Regulators are cracking down hard on crypto firms, and Paxos Trust is the latest to face the heat with a $48.5 million penalty. The New York State Department of Financial Services (NYDFS) on August 7 revealed a collaboration with Binance regarding its anti-money laundering (AML) practices.
According to a recent press release, the enforcement action involves a $26.5 million penalty along with a required $22 million investment aimed at addressing compliance issues. This situation arises from Paxos’s lack of thorough due diligence regarding Binance, its former partner in the issuance of Binance USD (BUSD), which is a stablecoin pegged to the dollar.
Regulators found that Paxos didn’t do enough to keep an eye on Binance, which opened the door for illegal money to move through the platform. Everything became suspicious from 2017 to 2022 when Binance processed about $1.6 billion in suspicious transactions linked to criminals and blacklisted groups.
AML Program Cracks Exposed
According to DFS, the AML system of Paxos, containing KYC and CDD systems, allowed risky users to slip through unchecked. Many users shared similar addresses, documents, or ownership profiles, signaling coordinated illicit activity.
Paxos lacked credible transaction tracking methods. It failed to build in warning mechanisms and identify the pattern of activities indicative of money laundering. More importantly, there were no explicit criteria as to when to initiate investigations upon the request of law enforcement agencies. This impeded the process of identifying malicious users on the platform.
DFS Leading the Charge
Superintendent Adrienne A. Harris stated, “Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks.” She added that NYDFS would continue enforcing accountability to protect markets and consumers.
In February 2023, NYDFS ordered Paxos to stop minting BUSD. Consequently, Paxos began winding down its BUSD operations under supervision.
Also Read: Binance Releases Latest Reserve Report; BTC Balance Rises, ETH Drops
