The Volkov Law Group Reports: Crypto Exchange KuCoin Faces Charges from DOJ and CFTC for Non-Compliance with AML and KYC Regulations

On the 26th of March, 2024, an unveiled indictment by the Department of Justice (DOJ) charged the eminent crypto marketplace KuCoin, along with its founders Chun Gan and Ke Tang. The DOJ’s allegations pertained to conspiring to contravene the Bank Secrecy Act (BSA) and operating without a proper licensing as a money transmitter service, with legal proceedings initiated in New York’s Southern District. Concurrently, the U.S. Commodity Futures Trading Commission (CFTC) initiated a separate civil enforcement action against KuCoin and its affiliated entities, citing several infringements of the Commodity Exchange Act (CEA) along with other CFTC rules.

Such charges mirror issues rife within the crypto sector, illustrated by previous cases involving Binance and BitMEX. U.S. Attorney Damian Williams emphasized the indictment as a stern warning to other crypto exchanges about adhering to U.S. laws. He stated that compliance for those who cater to American clients isn’t negotiable.

As an internationally recognized platform, KuCoin stands among the top five crypto exchanges globally by metrics such as user traffic, trading volume, and so on. The exchange, launched in 2017 by Gan and Tang, operates through multiple entities like Flashdot Limited, Peken Global Limited, and PhoenixFin Private Limited, all named in the DOJ lawsuit. Publicly acclaimed for its liquidity and trade volumes across derivatives, KuCoin is reputed for its customer base exceeding 30 million across 207 nations, with its daily trading figures surpassing $2.8 billion, offering a vast array of over 700 cryptocurrencies and more than 50 fiat currencies available for trading.

The indictment paints KuCoin as a platform that deliberately avoided establishing any form of anti-money laundering (AML) protocols. Until about mid-2023, KuCoin did not require any identification from its users beyond an email address for account setup. Despite an ‘optional’ ID verification system, the United States wasn’t even listed as a selectable country. The DOJ reveals that KuCoin was well aware of its U.S. clientele, monitoring IP addresses and login behaviors.

KuCoin’s stance on not requiring know-your-customer (KYC) procedures was also heavily promoted online. For instance, in April 2022, when a U.S. customer’s attempt to complete the optional KYC verification failed, KuCoin’s customer service indicated via social media that KYC wasn’t mandatory for U.S. users. This seemed to be the standard reply given by KuCoin across various public platforms.

The documents include a notable incident where a user, after a failed margin trade, threatened legal action against KuCoin, revealing his location as the U.S., which led to the exchange promptly closing his account after he registered it under a new email.

Prosecutors assert that KuCoin’s lack of diligence made it a routine channel for transferring funds linked to criminal activities. The DOJ accuses the exchange of handling billions of dollars related to illegal endeavors. It’s also noted that the platform had monetary exchanges with Tornado Cash, an entity on the OFAC SDN List, without ever reporting suspicious activities to FinCEN.

A foundational AML program wasn’t considered by KuCoin until they were notified of a formal investigation in May 2023. Despite this, their implemented measures, such as an updated Terms of Service and a mandatory KYC process for new registrants only, remained ineffective in fulfilling BSA standards and in preventing U.S. users from trading.

In response to the indictment exposure, KuCoin experienced an exodus, with over $800 million in assets withdrawn from the exchange within a day.