But there’s a workaround! I’ve offered FinCEN a way to answer the question of whether Changpeng Zhao (CZ) owns, controls, or directs the affairs of Binance.US. And the answer isn’t found in the Corporate Transparency Act. In fact, the CTA gives CZ and many other beneficial owners yet another way to exploit opaque legal structures to commit all sorts of mischief.
The answer requires a five-paragraph dive into money services businesses, or MSBs. Please bear with me.
The Corporate Transparency Act
When FinCEN began the rulemaking process to implement the Corporate Transparency Act, it touted that “this new reporting requirement will enhance the national security of the United States by making it more difficult for malign actors to exploit opaque legal structures to launder money, finance terrorism, proliferate weapons of mass destruction, traffic humans and drugs, and commit serious tax fraud and other crimes that harm the American people.”
What if those malign actors are not hiding behind an opaque legal structure, but are simply taking advantage of a loophole built into the Act itself?
MSBs – Exempt from the Corporate Transparency Act
MSBs include check cashers, money transmitters, dealers in foreign exchange, and virtual currency exchanges. For reasons that don’t make sense to me, but which I’ll get into, MSBs made out like bandits in the Corporate Transparency Act (CTA) and final Beneficial Ownership Information (BOI) reporting rule. The 35 million or so “reporting companies” that are covered by the CTA must submit initial and updated BOI reports disclosing all of their beneficial owners – up to four people who own the company and as many people there are that exercise substantial control – within 30 days. Yet the 26,180 MSBs that are registered with FinCEN, including Binance.US, were given special exempt status by the CTA and do not have to disclose any of their beneficial owners. Instead, MSBs must register with FinCEN, and in doing so only disclose one person who has either ownership or control.
But MSBs Pose Elevated AML/CFT and Proliferation Risks!
MSBs have long been seen as posing elevated risks for money laundering, terrorist financing, and proliferation financing. I won’t belabor the point with historical examples. More currently, though, virtual currency exchanges are MSBs, and recent FinCEN enforcement actions have shown that these MSBs pose considerable risks to the financial system and national security generally. In the last five calendar years (2018-2022), FinCEN has brought twelve enforcement actions. Three of those involved crypto exchanges or mixers that failed to register as MSBs (the Bittrex action (Action 2022-03), Helix (Action 2020-02), and Eric Powers (Action 2019-01). Also, see the Prepared Remarks of Himamauli Das, Acting Director of FinCEN at the ABA/ABA Financial Crimes Enforcement Conference on December 6, 2022, where he referred to convertible virtual currency exchanges.
MSB Registration Exempts Them as “Reporting Companies” Under the CTA
MSBs will not have to report their BOI to FinCEN. The CTA exempts MSBs from the definition of reporting company: MLA section 6403, adding 31 USC s. 5336(a) definitions, (a)(11) “reporting company”, (a)(11)(B) listing twenty-four exemptions, including (vi) “Money services business. Any money transmitting business registered with FinCEN under 31 U.S.C. 5330, and any money services business registered with FinCEN under 31 CFR 1022.380.”
The Congressional Record suggests that MSBs were exempted because they are already required to register with FinCEN (using Form 107) and as part of that registration, disclose their ownership. Some of those who have commented on this, such as the pre-eminent law firm Sullivan & Cromwell, have noted that money transmitters “are already required to disclose beneficial ownership information publicly or to federal regulators – and exempting them from the reporting requirement does not appear to represent a gap in coverage.”
MSBs Currently Provide the Name of Only One Owner or Controlling Person
As I noted in my comments to the ANPRM, I disagree with Sullivan & Cromwell’s statement. First, there is nothing in the CTA that ties the ownership information contained in the Form 107 (MSB registration form) to the new beneficial ownership information. Second, the Form 107 ownership information is not available to financial institutions, so they won’t be able to obtain it as part of their CDD obligations, or otherwise. Third, MSBs do not have to disclose up to four legal owners and as many control persons as they may have: they only need to disclose one owner or controlling person, so FinCEN will not have complete beneficial ownership information on one of the highest risk business types.
Binance.US – An Example of the Exempt MSB Loophole
The biggest crypto company on the planet is known as Binance. By all accounts, Binance is run as a personal fiefdom of Changpeng Zhao, known as “CZ”.
CZ is, apparently, a person, but Binance isn’t a legal entity. It is a brand. Like it’s former competitor, FTX. And like FTX and Sam Bankman-Fried (“SBF”), “Binance” is made up of complicated corporate structures which all, apparently, are beneficially owned by one guy: SBF for FTX, CZ for Binance.
