Last Monday, the Securities and Exchange Commission filed a 136-page complaint against Binance and its founder Changpeng Zhao, alleging the exchange had purposefully evaded U.S. oversight through improper controls, putting billions of dollars of customer funds at risk.
We allege that Zhao and Binance entities engaged in an extensive web of deception, conflicts of interest, lack of disclosure, and calculated evasion of the law, SEC Chair Gary Gensler said in an accompanying statement.
A week after the SEC complaint, and more than two months after similar charges from the Commodity Futures Trading Commission, speculation is mounting that the Department of Justice could conclude its long-simmering case against Binance and file charges any day. Unlike the two regulatory agencies, DOJ charges likely would be criminal, not civil, and focus on money laundering across a snarl of entities under the Binance umbrella.
With the SEC focusing on Zhaos control over Binance in its complaint, legal and money laundering experts say that the founders exposure to dozens of companies linked to the exchange could open him up to liability as the Department of Justice considers criminal charges.
Hes made it complex and difficult for regulators to track, said Kevin OBrien, a former assistant U.S. attorney for the Eastern District of New York and current partner at Ford OBrien Landy. If, in fact, theyre not independent companies, this feeds into the money laundering [allegation]hes creating transactions that line his own pocket.
Very little distinction
The two complaints from the SEC and CFTC, and hundreds of pages of accompanying exhibits, focused on the billions of dollars flowing between different Binance companies and accounts, many through U.S. banks including Silvergate and Signature.
Zhao sat at the front of many of these transactions through different entities he owned, including trading firms called Merit Peak and Sigma Chain, as well as a Seychelles company called Key Vision Development, which held customer deposits. The SEC also alleges that billions of U.S. dollars in customer funds were commingled in an account held by Merit Peak.
In a review of Binance entities shared with Fortune, the blockchain analytics firm Inca Digital found 40 associated with Zhao, with him serving as the founder, director, owner, or significant shareholder of many of them.
Image by Fortune
Our intelligence shows that there is very little distinction between Binance and Changpeng Zhao, said Adam Zarazinski, Incas CEO and a former legal advisor for the Air Force. CZ often uses his personal name and personal accounts to circumvent laws and regulations in jurisdictions where Binance faces scrutiny.
Zarazinski pointed to the example of Key Vision, where Zhao was the owner of a Signature bank account. In an exhibit accompanying the SEC complaint, an agency accountant lays out that over $11 billion was transferred from Key Vision to Merit Peak, another Zhao-owned entity, in 2021.
The SEC does not include an explanation for the arcane series of transactions, nor Zhaos control over the dozens of entities in the Binance network. Suzanne Lynch, an expert in money laundering and professor of economic crime at Utica College, says these are the types of red flags that investigators will be examining.
It seemed to be very tacticalthe millions, and at times billions, that moved within a couple of months to these offshore accounts located in different parts of the world, that still have an account at these U.S.-based banks, she told Fortune.
Binance has denied any impropriety with the flows of money, as well as allegations from the SEC that it mishandled customer funds.
These types of transactions are typical of most global corporate entities and are required to ensure we are able to facilitate our products and services in a stable and compliant manner, a spokesperson said in a statement shared with Fortune. Binance has not been accused of engaging in money laundering by the SEC.
Enter the DOJ
With the SEC typically more focused on securities violations than money laundering, Lynch said that the agency was setting the stage through forensic accounting and monitoring the Binance accounts to which it had access. She said the reach of the international financial networks, as well as the multiple accounts and speed of the deposits and withdrawals, raises red flags that the DOJ will likely be looking into.
This is the foundation for, what I think, is the criminal indictment, she added.
As OBrien explained, the challenge with making money laundering charges stick is that the transfers must further an underlying crime. For example, if someone goes to purchase a vehicle with cash obtained from selling narcotics, the car dealer could end up in jail. For Binance, OBrien said, that crime could be improperly routing customer funds to a trading entity and then sending those proceeds to various banks all over the world.
For now, the question remains whenand ifthe DOJ decides to press charges, and whether Zhao will be included along with his exchange.
Even with Zhao possibly living in non-extradition countries, Lynch said it would be difficult for him to evade the reach of the U.S. government, although his wide-reaching network of entities may allow continued access to capital.
What hes done with all these funds, and how hes dispersed them through the world, gives him access points in a variety of different countries, she told Fortune. Its very ugly, these kinds of cases.
