Fines levied in administrative and civil actions brought by the U.S. Financial Crimes Enforcement Network (FinCEN) reached new levels in 2023. New records also were set with the $4.3 billion levied against Binance (and its affiliates and personnel) by the U.S. Justice Department, FinCEN, and the Office of Foreign Assets Control (OFAC). At the Securities and Exchange Commission (SEC), orders were obtained for $4.949 billion in financial remedies, the second-highest amount in SEC history after the record-setting financial remedies ordered in fiscal year 2022. As such, running afoul of the SEC or FinCEN doesn’t just risk financial penalties, it risks substantial financial penalties.
Binance
Binance provides a useful case study in examining these record-setting penalties, both in the range of agencies involved and the range of charges. Let’s take a closer look at the defendants, the charges, and the penalties, focusing on the cases brought by the SEC and FinCEN.
The SEC filed a lawsuit in June 2023 against three Binance-affiliated entities and Changpeng Zhao, its then-CEO. The lawsuit alleged that the defendants unlawfully solicited US investors to buy, sell, and trade crypto asset securities through unregistered trading platforms at Binance.com. It also alleged that the defendants engaged in multiple unregistered offers and sales of securities, and that certain of the defendants defrauded investors about purported controls over manipulative trading. Concurrently, FinCEN conducted an administrative civil enforcement action against Binance and its affiliates for violations of the Bank Secrecy Act (BSA). The SEC’s case is still ongoing. FinCEN settled its case in November 2023 with a consent order imposing a penalty of $3.4 billion—the largest settlement in the Treasury Department’s history. The Binance parties separately settled in cases brought by the Department of Justice, the Commodity Futures Trading Commission, and the Treasury Department’s Office of Foreign Assets Control.
- The scale of Binance’s U.S. activity and the willfulness of its failure to comply with Treasury regulations were key factors underpinning the magnitude of the FinCEN Binance settlement. As noted in the settlement, Binance: (i) maintained U.S.-based personnel and other operational touchpoints to the United States; (ii) operated for over two years with no geofencing controls to restrict access by U.S. users, and then employed flawed protocols to “ringfence” its platform from U.S. users while misleading U.S. authorities; (iii) circumvented its own “ringfencing” protocols to allow large U.S. firms to continue to operate; and (iv) devised a scheme to retain lucrative U.S. users while redirecting regulatory focus through the establishment of a U.S.-located registered MSB that purported to be its sole separate presence in the United States, but in reality lacked autonomy. Overall, these actions could be viewed as not only a violation of regulations, but an effort to mislead regulators.
Titan Global Capital Management
Providing a contrast to the Binance case, the SEC recently settled an administrative proceeding against fintech investment adviser Titan Global Capital Management with the imposition of a cease-and-desist order, $192,454 in disgorgement of ill-gotten gains with interest, and a fine of $850,000. In Titan’s case, the scope and willfulness of the infringing activity were considerably less than with Binance. Broadly, Titan was alleged to have violated the “Marketing Rule,” finalized by the SEC in 2020, which regulates the marketing communications of investment advisers. While Titan had originally elected to comply with the Marketing Rule, the SEC alleged that it did not adopt and implement written policies and procedures or adapt its practices to address these new regulatory requirements. As a result, the SEC alleged that Titan violated the Marketing Rule by advertising hypothetical performance without having adopted procedures designed to ensure that the hypothetical performance was relevant and by failing to provide information underlying the hypothetical performance. The SEC also alleged that Titan made misleading statements in advertisements on its website regarding hypothetical performance, made conflicting disclosures about how assets were custodied, included in its advisory agreements certain disclaimer language which created the false impression that clients had waived non-waivable causes of action against Titan, failed to adopt policies related to the accuracy of its disclosures concerning its internal controls regarding Titan representatives’ personal trading in crypto assets, and failed to adopt policies to ensure that client signatures were obtained to authorize certain types of transactions.
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While these are serious claims, they do not suggest willful non-compliance as the claims against Binance did. In addition, Titan voluntarily undertook remedial measures to improve its compliance programs, self-reported issues to the SEC, revised its policies and procedures, and trained Titan staff to prevent future similar conduct. Taking these facts into account, the SEC settled with Titan for a non-trivial but comparatively small amount.
Learnings
While these cases differ on multiple levels, they are reminders that willful misbehavior often has significantly harsher consequences, while self-reporting may help lessen any penalties. These observations are also broadly accurate in cases where the Justice Department brings criminal charges—such as the Binance case. In those cases, settlement will be based on the US sentencing guidelines, which involve a series of factors that may be assessed at different levels.
But broadly, factors that increase the punishment of an organization include involvement in criminal activity, prior history, the violation of an order, and the obstruction of justice. Factors that mitigate punishment include the existence of a robust compliance program with evidence of oversight and adherence to policies and procedures and cooperation with authorities.
As an additional matter, it's worth noting that courts and regulators are often reluctant to allow indemnification for securities law violations. As such, insurance (including D&O insurance) and/or corporate indemnification may not be available in some cases. Whether a particular party’s liability can be indemnified or covered by insurance will generally require analysis on a case-by-case basis. As a result, executives targeted for regulatory, civil, or criminal cases by regulating agencies may find themselves personally liable for penalties imposed.
Closing thoughts
Looking forward, it’s likely that the trend toward increasingly record-setting penalties will continue. As such, all regulatory firms will likely need to step up their internal compliance procedures, train staff to prevent misconduct, and self-report any discovered issues. High fines probably aren’t going anywhere. But with some effort, it’s likely that companies and their executives can significantly reduce their own risk.
The opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
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