How Binance Will Open All Its Activity to the U.S. Government - Ep. 581

Transcript

five years in an industry that changes quarterly with a company that has only been around for six years is a really long time and so you know this settlement agreement allows the us to have extraordinary inside access to information and influence over the organization on an ongoing basis that it might or might not be able to have if there aren't future touch points to the US jurisdiction hi everyone welcome to unchain you're a no hypee resource for all things crypto I'm your host Laura Shin author of The cryptops I started cing crypto 8 years ago and as a senior editor at Forbes was the first mainstream Med reporter to cover

cryptocurrency full-time this is the December 12th 2023 episode of Unchained arbitrum leading Layer Two scaling Solutions can provide you with lightning fast transactions at a fraction of the cost all while ensuring security rooted on ethereum arbit trim's newest edition orbit enables you to build your own tailor mate layer 3 visit arbitrum doio today streamline your dii with Vault craft the ultimate onchain toolkit for deploying custom automated dii products on any evm chain join vulcraft referral program Unite with the community and supercharge your crypto details on vaft doio the game has changed the Google Cloud Oracle built for layer zero is now

securing every layer zero message by default their custom endtoend solution sets itself up to bring its worldclass security to web 3 and establish itself as the https within layer zero messaging visit layer zero. Network to learn more today's topic is binance's future with compliance monitors here to discuss are Michael Dawson partner financial institutions group at Wilmer hail and Dorothy DT founder and CEO of tot strategies welcome Dorothy and Michael thank you for having us pleasure to be here the US Department of Justice along with the treasury Department and the quantity Futures Trading commission

recently reached a settlement with binance the largest crypto Exchange in the world over anti-money laundering and sanctions violations the exchange's financial penalty totaled $4.3 billion and Chang Pang Xiao or CZ stepped down as CEO one less talked about aspect of the agreement is that binance for the next five years will now have a compliance monitor the monitor will be there for three years for doj and for five years for the financial crimes enforcement Network or finsen as well as the cfdc and the office of foreign assets control or ofac Dorothy can you explain what this means what is a compliance monitor sure the terms compliance monitor

corporate monitor third-party compliance um independent compliance consultant they can be used interchangeably but effectively um they are an independent entity that is paid for by the company but that reports to the court or the government uh and uh reports on uh or the primary responsibility including reporting is to assess and monitor binance's compliance with the plea and settlement and consent uh orders and to oversee the creation and implementation of new and effective compliance ma uh measures and to eliminate or at least reduce the risk of recurring misconduct as secretary Yellen said in the conference um announcing these

agreements what she really would like to see is for binance to offboard and not onboard all us customers going forward northy I like what you said about the monitor being an entity because sometimes people think it's going to be a single person but in fact it could be it could be headed by a single person who's got some particular domain expertise but it's going to be a large team especially in the like this and so Mike can you explain how it works for the company to have hired this person that in some ways or maybe in all ways is actually working for another entity like what will they have access to what will they not um you know what

kind of like relationship and processes are you know built up around um a compliance monitor yeah it really varies from case to Case and there are a lot of Provisions in the independent monitorship provisions of the guilty plea that binance agreed to that are designed to try to make it work better uh so uh first and foremost it's important that the monitor have good stature uh within the organization and outside of the organization and that comes from uh having a lead monitor got relevant uh experience in crypto uh preferably relevant experience from a regulatory background um heading the effort and then there will need to be

access to Personnel information data uh so that the monitor can can do their job but you're quite right at the end of the day the monitor sees their boss as being the Department of Justice finin s obac and the cftc uh and they see themselves as being answerable to them not to the company just add the key to monitorships is this is an ongoing concern the purpose is to achieve and maintain uh a compliance structure and a culture of compliance that will prevent future violations of US law and to move on and continue successfully um there are lots of ways to trip that up but a

