As reported by CNBC, the filing has the potential to disrupt the exchange's operations and may be the first move in a wider regulatory crackdown on the world's largest crypto exchange. In addition to disgorgement and other monetary penalties, the CFTC has asked the court to impose further relief, such as trading and registration bans.
According to the complaint Binance, Zhao, and Lim are alleged to have violated eight core provisions of the Commodity Exchange Act, including those requiring controls “designed to prevent and detect money laundering and terrorism financing.”
"Just days prior to the CFTC filing, CNBC reported on how Binance employees worked to subvert the exchange’s compliance controls in China, using some of the same techniques that the CFTC alleges Binance to solicit U.S. users," the report continued.
Zhao and Lim allegedly “actively cultivated lucrative and commercially important ‘VIP’ customers, including institutional customers, located in the United States,” said the court filing.
“Today’s enforcement action demonstrates that there is no location, or claimed lack of location, that will prevent the CFTC from protecting American investors. I have been clear that the CFTC will continue to use all of its authority to find and stop misconduct in the volatile and risky digital asset market,” CFTC chair Rostin Benham noted in a statement.
According to the regulator, Binance and Zhao intentionally obscured the location of the exchange's subsidiaries. This was part of a larger strategy that Zhao referred to as an effort to "keep countries clean," the regulator alleged in the filing, according to CNBC.
According to the CFTC filing, Binance's VIP program for high-net-worth individuals was a crucial element of its alleged strategy to solicit U.S. users and generate fees.
“Binance is aware of its VIPs’ identities and geographic locations because Binance monitors its sources of transaction volume and fee-based revenue as a matter of course in conducting its operations,” said the complaint, according to the outlet.
The federal agency accused Binance of providing special treatment to its VIP customers when they were being pursued by law enforcement agencies or when their assets were frozen. According to the CFTC, Binance allegedly informed its VIP clients ahead of time or advised them to withdraw their assets from the platform, said the report.
“Do not directly tell the user to run,” Binance instructed its VIP team, according to the complaint. “If the user is a big trader, or a smart one, he/she will get the hint.”
Following the filing, Zhao issued a statement claiming that the allegation was incomplete and did not provide a comprehensive view of the facts. He stated that Binance had cooperated with both US and international law enforcement investigations and had frozen $160 million in assets at the request of law enforcement so far that year.
Previously, CNBC reported that Binance's customer service and VIP representatives advised mainland Chinese users on how to evade compliance systems, suggesting the use of virtual private networks and alternative non-state documents. "The CFTC filing alleges that Binance engaged in similar activity for its U.S. users," CNBC added.
“But as best we can we try to ask our users to use VPN or ask them to provide (if there are an entity) non-US documents. On the surface we cannot be seen to have US users but in reality we should get them through other creative means,” Lim told a Binance employee in 2020, the filing notes.