FinCEN’s recent investigations into Binance have unearthed troubling revelations about the cryptocurrency exchange’s longstanding collaboration with the Russian exchange Garantex, which has been embroiled in money laundering controversies. This partnership persisted even after Garantex Europe, based in Estonia, had its license revoked in February 2022 due to AML concerns and was subsequently placed on the OFAC sanctions list in April 2022.
Narrative Of Russian Crypto Exchange Garantex
Garantex, established in late 2019 and initially registered in Estonia, primarily operates in Moscow and St. Petersburg. Analysis indicates that Garantex transactions exceeding $100 million are linked to illicit activities and darknet markets. This includes nearly $6 million from the Russian RaaS gang Conti and about $2.6 million from Hydra.
The Estonian Financial Intelligence Unit (FIU), after thorough supervision, discovered critical deficiencies in AML/CFT practices at Garantex, leading to the revocation of its virtual currency services license. Notwithstanding this setback, Garantex continued its operations through dubious means.
In April 2022, Garantex was designated under E.O. 14024 for its involvement in the Russian financial services sector. The Estonian Financial Intelligence Unit’s Director, Matis Mäeker, emphasized the high-risk profile of Garantex, particularly its significant transaction volumes exceeding 5 billion euros, largely tied to Russia and other high-risk countries.
Garantex has been operating on Binance as a nested exchange since March 2019. Blockchain analytics reveal approximately 100,000 transfers between Garantex and Binance from March 2019 to 2022. Binance’s lax KYC procedures and inadequate controls enabled Garantex’s continued operations on its platform, with no reported suspicious activity, despite over $100 million in questionable transactions.
Furthermore, Binance maintained transactions with Garantex, amounting to tens of millions of dollars, well into 2023, long after Garantex‘s OFAC designation. Binance also collaborated with SUEX OTC S.R.O., another Russian CVC exchange designated by OFAC in September 2021 for facilitating transactions involving illicit funds, including the Colonial Pipeline hack.
The CZ Sentencing
This extensive involvement in illicit activities raises questions about how Binance managed to settle with a payment of just $4.3 billion. However, these findings could significantly influence the sentencing of Binance‘s former CEO, Changpeng Zhao (CZ), who has admitted to charges of systematic money laundering and sanctions evasion under his leadership. CZ faces a potential prison sentence of up to 20 years, with sentencing scheduled for February 2024.
This case underscores the intricate challenges in regulating the cryptocurrency sector and the serious implications of non-compliance with international AML and sanctions laws, particularly for high-profile industry leaders.