Former FTX executive Ryan Salame has accused the government of reneging on an agreement that if he pled guilty to two charges, they would cease the investigation they had just begun into Michelle Bond, the mother of his child.[1] The hearing is tomorrow. The integrity of those charges provides important context.
In the official filing, the “conspiracy to operate an unlicensed money transmitting business” charge describes no illegal activity; instead, it exploits an ambiguity in order to give the appearance of an illegal act. The “conspiracy to make unlawful political contributions and defraud the FEC” charge is similarly on very shaky ground in my opinion, but perhaps I should let someone more qualified than I weigh in on that one. Either way, the ludicrousness of the first charge makes it highly plausible that Ryan’s plea was coerced.
People rarely read formal charges. Even those closely following a case usually don’t bother wading through all that technical jargon in my experience.
But this one’s relatively straightforward so stay with me. You can read the whole filing yourself but the key passage is:
In or about January 2020, Samuel Bankman-Fried, a/k/a “SBF,” contacted Bank-1 about opening an FTX account. Bankman-Fried learned from Bank-1 that Bankman-Fried should not attempt to open an account for FTX, an international platform, at that time. He was further told that if he wished to open an account to process customer deposits and withdrawals for FTX.US, FTX’s business in the United States, FTX.US would need to register as a money services business. While Bankman-Fried did later register FTX.US as a money services business in 2020, no attempts were made to make FTX a licensed money services business.
In other words, the bank told SBF that FTX.US needed a U.S. license and so SBF obtained a U.S. license for FTX.US. So far, so good. Separately, the bank told SBF that FTX International couldn’t have a bank account yet for some unstated reason and SBF did not obtain a U.S. license for FTX International. The reader assumes the unstated reason is the same as the reason just given for FTX.US, namely that FTX International needed a U.S. license. And then based on this equivocation, Ryan is given five years behind bars for conspiracy to operate an unlicensed money transmitting business.
FTX International a.k.a. FTX Trading Ltd was not subject to U.S. licensure requirements. It was not incorporated in the U.S., it did not operate in the U.S. and it did not serve U.S. customers. It did obtain licenses in countries where it was actually required to.[2] FTX International and FTX.US were separate entities – neither was a subsidiary of the other and they were not subsidiaries of a common holding company.[3] I’m not even sure FTX International could have registered as a money services business with FinCEN if it had tried.
Outside counsel Fenwick & West – who drafted the payment agent agreement between Alameda and FTX International – explained the situation to FTX International’s Chief Regulatory Officer at least once. From a February 2020 email:
According to a 2012 FinCEN guidance, "[t]o qualify as an MSB, a person, wherever located, must do business. wholly or in substantial part within the United States, in one or more of the capacities listed in 31 CFR 1010.lO0(ff). Relevant factors include whether the foreign-located person, whether or not on a regular basis or as an organized or licensed business concern, is providing services to customers located in the United States." FIN-2012-AO0l (emphasis added).
…
FTX is incorporated and operated outside the US, and does not allow US persons to trade on its platform.
FTX is majority owned by Sam Bankman-Fried who we understand is not a resident of the US, but is a US citizen and US taxpayer.
FTX is operated from abroad, and no FTX business activities are conducted within the US. We note that FTX does not accept US customers or offer services to the US. FTX also has no physical presence within the US.
On its face, FTX is not a customer “located” in the United States. Any fair reading of the 2012 FinCEN Guidance indicates that the customer’s physical location controls for purposes of determining whether an entity is doing business in the United States. This is buttressed by the fact that the few cases where a foreign entity was subject to proceedings for failing to register as an MSB, that entity had a direct and substantial customer base physically located in the US.
Ryan’s charge also alleges, “Alameda never informed the banks where these accounts were held that these accounts in Alameda’s name began to be used in substantial part by FTX to accept customer deposits for, and as a vehicle for customer withdrawals from, FTX’s cryptocurrency exchange.” This isn’t the main substance of the charge but for what it’s worth, it sure does look like the bank knew what was happening. X users have backed Ryan up on this one and Ryan even says the whole thing was the bank’s idea.
But the main point here is that no one obtained a U.S. money transmitting license for a foreign business that clearly did not require one,[4] while—by the government’s own admission—such a license was obtained for the U.S. business that required it. And so a man is going to prison for five years for failing to get something that he never in fact needed.
[1]Michelle was only Ryan’s romantic partner at the time, not the mother of his child. But they felt so reassured by prosecutors’ alleged promise that they decided to have a baby.
[2]Australia, Cyprus, Gibraltar, Japan, The Bahamas, UAE, etc.
[3]Don’t get me started on all the other trouble that’s been caused by outsiders conflating FTX.US and FTX International.
[4]Even if FTX International could have and should have obtained a U.S. license, would that have been Ryan’s responsibility? Something’s gone wrong if FTX International’s general counsel can walk free in exchange for testifying against his boss, while Ryan – Alameda’s Head of OTC-APAC at the time – gets five years for it because he “had nothing to offer [prosecutors] without lying”.