compliance monitor needs to also have private sector sensibilities in addition to an full understanding and experience uh you know with government as a previous senior regulator or law enforcement uh prosecutor Etc but you have to have that balance between uh private sector sensibilities and practicality and credibility as well as um you know the perspective of the government to whom you ultimately report that's a good point you need that balance I agree and so why do you think the government made this part of the settlement rather than just having the fine and having CZ step down so the government has jurisdiction over you know this person who's in the UAE not a US person and this entity that operates

overseas and you know theoretically you know theoretically but not actually not in the US but part of the agreement is that uh binance will stop doing business with us persons and where we'll offboard all of them and so in so far as they have connections to the US these regulators and law enforcement have jurisdiction but suppose they have completed the theoretically completed their offboarding of us persons I don't know within six months or as of today they've already done that let's just suppose that then it's not clear what jurisdiction or effect or influence the US government regulators and law enforcement can have on an overseas entity that doesn't have touch points to the US so I think part of the I'm

speculating my sense is that part of the settlement is to enable the US to really have full insight into the way the organization Works what products it has what compliance it has to be able to affect explicitly the company's culture of compliance which is a major undertaking and to be able to ensure that and test and validate on ongoing for five years the compliance function to make sure that it's adequate to achieve compliance with us laws five years of compliance monitoring which can be extended to six and in certain circumstances we can talk about could have it could go very badly and there could be bigger issues which could have happened in other Industries five years

in an industry that changes quarterly with a company that has only been around for six years is a really long time and so you know this settlement agreement allows the us to have extraordinary inside access to information and influence over the organization on an ongoing basis that it might or might not be able to have if there aren't future touch points to the US jurisdiction yeah if I could just add to that I think the um the point about Finance being a non- US entity uh is really important because the Department of Justice has a 10 Factor um protocol that it uses to decide whether or not it should impose a

monitorship so in answer to your question Laur about why a monitor was chosen here uh doj ran through those 10 factors and on balance concluded that one was important but one of the key factors is is the entity subject to comprehensive supervision and regulation by a foreign regulator in this case the answer is no and so that would have factored into their decision to impose monitor it's got an interesting consequence because what will happen as a de facto result of the monitorship is that you'll have one of the largest players in the industry um being subject to uh a set of expectations and rules that are coming from this monitor that's

going to have um basically a ripple effect across the industry I think essentially de facto regulation is going to be defined by this monitor ship and then percolate out but how is that the case like how would that percolate like I don't know you know I I would imagine it's mostly private or explain how how other exchanges because I the reason why I'm saying this is I guess most of these exchanges being private companies like they probably all have their own internal processes and I'm sure there are certain things that become best practice but like within within that framework still that you know they all have their own ways of doing things um so how how would that percolate out I

think exactly through that best practice mechanism so what what it happens um as a as a general tendency in the regulated space is that in the wake of an enforcement action like this other companies looking at uh the binance experience and attempting to avoid uh a similar event attempting to avoid a similar monitorship we're going to try to reach the standards that are set by binance some of those are going to be private and unknown to other industry participants but others are going to be apparent so for example if you're a customer and you're trying to uh on board at binance you're going to know the kyc and enhanced due diligence processes that they put you to and then

when you go to other industry participants and go through the same thing you're going to share your experience you're going to say uh you know wait a minute you're asking me questions if binance didn't why are you doing that and so there's there are a lot of mechanisms through which uh word gets out as to what the current standards are and you see um a tendency to uh I think for the industry to rise to the standards that will be set within binance and that's in their interest because you know the rest of the industry wants to not have a monitor monitors are extremely expensive extremely invasive um have a full access almost unfettered access to Personnel records data Etc

and companies and frankly policy makers want companies to improve um their compliance functions and their culture of compliance and their internal risk and control framework you know terminologies that haven't been normal lexicon in this industry because it's a newer industry but have been the normal lexicon in in in more traditional Industries they will really want to make sure that they have a demonstrable and reasonably designed and effectively imp implemented internal control framework so that if and when uh Regulators come and ask about it or have inquiries or enforcement and maybe even with some active Enforcement cases they can say a monitor is not required because of

