shocked. Shocked! Well... not that shocked.

Good. KYC and AML laws are a travesty for basic individual freedom and privacy in modern times and a hypocritical joke in many contexts.

The privacy makes sense, but KYC doesn't restrict your freedoms. Just adds responsibilities

General question: are crypto exchanges not regulated the same way banks are regulated (in the US)?

Crypto exchanges are typically regulated as money transmitters (like PayPal, for instance), usually by state banking regulators. In New York a special "bitlicense" is required, which is issued by NY state banking regulators.

Among the differences between being a money transmitter and a being a bank include an obligation that 100% of client obligations be backed by cash-equivalent assets or surety bonds (as opposed to <20% fractional reserve required of banks). Money transmitters are not insured by the FDIC, so there is no federal-level prudential supervision. State regulation varies between completely hands-off (Montana, for instance, does not require licensing to operate in the state) and very strict (for instance in the case of New York).

That being said, with regards to anti-money laundering, all money transmitters are overseen at the federal level by FinCEN, and are subject to the Bank Secrecy Act with regards to all KYC and anti-money laundering requirements. Regardless as to the states in which they operate, they must register with FinCEN, and like banks must take proactive steps to detect and report suspicious activity to that entity.

In other words, there is no way for Binance to operate legally in the United States without being subject to the same strict anti-money-laundering rules and requirements that banks are subjected to.

No. They fall under a variety of regulations because they sell securities, transmit money, and hold cash, but most of them are not banks yet. I think that will change soon, especially as the government equates stablecoin offerings as equivalent to banking.

Also, Binance is not regulated in the US at all. It's banned from the US.

> Also, Binance is not regulated in the US at all. It's banned from the US.

Their website suggest otherwise?

> Binance is unable to provide services to U.S. users. Binance.US (BAM Trading Services) is a US-regulated cryptocurrency trading platform. In approved states, U.S. customers can use Binance.US to buy and sell over 50 cryptocurrencies with low fees.

So it looks like Binance has a U.S. entity that is regulated.

Binance.com is banned in the US. If you are a US citizen (and KYC'd as such), you can't access their site services at all. Even if you do get in, you can't deposit / withdraw.

As a US citizen, I tried to setup an account with Binance.US when it launched and for whatever reason, their automated systems locked me out and I didn't bother trying to investigate it further.

So yea, despite what Reuters says, my personal experience is that their platform is pretty tough on compliance.

Binance.us is so much more limited and separate from Binance.com that it's easier to think of it as a seperate entity that Binance lends their name to.

Some of them are, eg. https://www.finextra.com/newsarticle/36582/crypto-exchange-k...

Nope. They don't have a banking license so they are not banks so they are not regulated like banks.

(Whether they should be regulated like banks is a different question, and one that is still being debated)

While they're not regulated like a bank, nor should they be, since they're not a bank... They are regulated, such as by FinCEN [0] which imposes AML and KYC measures on all fintech (including crypto) companies operating within the United states. Additionally, since crypto is classified as securities in the U.S., I believe they are regulated by the SEC as well.

[0]: https://www.fincen.gov

United States does not have regulation for cryptocurrencies. They also do not have classification for cryptocurrencies.

How do binance wallets work? Does everybody's coins go into a large shared wallet?

Correct. It is called a hot wallet.

https://ethereum.stackexchange.com/questions/84401/how-to-bu...

Would that essentially act as a tumbler?

Ironically, yes. Casino sites can also do the same thing (although obviously if you deposit 1.215179 BTC from one address and then withdraw the exact same amount to a separate address it's probably still going to be possible to link the two addresses) This is why some blockchain analysis companies increase the risk score of coins from exchanges with effectively no KYC like Huobi or Kucoin.

What's the irony?

Not really binance would have a registry, and most likely comply with law enforcement.

I’ve gone through corp compliance checks with Binance and through the same checks with various traditional payment processors. Requirements weren’t particularly different.

If anything, Binance was more stringent than some high risk payment processors I’ve dealt with.

Looking at the list of "transgressions", none of them crosses the line of being illegal. They are concerns about lax standards and a request from the police (which as i understand they fulfilled). Banks in europe do worse stuff than this

We really should just get right of AML laws.

s/right/rid

it’s not like AML even works. https://www.icij.org/investigations/fincen-files/

SEC pls close this bucket shop.

Binance, remember, is the company behind Tether. Binance issues insane amounts of Tether, backed by almost nothing. This only works as long as long as there is a net inflow of USD to Binance. If that ever stops, the bottom will fall out.[1]

[1] https://www.coalexander.com/post/the-tether-binance-axis-and...

The company behind Tether is Bitfinex. Tether was founded 2014, Binance 2017. This blog post has multiple of its facts wrong or as speculation, while it is still a fact that Tether is super shady.

Right, Bitfinex, not Binance, is behind Tether.

Tether is a lot like Madoff's fund. Everything is just great, until there's a net outflow, which happens during a recession. Then the house of cards collapses.

Which facts does the blog post get wrong?

1.) Tether and Binance have nothing to do with each other. 2.) The author correlates that Tether's market cap rose only because of Binance futures. Binance was a contributing factor, but it wasn't the only one. Tether was/is available on all exchanges as default stablecoin. All big exchages in 2018/19/20 used to only have USDT and still largely have. Recently more have startd popping up like USDC, BUSD, Pax, GUSD etc. 3.) Though, I might be wrong here.

1) The blog post doesn't assert that they do.

The rest is speculation- which is fine, it's a blog post.

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