More prosecutions and compliance chaos likely in crypto sphere

Recent convictions serve as a warning for future prosecutions.

Corporate accountability is a topic that has surged to prominence in recent months. We live in a world of increasingly stringent and highly-regulated corporate governance, especially concerning high-profile figures and their actions (or inactions) within large global corporations.

The world of digital and crypto assets has been under a particular public spotlight in this regard. Things came into sharp focus with the jailing, in March, of Sam Bankman-Fried, disgraced founder and former CEO of cryptocurrency exchange FTX. Bankman-Fried received a 25-year prison sentence, along with an $11 billion forfeiture order, for defrauding his investors and customers.

Prison sentence for Changpeng Zhao

The spotlight has since shifted to the former CEO of the world’s largest cryptocurrency exchange, Changpeng Zhao. He has just started a four-month sentence in California after pleading guilty to charges of enabling money laundering. Zhao resigned from Binance in November, having pleaded guilty.

As the judge at his sentence hearing put it, Zhao had put “Binance’s growth and profits over compliance with US laws and regulations”. The judge imposed a $50m criminal fine, plus a further $50m to be paid to the US Commodity Futures Trading Commission, with Binance also fined approximately $4.32 billion.

Some might argue this was merely a slap on the wrist. After all, according to Forbes, Zhao’s net worth was approximately $33 billion. Most of this was largely amassed “because of his conduct” and in the process “Binance processed millions of dollars of unlawful proceeds”.

As prosecutors in Zhao’s case put it, both Binance and his openly “willful violation of US law was no accident or oversight”. In fact, Zhao had been evidenced telling members of his team that it was “better to ask for forgiveness than permission”.

Zhao is just the latest individual in the spotlight, but based on the outcome of his case, he certainly won’t be the last.

Alarmingly, poor internal controls at Binance included failures to report more than 100,000 suspicious transactions, including those with designated terrorist groups such as Hamas, al-Qaeda and ISIS. Binance was described as working with a “Wild West model”. According to one Binance compliance employee, criminals were encouraged to come to the platform. The staffer wrote: “We need a banner ‘is washing drug money too hard these days – come to binance we got cake for you.’”

Prosecutors in the case had requested that Zhao should be handed a 36-month prison sentence, twice the maximum sentence of 18 months recommended under federal guidelines. This would “reflect the gravity of his offences”, they said. The four-month sentence Zhao received was far less.

Some will argue that, at the very least, incarceration provides a deterrent to others. In this case, the sentence handed down did not send a strong enough message. Head of the financial reform advocacy Group Better Markets, Dennis Kelleher, said in response to Zhao’s sentencing that: “‘Crime pays’ is the message sent today”.

Crime pays?

I concur. Zhao amassed his billion-dollar fortune through his association with a cryptocurrency exchange, which knowingly and willingly violated US law. He emerges from these proceedings relatively unscathed. After his short spell in prison, he will move forward with the vast majority of his wealth intact (nearly all of it a byproduct of his relationship with Binance).

It is a slap on the wrist for Zhao, a kick in the teeth to the compliance industry, and fails to send a strong enough warning to others in the industry.

Zhao’s case highlights the importance of robust corporate governance mechanisms and regulatory oversight, both still seriously wanting in the digital assets sphere. The topic of regulation in crypto is like the proverbial hot potato: people will play the game, but nobody wants to be holding the hot potato (of accountability and responsibility) when the music stops.

Zhao is just the latest individual in the spotlight, but based on the outcome of his case, he certainly won’t be the last.

Harley Thomas is a forensic accountant and senior investigator at Martin Kenney & Co (MKS), a BVI litigation practice which specialises in global asset recovery cases.