everything that we've done and where we are or if a monitor is required the scope and time should be limited and so on and so forth to have a little bit more a lot of investment UPF front can really help out on the back end around monitors and independent third party consultants and resolutions and so one thing you know that is a little bit confusing which we've kind of addressed but I just want to ask about one specific aspect of it so as we mentioned binance is not a US entity um and yet these monitors will be reporting to the US government so is it literally simply making sure that binance will not serve us customers is that it or is it also making sure that

they're complying with the laws and the jurisdictions where they operate or like what exactly are they making sure they they do yeah it is off porting the US customers for sure but it's a lot more than that they're being yeah because that can't take that long yeah although you know nothing is really as easy as it seems so you have to identify the US customers you have to uh Trace ultimate beneficial ownership and you might find some us ownership that's lurking behind several layers of uh ownership so it see sounds easy but nothing as easy as it is as easy as it seems right but I I guess like I would imagine it just wouldn't take five years it might take like one year maybe the very most two yeah that shouldn't but

the uh the provisions also call for the monitor to make sure that binance is meeting uh standards associated with compliance with us sanctions um making sure they're not uh allowing the platform to be used to facilitate terrorist financing they're also uh exporting us expect ations around anti-money laundering uh compliance programs so it's much more than just offboarding the US customers and when you say exporting us um anti-money laundering or kyc um you mean like to the other jurisdictions that Finance actually operates in yes oh interesting yeah okay but I guess I'm just confused

as to it I guess it's just because of the settlement that they can do that because there's nothing and those other like like let's say the there's some gap between what the US requires in those processes and what the jurisdictions that Finance operates and require then yeah it's just kind of forcing binance to do something for the jur for the US jurisdiction simply because of the settlement that's right but if there's a contradiction the agreement says that bance can say hey we're prohibited uh from doing that as a result by local law so what the monitor is asking us to do we can't do because of Lo the law and the agreement recognizes that but where there's a gap and not a contradiction

then the um us regulation is going to fill that Gap and it's to me it's really interesting what we have is a situation where we have an absence of regulation in the US and in uh foreign jurisdictions and that void is being filled uh as a result of this agreed to resolution by binance the US government it's being filled by us standards so how unusual or or perhaps typical is it for the government to make a monitorship part of a settlement like this like would you have predicted that this would be part of some arrangement you know because obviously for years now there's been rumors that or not even

rumors but you know it's been reported that there was s you know some action kind of that was going to happen against Finance um so did you expect this or was this a surprise by expect it and I expect there to be more monitorships appointed in the industry for a few reasons the first is well we talked about the overseas jurisdiction overseas jurisdiction the challenges on an ongoing basis to having you know bootes on the ground and eyes on everything and and that's part of the the benefit of a monitorship and the establishment of that monitorship the second is that doj has s waxed and waned on its approach to monitorships as a part of criminal settlements but uh civil Regulators have been increasingly emphasizing the need

for monitorships uh particularly in the areas where there isn't comprehensive us regulation like a bank has day in and day out uh Bank Regulators that are at the company and looking at everything and so on and so forth you just don't have that generally speaking in in in this and some other Industries and so this allows there to be you know government supervised uh you know Buy on the company and Rural influence on the the company's operations going forward as we talked about for five years you know the whole industry could change the way that monitoring is done can change the way that detection is done could change prevention is done can change you know we don't need to get into defi but there are all kinds of things that could

change that could make it more challenging and the length of the monitorship reflects I think the anticipation of a really changing environment so the cftc just recently said it's going to require monitorships as uh much more frequently in missions and other things like that as a result of their settlements and they indicated that where they trust that the company has and can remediate itself they might do a third- party consultant that could advise on that remediation where they're really not sure maybe it's recidivous or maybe it's very serious as in this case they are going to require monitorships um you know probably akin to what we see here because of of these various things and Mike I just have a question for you

