(Kitco News) – Today was sentencing day for former Binance CEO Changpeng "CZ" Zhao, who pleaded guilty to one count of violating the Bank Secrecy Act last November, a charge that can carry up to 10 years in prison.
Zhao isn’t expected to face such a lengthy term, however, as his guilty plea and cooperation with authorities resulted in sentencing guidelines coming back with a recommended sentence of 18 months in prison, followed by probation.
A presentence report filed by the court's Probation Office recommended he spend just five months behind bars, while the U.S. Department of Justice recommended 3 years, twice what was laid out in his plea agreement, due to the severity of Zhao’s violations.
Zhao’s defense asked for no prison time, suggesting he be sentenced to house arrest and probation instead. The plea deal he signed will also see him pay a $50 million fine. Binance, the world’s largest crypto exchange – which CZ founded – also agreed to pay a $4.3 billion fine the same day Zhao pleaded guilty.
As part of the deal, CZ also agreed to step down from his role as CEO of the exchange.
Ultimately, Judge Richard Jones settled on 4 months in prison for Zhao.
The hearing in the Seattle courthouse started on a positive note for Zhao, with Judge Jones saying he disagreed with the DOJ's request for an enhancement to the sentencing guidelines that would push the sentence from 18 months to 3 years.
“There’s no evidence that the defendant was ever informed of illegal activity,” Judge Jones said.
The attorney for the DOJ pushed back against this position, arguing that the judge should be able to infer CZ was aware of illicit activity, citing a previous case where a judge inferred a defendant knew of illicit activity.
"Given that inference is in that case a part or a function of how the court came to that conclusion, we argue that supports a similar finding here,” they argued.
Judge Jones responded, "The bottom line, the case authority is not clear," saying there's no clear circuit court record.
Reviewing the baseline sentencing recommendation, Judge Jones said he largely agrees with the Probation office that the “total level is 12,” which would result in a 10-16 month prison term and 1-3 years supervised release.
The DOJ argued that CZ deliberately tried to capitalize on the U.S. financial system. "Violating the law was integral to that endeavor; we're not guessing here, Mr. Zhao said that himself - ask for forgiveness, not permission,” they argued, adding that any credit he deserves for coming in and cooperating has already been reflected in the plea agreement.
"If Mr. Zhao does not face incarceration after deliberately and willfully planning to violate U.S. laws to build the largest crypto exchange in the world and get rich in the process … then no one will face incarceration and the [Bank Secrecy Act] will for all intents and purposes be a dead letter,” the DOJ argued.
"A probationary sentence here will incentivize others to break the law and to do it in the largest scale possible," the DOJ attorney said before making a final plea for a "meaningful" sentence of incarceration.
The Judge asked if the recommended sentencing guidelines, which are twice the normal length, would lead to a sentencing disparity, to which the DOJ replied, “No single defendant has been responsible for so much. We don't believe it would be a sentencing disparity ... the disparity is in the magnitude of the conduct.”
A probation officer reiterated a 5-month recommendation and said that if Zhao is not incarcerated in a prison, then any form of house arrest should be completed in the U.S.
Zhao’s defense further highlighted his cooperation with the courts and said various factors support a downward variance (a lighter sentence). They added that there are no cases with similar circumstances where the defendant was incarcerated, highlighting the sentencing for former BitMEX CEO Arthur Hayes a few years ago where he received probation.
Following a brief recess, Zhao had a chance to speak on his behalf. He started out by saying, "The first step to taking responsibility is to fully recognize the mistakes." He acknowledged that he failed to set up a KYC/AML program at Binance but said he’s tried to rectify that by directing Binance to cooperate with the U.S. government.
"I also recognize the importance of having a robust KYC/AML program," he added.
"Everything I see about you and your characteristics is of a mitigating nature," the Judge said to Zhao as he began to read through his order. He acknowledged CZ’s “significant and extraordinary steps to cooperate with law enforcement,” before addressing his missteps.
“You were the CEO of Binance. You made decisions,” he said. “Again the court goes to your failure and responsibility to maintain a proper anti-money laundering program that created the potential for a significant impact on money laundering ... that includes drug trafficking and terrorism.”
Judge Jones noted that the court appreciates his cooperation but also needs to support respect for the law, and stressed the importance of sending a strong message to other would-be violators.
Addressing the 161 letters filed on Zhao’s behalf, Judge Jones said, “I don't think I've ever seen this volume of letters, not just from family, but from people who have known you a long time. The letters paint a picture of a man driven by motivation, passion, and drive. You risked your entire net worth” to make Binance succeed. “It's also clear from the letters that you're a dedicated family man.” He also cited the work done through Binance Charity.
That said, he noted that Zhao and Binance had the “personnel, resources, and wherewithal to comply with U.S. regulations, but failed at that opportunity.”
“The report shows that billions' worth of Bitcoin were directly sent” to darknet markets, he highlighted. “I was deeply troubled in the materials submitted by the parties that include reference to your statement, ‘it was better to ask forgiveness than permission.’”
“You have the ability and will to rehabilitate because of this tough lesson,” Judge Jones said.
After again rejecting the 36-month term recommended by the DOJ, he said, “There needs to be an effort by this court to impose a sentence that's appropriate and reasonable.”
At that point, Judge Jones handed down a prison sentence of four months for Zhao.
After a brief recess, the defense requested expedited designation but elected to allow the probation department to decide on the reporting date. The Judge asked Zhao if he swears to show up on the designated reporting date, and he replied in the affirmative.
“With light admitted-to crimes came incredibly light punishment,” said Terrence Yang, Managing Director at Swan Bitcoin, in a note to Kitco Crypto. “Like in SBF, this was another soft decision by a soft judge. While the DOJ just didn't have enough goods on CZ to warrant 3 years, I can't believe CZ is getting 4 months and not 18 months, which is what the sentencing guidelines allow.”
“The judge listed a bunch of mitigating factors, believing CZ worked hard, is a family man and had many letters including from folks who knew him a long time,” Yang added. “Of course he did. He's a decabillonaire who knows how to engender loyalty and favors.”
“He had great lawyers, was good at building a giant business, however illegal and scammy,” he said. “The question is, did he break the law and does the magnitude even matter? Even though I believe he was guilty of much more, the DOJ didn't have the evidence and that's why they could only get CZ to admit to rather light crimes.”
“Unlike SBF (fought extradition, found guilty, 25-year sentence), CZ didn't fight extradition (was in a non-extradition country) and agreed to only light crimes in his plea deal,” Yang noted. “CZ is only paying $50M in his plea deal with the DOJ.”
“In comparison, Binance agreed to pay $4B and have a monitor in place for three years with the DOJ and five for FinCEN,” he said. “That's why the sentencing guidelines suggested a max of 18 months, not 36 as the DOJ asked. And why the probation officer suggested five months. The defense made a great point that Arthur Hayes got zero jail time.”
