New York State Department of Financial Services Superintendent Adrienne A. Harris announced that Paxos Trust Company will pay a $26.5 million penalty to New York State for the alleged ‘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.”
Superintendent Harris said:
“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. 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.”
A Paxos spokesperson noted that ”for the avoidance of doubt, the compliance issues discussed are historical issues that were identified over two and half years ago and have since been fully remediated.”
Paxos further claimed that these matters had ”no impact on customer accounts and there was no consumer harm.”
The company also mentioned that “BUSD was approved and regulated by the New York State Department of Financial Services.”
In early 2023 after receiving an order to cease minting the token, Paxos ”wound down more than $16B in BUSD market cap without the token de-pegging.”
The firm also noted that there ”are no new claims regarding Paxos’ relationship with Binance or the issuance of BUSD, and Paxos’ other white-labeled stablecoins operate on similar models with different partners and have not faced any regulatory issues.”