do you think monitor ships are an optimal solution in crypto or do you think they reflect you know I spent six months on the hill recently drafting crypto legislation in the Senate which you know it's not clear where that's going to go but it is clear that there has been a a need for legislative solutions to allow for a more comprehensive regulatory program how do you think monitorships play into that lack of legislative solutions to some vexing issues yeah it's a good question I I think they're clear cly a second best uh solution and if we had uh a comprehensive regulatory regime and a comprehensive supervisory re regime like we had for uh Banks or broker dealers or

other participants I don't think you'd see monitors being used as often as they are in crypto so you've got a monitor in the coinbase settlement with the New York Department in financial services you have an independent consultant appointed in the DFS settlement with uh Robin Hood crypto and now you've got this monitorship and they are necessary in these circumstances but I think a poor um second best solution in the absence of kind of a comprehensive regulatory approach one more reason to uh advocate for a comprehensive regulatory approach so yeah one thing I did want to note about you know how

unusual this is is um this is actually the first time that finsen has had an independent compliance monitor as part of you know a settlement so you know that I think says yeah well no the uh the Wall Street joural reported that this was the first time that they've ever employed a um an independence compliance monitor independent compliance monitor they fine yeah for sure um so now you know you mentioned earlier the high price that these companies have to pay when there are monitors so do you have a ballpark figure of like how much this will cost binance I think it depends on the Monitor and it depends

on also on the cooperation by the company you know providing information credibly not false green thumbing um you know saying that everything is going well when it isn't necessarily and um being responsive and Cooperative are key factors in the duration and the cost but you know Mike I don't know what are other key factors in yeah I think one thing that's really interesting here is that um the provisions in the guilty plea say that the independent monitor can rely on the Personnel reports testing of binance so they can rely on the internal resources and I think that

will go a long way to reducing the cost but you're still talking about tens of millions of dollars over a 5year period not billions maybe it might total 100 million by the time it is done it's going to be expensive and so this can't all be going to the main person that's running the show or it's not like just a salary right or what is that expense comprised of well it will be um basically you're going to be paying time and materials for the time of the labor of the lead independent Monitor and all the arms and legs that they're going to need to employ um to do their job so will be a team of people and will charge

hourly rates you know that are um basically competitive within the market for um people with um talent in crypto in regulation and in uh as Dorothy said earlier getting that balance right in terms of what complies with the regulatory expectations but is also practical from a business perspective those people aren't cheap I was just going to say there are different models so one model might be to hire a big law firm and the law firm will have the arms and legs within the law firm maybe they'll hire some forensics experts as well which I have no doubt will take place here and so on and so forth and so you know there's a tacd I don't think

explicit because lawyers have you know lawyers that would do this kind of work U and and others will will be know credible and highbrow and so on so forth but you know the more arms and legs are out there out there and the more work is done the more it costs and the more the Monitor and its organization make there's a second approach which is the kind of a two-tier structure which is to have a smaller organization entity or individual who does uh the monitorship and then outsources but does not benefit from the cost of the arms and the legs um and you know those the the types of services that my company to offers uh Monitor and third part party compliance solutions that are that second that

two-tier model but there are other very wellestablished long-standing larger organizations that have you know a whole slew of Divisions that can do that kind of work inhouse and so it just sort of depends on where the bills come from who's seeing it and who's ultimately in charge and you know what the incentive structures are on there so you know bance will have to make some decisions I'm sure it has you know some good options I will focus one thing on one thing that Noah Perman said he did an interview with law 360 a couple days ago and and he's oh yeah he's the chief compliance officer of binance who was brought in about a year ago very well regarded I've known him for decades in

the industry I was at Morgan Stanley for 15 years um and then at um Gemini uh but he came in and I think he was critical to and and the docu settlement documents suggest uh very much so that he was critical to kind of turning around that compliance program and to he's also very experienced in you know major program management which this involves like it's a major cultural change major change in the way U business is done and so on so forth so you know he said in his interview that you need a crypto who has expertise in the space you know industry wants a a monitor who is kind of committed to the success of the industry and they is willing and able with those

