Binance Monitor Must Build an ‘Army’ for Unique Compliance Role

Big Law attorneys, forensic accountants, and crypto consultants began positioning themselves months ahead of a plea deal by Binance Holdings Ltd. to land a lucrative monitorship that’s rife with pitfalls.

The individual chosen after the world’s largest crypto exchange submits its top three preferences to the Justice and Treasury departments this month must build a global operation to inspect Binance’s compliance with anti-money laundering and sanctions laws.

Arguably the closest parallel in scale and cross-border reach—a multi-agency monitorship of European banking behemoth HSBC for laundering Mexican drug cartel money—exposed numerous failings that prolonged its term to nearly a decade. And yet Binance’s money-flow volume—with some 150 million users—and opaque reputation are anticipated to present even greater challenges for the monitor, say financial crime enforcers.

“There has been nothing remotely close to this when it comes to complexity, length, scope”—and to monitor what was “a criminal enterprise, essentially,” said Jim Richards, the former global head of financial crimes risk management at Wells Fargo.

The winner has to figure out exactly where Binance operates, hire personnel with the proper mix of crypto and senior government expertise, conduct a five-year audit of past transactions, store troves of data, and scrutinize a secretive corporate culture that’s wholly unaccustomed to omnipresent intrusion.

At the same time, the monitor must balance the government’s expectations of a hard-charging approach against the sensitivity that federal authorities hope to keep Binance in business. Although some digital assets experts are skeptical that Binance can remain economically viable amid independent oversight of customer records, the monitorship, in a best-case scenario, could set an industry-wide template for legitimizing cryptocurrency.

Expect Delays

The DOJ’s announcement last month that Binance agreed to pay $4.3 billion and plead guilty to anti-money laundering and sanctions violations accelerated a vetting process that was well underway to determine who is equipped to take on the project, said four sources familiar with the process. They were granted anonymity to discuss private conversations.

Noah Perlman, Binance’s chief compliance office, said in an interview that he’d already been preparing for the conclusion of the government’s five-year investigation by interviewing candidates—including teams applicants had assembled from other organizations. He expects Binance will use the full 30 days allowed under the Nov. 21 plea deal until it must submit three choices, in order of preference, to DOJ and Treasury’s Financial Crimes Enforcement Network.

The government will then have an additional 30 days to appoint a monitor from that list, or it can reject candidates and force Binance to present new options. Perlman said it’s being conceived as a single monitor to assume DOJ’s three-year term and FinCEN’s five-year period—both of which can be extended.

The plea deal sets several target dates for the monitor to submit reports to the government, but “in the practical world, it just never gets done on time. It’s just harder than everyone thinks,” said Michael Cherkasky, who was HSBC’s monitor. “Where is the information stored? Who has the information? Can it be moved offshore?” The Binance monitor is “going to have to have great technology and they’re then going to have to have an army.”

Cherkasky founded a new firm Exiger in 2013 specifically to tackle his sprawling HSBC assignment, a decision forced on him after DOJ wouldn’t let him contract out monitorship services to firms with HSBC representation conflicts. That’s a model that Perlman said Binance is also considering to abide by DOJ’s focus on independence.

“Given our size, our scope, our jurisdictional reach, there are a lot of folks—both lawyers, consultants that have done work for us over the years,” Perlman said.

Lawyers and consultants from many of the leading firms with relevant compliance expertise declined to comment, some expressly noting their interest in working on the monitorship.

‘What is Binance?’

Once a monitor is selected and starts developing a work plan, they may find themselves operating somewhat in the blind, at least compared to preceding DOJ appointees, said Craig Timm, who was one of DOJ’s lead HSBC prosecutors. Most previous monitorships didn’t oversee privately-held companies like Binance and began with greater visibility into the company’s structure, he said.

“They’re just going to wrap their head around what is Binance,” said Timm, who is now senior director of anti-money laundering at ACAMS, a membership organization of financial crime professionals. “They’re going to have to figure out, OK, where are the major executives located, where’s the staff, where are the records, because a key part of these monitorships is actually getting on the ground, sitting with the staff, speaking with them, looking at documents.”

Timm, as deputy chief of DOJ’s bank integrity unit, was the primary point of contact for Cherkasky during his inspection of HSBC, and reported up to a boss, Kendall Day, who now, as a Gibson Dunn partner, is serving as Binance’s outside counsel. Day, along with another Gibson Dunn partner steeped in senior government experience, Stephanie Brooker, have been leading the interview process for monitorship candidates, said four sources.

Firsthand knowledge of another tricky cross-border monitorship will let Day advise Binance on how to satisfy the government’s expectations of effective cooperation. But this situation may be extra complicated for all parties involved. A DOJ official with the same title Timm once held will now be overseeing the Binance monitorship, which similarly to HSBC will probe the company’s compliance with varying laws, depending on where they operate.

Except Binance hasn’t even selected a corporate headquarters, and is part of an emerging crypto legal regime that’s less developed than what brick-and-mortar banks experienced.

In crypto, “are there AML (anti-money laundering) obligations or are there not?” said Timm, who was also a financial crimes director at Bank of America. “There are certain places where there aren’t.”

Independent Testing

A thorough evaluation of Binance’s progress in overhauling risk assessments will mean not just looking over the company’s shoulders, but independently verifying the results, said Mikhail Reider-Gordon, managing director at Affiliated Monitors, Inc.

Perhaps more difficult than any other aspect of the project will be the five-year lookback of all customer transactions to determine which should’ve been flagged as suspicious to FinCEN. Among other findings, Treasury’s settlement showed Binance didn’t report a single Suspicious Activity Report, willfully failing to disclose more than 100,000 suspicious transactions.

SAR reviews are always an expensive and labor-intensive because after an initial automated filtering of all activity, people need to manually review each of the hits to eliminate false positives, Cherkasky said. “If you start to look at the number of transactions at Binance, it’s just staggering.”

Compared to Cherkasky’s days, the Binance monitor may have to be mindful of a more attentive and scrutinizing DOJ. Deputy Attorney General Lisa Monaco has called for more careful monitoring of the monitor to ensure they don’t venture from their mandate and rack up unnecessary expenses on the company, which foots the bill.

At the same time, more eyes from DOJ, and in such a high-profile matter, will likely lead to the appointment of someone with an aggressive reputation, said Brian Frey, a former DOJ bank integrity unit attorney who’s now a partner at Alston & Bird.

Striking the appropriate balance will be key, bearing in mind that DOJ made a conscious decision in its resolution to be punitive, yet without going too far.

That’s one reason why Ellen Zimiles, who was the DOJ-appointed monitor of British bank Standard Chartered, said the Binance monitor should be “somewhat business-minded.”

“It’s a partnership with a little bit of a hammer, but it’s a partnership to keep it going,” Zimiles said.

Ultimately, when a monitor is named, initial disappointment among those who lose out may fade once the monitorship evolves and requires more and more firms to get brought on in supporting roles.

“It’s unique, it’s complicated, its multi-jurisdictional, it’s detailed,” said Richards, the former Wells Fargo executive. “This is going to be just a windfall for whatever firms get this.”