Binance, considered the world’s largest cryptocurrency exchange, opened an office on Malta in 2018 after closing its operations – first in China and then in Japan – after regulators in both countries stepped up their crackdowns on all things crypto.

When it moved to the Mediterranean island, it raised more than a few eyebrows.

“Any entity that hops from jurisdiction to jurisdiction in pursuit of the lightest regulatory regime is sending a signal to criminals that it is an easy target for money laundering and other criminal activity,” Dave Murray, from the Financial Integrity Network, a Washington DC-based financial compliance advisory, told Asia Times.

Mike Orcott, editor of the popular “Chain Letter” blog at MIT Technology Review, was perhaps more direct when he wrote in a post last month that “Binance’s overall strategy, which seems to depend on avoiding regulatory accountability by playing a high-stakes game of cat-and-mouse with policymakers around the world, comes with the obvious risk that it will eventually get caught.”

Malta is actually three tiny islands that sit south of Italy and face the North African coast. For millennia, it has been a useful maritime transit point for both traders and a long sequence of occupying armies. The Phoenician Empire came about three thousand years ago. The British Empire left in 1964 when Malta gained independence.

It joined the EU in 2004 and in recent years has carved something of a niche as a tax-break-ready financial center. This, in turn, has seen it become a remote offshore hub for gambling operations – and, most recently, for crypto operators.

Binance’s trading desks process an estimated $1 billion-plus in daily crypto trades and this involves 100-plus different forms of crypto.

The business, which only started trading in July 2017, has around 400 employees, but last April claimed that it was “more profitable” than Deutsche Bank.

The exchange’s founder and CEO, the enigmatic 41-year-old Chinese-Canadian Changpeng Zhao – who in the fintech world is known simply as ‘CZ’ – made that claim in a company blog.

“Binance is the world’s largest [digital] exchange,” wrote Zhao. “In the first three months from inception, profits amounted to US$7,500,000. In the second quarter, profits amounted to $200,000,000. The third quarter is still in progress, and is expected to have further growth. Any country that can attract Binance to open a branch in their location will receive a handsome tax income revenue.”

“Welcome to #Malta @binance,” Prime Minister Joseph Muscat duly tweeted when the crypto exchange announced its move there in March 2018. Muscat went on to outline plans for the nation becoming a “blockchain island” for Europe.

‘Island mafia state’

However, with the new money has come age-old problems. Some commentators have described modern Malta as an “island mafia state” and the widely-read journalist Caruana Galizia, who wrote a hard-hitting blog about Maltese corruption and organized crime, was murdered in October 2017 by a car bomb. “There are crooks everywhere you look,” she wrote in her final blog post, posted on the day she died. “The situation is desperate.”

The murder provoked shock and outrage, locally and internationally, and Muscat’s government has been trying to distance itself from a sordid tangle of allegations ever since.

Malta is also understandably keen to show the world that it is a clean place to do business and, indeed, since Binance’s move to the Med, anti-money laundering and countering the financing of terrorism (AML/CFT) compliance have become both more focused and more co-ordinated globally. It is only a year but the landscape has changed considerably. And especially so for crypto.

Selva Ozelli, a New York-based international tax attorney and CPA, told Asia Times that the Paris-based Financial Action Task Force (FATF), which is the global intergovernmental organization that develops AML protocols and regulations to combat the financing of terrorism (CFT), has sought to move with the times.

The FATF “has amended its cryptocurrency policies that are aimed to help countries develop coordinated regulatory processes to manage the potential cross-border risks associated with cryptocurrencies,” Ozelli said. “They require exchanges, wallet providers, and providers of  financial services for ICO’s to be all subjected to the CFT regulations and the AML protocols.”

Ross Delston, an independent Washington DC-based attorney and expert witness who specializes in anti-money laundering and countering the financing of terrorism matters, said: “The EU has high AML / CFT standards, often exceeding those of the FATF”.

The EU’s Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) has just completed a 12-month investigative mission, wrote Ozelli on her FCPA blog site, that has included assessing, “national schemes providing tax privileges such as citizenship programs offered for sale by Portugal, Italy, Malta, the United Kingdom, and Cyprus.”

In her blog, Ozelli also outlines how the US Internal Revenue Service has also recently created a Joint Chiefs of Global Tax Enforcement (J5) multinational taskforce that unites tax and criminal enforcement authorities from the US, UK, Australia, Canada and the Netherlands in order to expand and enhance cooperation on intelligence and criminal investigations.

Ozelli says neither J5 nor TAX3 existed before 2018.

Growing threat to tax administration

“The aim is to reduce the growing threat to tax administrations posed by cryptocurrencies and cybercrime, as well as to target transnational tax crime and money laundering,” wrote Ozelli.

These international efforts, unsurprisingly, have not gone unnoticed in Malta. In March, the Malta Financial Services Authority (MFSA) enlisted California-based CipherTrace to help it remodel its regulatory enforcement activities. The role of audits in anti-money laundering-based “Know Your Customer” (AML/KYC) procedures was a central theme and crypto will be very much involved in this process.

Two weeks after Malta announced its link withCipherTrace, Binance enlisted its own advisors, California-based IdentityMind, to, it said, “increase transparency” in Binance’s AML/KYC procedures.

Binance told Asia Times, via an unattributed email, that it “continuously evaluates KYC/AML providers and supplements its proprietary KYC/AML technologies with third-party tools to comprehensively control operational risks.” The work with IdentityMind, says Binance, “is part of that process.”

Binance is now very much a global operation but to date has seemed to avoid the US, with its intensive regulatory scrutiny. In September, CZ tried to brush this off as a business decision based on strong existing competition already in the States. 

But as Washington’s regulators and the other international regulatory bodies gear up to stretch their reach, it seems that Binance and the other crypto exchanges, like it or not, will have to start playing by international rules.