sensible and practical approaches to you know allow and permit uh the company to go on and move past some monitorship and succeed with great compliance programs and so on so forth but you also need someone who's credible with the government and when you look at that VIN diagram it's really small and then even within that you may have firms and forensics and others that are conflicted for example I'm sure that some of the blockchain analytics companies have worked with the government um in this case and others I'm sure that some of the law firms have represented there a whole host of individuals and entities who would have representation here like individuals one through four and you know uh entities a through F that are unnamed but you can kind of

understand who they are so the VIN diagrams get overlap gets smaller and smaller and so um and and also keep in mind that both the doj and finson say they pre and they ultimately choose the monitor from the three that are recommended by binance based on certain uh requirements doj and finson ultimately choose it it'll probably one monitor across all of it um that's fairly apparent um but they have obligations to or they have priorities around diversity and inclusion in deciding which of the monitors there are so even that makes the overlap of the VIN diagram even smaller okay so basically it could be kind of one entity

meaning law firm as Mike mentioned or it could be maybe a person who then outsources some of the functions that they'll be overseeing so you know obviously at the moment it's a person either way the person may be affiliated with a bigger organization like a law firm or a big forensics compliance company or something like that or the person may be not affiliated with the arms and legs but decide how to use the arms and legs which to use and not NE have uh you know direct interest in you know how much that involves related to their own payments and remuneration and such okay so at the moment binance is I guess vetting these different candid or

not vetting but choosing which candidates they're going to offer up to the government so what do you think binance is looking for um you know some some of the requirements we just discussed are just you know kind of what are the parameters of of what they you know can select but within that what do you think they'll be looking for I think they'll be looking for three things and maybe a fourth cost and that's not to say like is it x amount an hour 1.5x amount an hour it's more that you know are they going to be able to make sure that there's a comminate benefit to the public and the government and National Security to the work that's being done and charged for example there have been

examples that you know Mike and I can tell you about where it's not clear that there's a comminate benefit between the cost and the outcome so they're going to make sure cost and cost is related in large part to scope scope around AML kyc sanctions uh you know Etc um no scope creep is an issue that can come up um and that can be very very costly and third and you know part of the costs are what Mike said where um the monitor can rely on B binance's internal uh forensic analysis and and reports and this and the other if in their own discretion the monitor finds those credible if not they can use their own so different cost mechanisms scope mechanisms there also

is the ability to in the monitorship early if you know everything if the government agrees that you know the purpose of the monitor has been completed and so on and so forth that has happened it's not very common but it has happened and that's certainly what companies always want to try to do and they're very incentivized to put in place uh the mechanisms to do that it's key to note one particular thing it's not just that the monitor is going to ensure help ensure that the internal control framework prevents us customers from accessing their platform going forward it's also that the monitor has an obligation to and uh binance agreed to this obligation to do a look back a

look back is where you look back over the last six years and you look at every transac action or huge samplings and swats of transactions so on so forth and you'd identify which transactions should have had uh suspicious activity reports SARS filed and for each of those that they find over you know a long look back period they need to file those so that gives ofac and finsen much more um information about what elicit activity has taken place and they can see the wallets and they can see you know the kyc if any was done and they can see the transactions and so on and so forth so the look back is key that can take longer than you expect it's hard it's

complicated and then also key is explicitly changing the culture of compliance and um improving uh the compliance program to achieve compliance with us laws so since as we mentioned um this is a very small then diagram and just gets smaller when you kind of look at all the different requirements that need to be met so given that I wondered if you had any particular candidates that you thought were likely choices for this role I wouldn't want to speculate there are big organizations that have done this there are like forensics and consulting firms there are law firms and then there are organizations like me that are you know having been the

