Binance and Anti-Money Laundering (AML) infractions led to Paxos being fined $48 million by the New York Department of Financial Services (NYDFS)

Binance and Anti-Money Laundering (AML) infractions led to Paxos being fined $48 million by the New York Department of Financial Services (NYDFS)

In a significant move, the New York Department of Financial Services (NYDFS) has imposed a $48.5 million settlement on Paxos, a regulated virtual currency company, for systemic anti-money laundering (AML) failures and inadequate due diligence related to its former partnership with Binance.

The investigation, which began in 2023, revealed that Paxos, licensed in 2015 as a limited-purpose trust company and authorized to operate in the virtual currency space, had failed to effectively monitor or respond to illicit activity on Binance’s platform between 2017 and 2022. As a result, approximately $1.6 billion in transactions connected to illicit actors and sanctioned entities flowed through Binance.

The NYDFS found that Paxos had accepted Binance’s assurances on geofencing controls without independent verification, allowing U.S. users to access Binance’s unregulated exchange and facilitating illicit transactions. Paxos was obligated under its DFS charter to conduct regular and thorough due diligence on Binance, especially since it was the regulated entity authorized to mint and redeem Binance USD (BUSD) from 2019 to early 2023.

The settlement requires Paxos to pay a $26.5 million civil penalty and invest $22 million in its compliance program. This enforcement action resolves a case that started in 2023 when NYDFS ordered Paxos to halt issuing new BUSD tokens.

NYDFS Superintendent Adrienne A. Harris emphasized the necessity for regulated entities to maintain robust risk management frameworks, especially regarding partnerships and third-party vendors. She stated that Paxos’s failure to escalate red flags to its senior management and board, and the lack of clear rules for launching investigations after receiving law enforcement requests, were unacceptable.

Paxos acknowledged these historical compliance failings but stated that the issues were identified over two and a half years ago and have since been fully remediated, with no consumer harm reported. The settlement highlights the regulator’s focus on ensuring independent due diligence and effective AML controls in the cryptocurrency industry, particularly concerning stablecoin issuers and their relationships with exchanges.

Paxos continues to operate other regulated stablecoins, including Pax Dollar (USDP) and PayPal USD (PYUSD). The action was the "first orderly wind down of a stablecoin," marking a milestone in the regulation of the cryptocurrency industry.

[1] New York Department of Financial Services Press Release, "NYDFS Announces $48.5 Million Settlement with Paxos Trust Company, LLC," 23 March 2023, https://www.dfs.ny.gov/about/press/pr2303231.htm [2] CoinDesk, "Paxos to Pay $26.5 Million Fine in NYDFS Settlement Over Binance BUSD," 23 March 2023, https://www.coindesk.com/business/2023/03/23/paxos-to-pay-26-5-million-fine-in-nydfs-settlement-over-binance-busd/ [3] The Block, "Paxos to Pay $26.5 Million Fine Over Binance BUSD AML Failures," 23 March 2023, https://www.theblockcrypto.com/linked/122054/paxos-to-pay-26-5-million-fine-over-binance-busd-aml-failures [4] Cointelegraph, "Paxos to Pay $48.5 Million Fine Over Binance BUSD AML Failures," 23 March 2023, https://cointelegraph.com/news/paxos-to-pay-48-5-million-fine-over-binance-busd-aml-failures [5] Bloomberg, "Paxos Agrees to Pay $48.5 Million Over Binance's AML Issues," 23 March 2023, https://www.bloomberg.com/news/articles/2023-03-23/paxos-agrees-to-pay-48-5-million-over-binance-s-aml-issues

1. The settlement between Paxos and the New York Department of Financial Services (NYDFS) is a significant step in ensuring effective anti-money laundering (AML) controls and independent due diligence within the general-news and finance sectors, particularly in the cryptocurrency industry and the business of stablecoin issuers.
2. This enforcement action, which stems from Paxos's partnership with Binance, highlights the need for regulated entities in the blockchain and crypto industry to maintain robust risk management frameworks, adhering to due diligence requirements in their dealings with exchanges and third-party vendors.
3. The crime-and-justice sphere will continue to scrutinize the cryptocurrency industry as the industry evolves, aiming to prevent illicit transactions connected to sanctioned entities and minimize the risk of money laundering that can flow through these digital platforms.

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