The New York State Department of Financial Services announced a USD 48.5 million settlement with Paxos Trust Company after finding insufficient due diligence of its former partner Binance and systemic anti-money laundering (AML) program failures that increased money-laundering risk. The settlement requires Paxos to pay a USD 26.5 million penalty and invest an additional USD 22 million to improve its compliance program. Paxos, a DFS-chartered limited purpose trust company authorized to conduct virtual currency business, partnered with Binance to market and distribute the Binance USD stablecoin and was required to conduct regular due diligence of Binance. DFS found Paxos lacked appropriate controls to monitor for significant illicit activity occurring at or through Binance and failed to escalate red flags to senior management and its board, with Binance’s lax geofencing restrictions enabling US 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 USD 1.6 billion in transactions flowed to or from the platform involving illicit actors and that Binance processed transactions to and from entities after they were sanctioned by the US Office of Foreign Assets Control. Separately, DFS identified multi-year deficiencies in Paxos’s compliance program, including weaknesses in Know Your Customer and customer due diligence and transaction monitoring that allowed potentially coordinated customers to open multiple accounts undetected and impeded detection of obvious money-laundering patterns, alongside a lack of defined guidelines on when to open investigations following law enforcement requests. Remediation must be completed under a plan approved by DFS, supported by the additional USD 22 million compliance investment.

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