The recent settlement revolves around Paxos, a digital currency company, facing criticism for inadequate due diligence linked to its partnership with cryptocurrency exchange Binance. This was noted in a press release issued on August 7th by a former partner.
The New York Department of Financial Services (NYDFS) identified significant shortcomings in Paxos’s anti-money laundering (AML) program. As a result, Paxos has been fined $26.5 million and will also invest an additional $22 million to enhance its compliance procedures.
Adrian A. Harris from NYDFS emphasized that regulated entities must maintain a comprehensive risk management framework that effectively addresses potential business risks, including those posed by partnerships. The department is committed to ensuring accountability, protecting consumers, and maintaining the integrity of the financial system.
Paxos has not commented on the situation in response to requests.
The press release mentioned that Paxos had a partnership with Binance to market and distribute its services, including its stablecoin. However, the investigation revealed that Paxos lacked the necessary controls to monitor illegal activities that might take place via Binance.
Specifically, it pointed out that Binance’s geofencing restrictions permitted users to access unregulated exchanges.
The investigation found that between 2017 and 2022, $1.6 billion in transactions through Binance involved fraudsters, raising alarms about the monitoring of transactions between authorized entities and those under U.S. sanctions.
Deficiencies in Paxos’s transaction monitoring system were highlighted, revealing failures in identifying instances of money laundering. There was also a notable absence of adequate protocols for responding to law enforcement inquiries, which left scammers on the platform undetected.
In 2023, NYDFS took the lead among regulators in questioning Binance’s safety and integrity. Subsequently, Binance faced a $4.3 billion fine from federal authorities as part of broader scrutiny within the cryptocurrency space.
Moreover, the government’s approach to enforcement under President Trump shifted focus towards crypto-related crimes, particularly those concerning terrorism, drug trafficking, and organized crime.
