- DFS Investigation Found Deficient Transaction Monitoring and Compliance Program Led to Increased Money-Laundering Risk
- Settlement Requires Paxos to Pay $26.5 Million Penalty and to Invest an Additional $22 Million in its Compliance Program
New York State Department of Financial Services Superintendent Adrienne A. Harris today announced that Paxos Trust Company (“Paxos”) will pay a $26.5 million penalty to New York State for failure to conduct sufficient due diligence of its former partner, Binance, and systemic failures in Paxos’s anti-money laundering program. In addition to the penalty, Paxos has agreed to invest an additional $22 million to improve its compliance program and remediate deficiencies pursuant to a plan approved by DFS.
“The Department of Financial Services has led the nation in regulating the virtual currency industry, protecting consumers and markets through examinations, supervision, and where necessary, enforcement,” said Superintendent Harris. “Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which includes relationships with business partners and third-party vendors. The Department continues taking significant steps to ensure accountability, in turn protecting consumers and safeguarding the integrity of the financial system.”
Paxos was chartered as a limited purpose trust company and authorized to engage in virtual currency business by the Department in 2015 and later formed a relationship with Binance to market and distribute the Binance USD (“BUSD”) stablecoin. Under the terms of its agreement with the Department, Paxos was required to perform regular due diligence of Binance.
The Department’s investigation revealed that Paxos did not have appropriate controls in place to effectively monitor for significant illicit activity occurring at or through Binance, and failed to escalate red flags to Paxos’s senior management and its Board. Notably, Binance’s lax geofencing restrictions enabled U.S. users to access an unregulated exchange. A review of historical Binance transactions between 2017 and 2022, across a select set of virtual currency assets, concluded that $1.6 billion in transactions flowed to or from the Binance platform involving illicit actors and found that Binance had processed transactions to and from entities after the U.S. Office of Foreign Assets Control sanctioned them.
In February 2023, DFS was the first regulator in the world to address safety and soundness concerns related to Binance, ordering that Paxos Trust cease minting Paxos-issued BUSD, and oversaw the first orderly winddown of a stablecoin. After DFS took this supervisory action, federal and foreign regulators quickly followed in DFS’s footsteps.
In addition to Paxos’s failures related to Binance, the Department’s investigation revealed that Paxos operated a deficient compliance program for years. As a result of its unsophisticated Know Your Customer/Customer Due Diligence program, customers who shared addresses, corporate documents, beneficial owners, and certain behavioral characteristics indicative of potential illicit coordinated activity were able to open multiple accounts and remain undetected. Paxos’s deficient transaction monitoring system also prevented the Company from detecting obvious patterns of money laundering, thus exacerbating its onboarding compliance deficiencies. In addition, Paxos lacked defined guidelines regarding when investigations should be opened following receipt of a law enforcement request. This deficiency prevented the Company from more readily identifying bad actors on its platform.
Read the Paxos consent order.
