Paxos and NYDFS: $26.5 million Settlement Over Binance AML Failures

• Paxos to pay $26.5 million settlement over AML and compliance failures.
• suspicious transactions from Binance partnership revealed.

On August 7, 2024, the New York State Department of Financial Services (NYDFS) announced a $26.5 million settlement with Paxos Trust Company. The settlement addresses significant lapses in the company's anti-money laundering (AML) controls and due diligence concerning its former collaboration with Binance. This regulatory action highlights the growing scrutiny of compliance within the cryptocurrency sector.

Under the settlement, Paxos will pay a $1.6 million penalty to New York State and has also pledged an additional $24.9 million to address its compliance shortcomings and bolster its risk management frameworks. According to the NYDFS, these measures will rectify critical failings and strengthen safeguards against illicit financial activities.

The NYDFS investigation revealed that between 2020 and 2022, Paxos failed to adequately monitor transactions tied to addresses associated with illicit activities. This oversight stemmed largely from the company's partnership with Binance to issue the Binance USD (BUSD) stablecoin. Officials noted that Binance’s inadequate geofencing controls worsened these compliance gaps by allowing U.S. users to access its unregulated crypto exchange.

On August 7, 2024, NYDFS Superintendent Adrienne A. Harris stated in an official announcement, “Regulated entities must maintain appropriate risk management frameworks that correspond to their business risks, which includes relationships with business partners and third-party vendors.”

This enforcement action follows a February 2023 NYDFS directive that ordered Paxos to halt BUSD issuance over compliance concerns. Around the same time, the U.S. Securities and Exchange Commission (SEC) also issued a Wells Notice to Paxos, which alleged that BUSD might be an unregistered security. However, in July 2024, the SEC informed Paxos it would not pursue enforcement action, effectively closing its investigation into BUSD.