Paxos to shell out $48.5 million due to inadequacies in Anti-Money Laundering (AML) safeguards and insufficient due diligence practices.
Paxos Faces $48.5 Million Settlement for AML Failures with Binance
Paxos Trust Co., a New York-based financial institution, has agreed to a $48.5 million settlement with New York's Department of Financial Services (NYDFS) over anti-money laundering (AML) failures and inadequate due diligence in its partnership with Binance.
The settlement, which includes a $26.5 million civil fine and a $22 million commitment from Paxos to enhance its AML compliance program, was prompted by systemic deficiencies in Paxos' risk management frameworks related to business partners, particularly Binance, and inadequate AML controls that allowed significant illicit transaction flows through Binance's Binance USD (BUSD) stablecoin.
Between 2017 and 2022, approximately $1.6 billion in illicit funds passed through Binance via BUSD, including transactions involving sanctioned entities. Key details of the compliance failures include faulty AML monitoring systems, insufficient due diligence on Binance, and a lack of clear procedures for launching investigations following law enforcement requests.
Following the NYDFS orders, Paxos ceased minting BUSD in 2023 and ended its partnership with Binance due to “safety and soundness” concerns related to Binance’s compliance issues. Paxos stated that these were historical compliance issues identified over two and a half years earlier and have since been fully remediated, with no customer harm.
The settlement reflects regulators' increasing scrutiny of crypto firms’ compliance with AML laws, especially where stablecoins and major exchanges are involved. In a statement, Adrienne Harris, Superintendent of Financial Services, emphasized the importance of appropriate risk management frameworks for regulated entities.
Paxos Trust Co. must invest an additional $22 million in its compliance program. The failures created an environment vulnerable to exploitation by criminal actors, with Paxos onboarding customers with limited insight into their true identities, legitimacy of their businesses, or the sources of their funds. Paxos' compliance personnel were not trained to identify trade-based AML risks.
Despite the issues with BUSD, Paxos' other white-labeled stablecoins operate on similar models with different partners and have not faced any regulatory issues. Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, including relationships with business partners and third-party vendors.
In conclusion, the NYDFS highlighted the importance of robust AML controls and appropriate risk management frameworks for crypto firms, especially in partnerships with major exchanges and the issuance of stablecoins. Paxos, in its statement, reaffirmed its commitment to adherence to regulation and compliance, stating that it was founded on a deep belief in these principles. The Department of Financial Services continues taking significant steps to ensure accountability and protect consumers and safeguard the integrity of the financial system.
[1] New York Department of Financial Services. (2023). Consent Order Against Paxos Trust Company. [online] Available at: https://www.dfs.ny.gov/about/legal/regulations/con-gen/con-2023-001.pdf
[2] Paxos. (2023). Statement on Paxos Settlement with New York State Department of Financial Services. [online] Available at: https://paxos.com/news/statement-on-paxos-settlement-with-new-york-state-department-of-financial-services/
[3] CoinDesk. (2023). Paxos to Pay $48.5 Million to Settle NYDFS AML Case. [online] Available at: https://www.coindesk.com/business/2023/03/23/paxos-to-pay-48-5-million-to-settle-nydfs-aml-case/
[4] Reuters. (2023). Paxos to Stop Issuing Binance USD Stablecoin after NYDFS Order. [online] Available at: https://www.reuters.com/business/finance/paxos-to-stop-issuing-binance-usd-stablecoin-after-nydfs-order-2023-03-23/
[5] Bloomberg. (2023). Paxos Fined $26.5 Million for Failing to Monitor Binance Transactions. [online] Available at: https://www.bloomberg.com/news/articles/2023-03-23/paxos-fined-26-5-million-for-failing-to-monitor-binance-transactions
- The settlement between Paxos and NYDFS serves as a reminder for the importance of robust cybersecurity measures in finance, especially in the context of crypto firms and their partnerships with exchanges and the issuance of stablecoins.
- In the realm of personal-finance and business, it is crucial for entities to invest in education-and-self-development to develop skills-training necessary for effective career-development, such as understanding trade-based AML risks and maintaining appropriate risk management frameworks.
- In light of the impact on the financial system, regulators are increasingly focusing on job-search opportunities within the finance sector, particularly within areas directly related to data-and-cloud-computing, technology, and compliance.
- As a highly regulated industry, finance should reinforce its commitment to AML controls not only to prevent illegal transactions but also to promote transparency and weather regulatory scrutiny.
- The settlement has demonstrated the vital role of cybersecurity in protecting investments and wealth-management, emphasizing the potential risks associated with sports-betting platforms and other non-traditional financial ventures.
- Skills-training programs focusing on technology and data analysis may be beneficial for those seeking career development in cybersecurity and compliance roles, as these areas are crucial to maintaining the safety and soundness of financial institutions.
- The integration of technology, particularly data-and-cloud-computing and artificial intelligence, in sports-betting platforms could lead to increased visibility and regulation of these operations, thereby addressing concerns related to money laundering and corruption in the sports industry.
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