By some accounts, CZ is the beneficial owner of CPZ Holdings, which owns BAM Management U.S. Holdings Inc., which owns BAM Trading Services Inc. dba Binance.US. Somewhere either in or near the CPZ Holdings structure is something called Binance Holdings Limited, which does business as Binance.com, which, if you believe the Binance.US terms of use, shares common majority ownership with Binance.US, but is not within the same corporate structure.
So, we don’t really know how the Binance org chart(s) is(are) structured, and who the beneficial owner(s) is(are). But by many accounts, Binance.com is CZ’s global, everywhere-but-the-USA crypto exchange, and Binance.US is CZ’s USA crypto exchange. Maybe. We don’t know, and CZ isn’t telling.
Wouldn’t it be great to know who is the ultimate beneficial owner(s) of Binance.US? But, since it is registered with the Financial Crimes Enforcement Network (FinCEN) as a money services business (technically as a dealer in foreign exchange, a money transmitter, and a provider of prepaid access, all of which are a “money services business”), it is exempt from having to report its beneficial ownership information.
3.5 Million Americans Would Like to Know Who Really Owns Binance.US
When Voyager Digital filed for bankruptcy protection in July 2022, about 3.5 million Americans found their crypto “deposits” were locked up and potentially gone forever. In October 2022 FTX won an auction to buy Voyager’s assets – which includes a lot of the locked up crypto as well as the Voyager customer list. But FTX went bankrupt itself in November 2022. In December 2022 Binance.US steps in to attempt to buy Voyager’s assets, including the customer list. That attempt is being challenged by a number of entities, including the SEC, New York State Department of Financial Services, and the Texas State Securities Board. Those challenges are heavy, difficult reading: for those with the ability, energy, and interest probably already have read them. They’re available on the Southern District of New York Bankruptcy court docket in case 22-10943 at Dkt 1047 (SEC), Dkt 1051 (NYSDFS), and Dkt 1086 (Texas).
All three agencies share the same concerns: the Binance.US terms of use provide that Binance.US relies on Binance.com and unnamed related parties and third parties (“parents, subsidiaries, affiliates, entities under common ownership, or otherwise related parties”). Effectively, Binance.US can transfer its customers’ sensitive personal information to, realistically, any entity anywhere in the world. That information includes names, social security numbers, passport numbers, driver’s license numbers, emails, physical addresses, and phone numbers for all active and inactive users. And, if Binance.US is allowed to purchase Voyager’s customer list of 3.5 million people, the SEC, NYSDFS, and Texas State Securities Board, and probably many of the 3.5 million Voyager customers, are concerned that this information will soon be CZ’s information to do with as he sees fit.
Recommendation – Require MSBs to Report All Beneficial Owners
I’ve submitted a formal comment letter that gave FinCEN two solutions to the Corporate Transparency Act’s loopholes for money services businesses (MSBs). FinCEN can’t change the CTA itself, which exempts MSBs from reporting BOI, but it can level the playing field a bit.
Being exempt from the BOI reporting requirements gives MSBs a pass from disclosing their beneficial owners. And the current MSB regulations only require that MSBs disclose the name of one person with ownership or control. But the statutory language allows FinCEN to collect beneficial information. 31 USC s. 5330(b) provides that the registration of a money transmitting business shall include: “(2) The name and address of each person who – (A) owns or controls the business; (B) is a director or officer of the business; or (C) otherwise participates in the conduct of the affairs of the business” and “(5) such other information as the Secretary of the Treasury may require.” The implementing regulations speak to who must file the registration form – a single person who owns or controls the MSB – but what is reported on that registration form is left to the form itself: “a money services business must be registered by filing such form as FinCEN may specify with FinCEN (or such other location as the form may specify). And the form currently does not include the names and addresses of each person who owns or controls the business, is a director or officer, or otherwise participates in the conduct of the affairs of the business.
FinCEN doesn’t need Congress to change the law: it need only change the Form 107 to include the name, address, and identifying number of each person who owns or controls or directs the business or otherwise participates in the conduct of the affairs of the business.
What are the chances that CZ is not an ultimate beneficial owner of Binance.US? Come on, FinCEN, step up and give us the means to answer that question!
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Jim Richards is a 30-year financial crimes professional offering BSA Officer, director, and senior management support, training, awareness, and crisis management around all risks and threats related to financial crimes. Read more from Jim here.
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