director of the division of Market oversight at the cftc the first woman director and also having the general council at coinbase and more recently drafted crypto legislation in the senate for a temporary stint um this year and last um you know those are those you just to give us a Shameless plug you know th those are other options as well and that's the two-tier structure both structures can work and it really depends on what the government prefers and what com binance prefers and I'm sure they will put tremendous amount of thought and I'm sure there will be lots of interest and submissions to seek uh this monitorship it's an important one it's important to our national security it's important to the industry and it's important to um you know the

direction of the industry in compliance well Michael do you want to name names uh you know sure as a thought experiment uh I've got a dream candidate completely probably completely implausible but um how about Patrick McKenry outgoing chair of the house Financial Services uh committee has announced he's not going to seek reelection I don't think the timing is going to work out for this but I think that's the type of uh person you want it gets to one other dimension that is required here in addition to that then diagram and Dorothy alluded to it which is leadership it's going to be a big project with a lot of people and you need to have um a leader at the head of IT who can keep all the projects and

tasks uh going on time so I think that's a fun candidate to speculate about again thought experiment probably completely impossible that's a great idea all right so in a moment we're going to talk a little bit more about what it is that the monitor will do but first a quick word from the sponsors who make the show possible the game has changed the Google Cloud Oracle built for layer zero is now securing every layer zero message by default their custom endtoend solution sets itself up to bring its world-class security to web 3 and establish itself as the https within layer zero messaging visit layer zero. Network to learn more defi just got way easier with Vault

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conversation with Dorothy and Michael so Dorothy alluded to this earlier um but you know in addition to just making sure binance is offboarding US users and that it's complying you know up to a certain standard especially um if there are gaps um in the jurisdictions that Finance operates and they are going to be also doing this look back um so as far as I understand this is actually a separate role or it's probably somebody under the Monitor and it's called the SAR back Consulting with SAR standing for suspicious activity report which is something that has to be um filed here in the US when a financial institution you know identifies what they believe to

be suspicious activity and then the other is an AML or anti money laundering program consultant so can you talk a little bit about what these two roles will be doing yeah why don't I take the uh SAR look back one Dorothy and maybe you can speak to the other one um I've been involved in a lot of suspicious activity report look backs and basically what's involved is the monitor is going to have to first collect transactional and customer data from the past uh from Babs and that itself is a non-trivial difficult exercise because at the end of the process you have to be able to show the Department of Justice and finsen that the beginning of the

process was sound uh that you collected all the data that there weren't any gaps in the data that you collected then uh what the monitors team is going to have to do is analyze those transactions against a set of typologies or known patterns of money laundering or terrorist financing Behavior to try to identify uh potentially suspicious uh activity then what the monitor does is that that's kind of an automated computer-driven process that'll spit out alerts that a team of humans uh will then investigate to see whether those potential Le suspicious activity uh are

actual suspicious activity then they prepare and file a report uh with finsen that details the who what when and where uh of this suspicious activity these are um very even though it begins with this automated process to generate the alerts they're they're very labor intensive I would an participate you'd have a team of you know scores of analysts um so in the uh maybe not quite a hundred but around that number of people actually reviewing the alerts to identify suspicious activity yeah I would imagine that the sheer number of transactions that they have to kind of um you know

vet initially is I don't even want to imagine yeah this SAR lookback operation could turn up a lot of information that leads to clues about who perpetrated other crimes that we don't know about yet and you know thinking back I remember there was the Dutch authorities who seized the dark net Mark at Hansa the doj seized alphab Bay which is another Dark Net market and I'm I'm not saying that Vex is a darket market but I'm just saying when authorities get a lot of information about transactions it's led to other crimes being resolved like for instance the bitfinex hacker her um I believe you know the authorities figured out who they were um from I think it was

uh transactions on alphab Bay so do you think this look back operation could end up identifying more crimes and if so like how it because the you know everything that the government's produced so far has has shown that they have a lot of information already about what happened on binance so I was just wondering kind of what the difference is between the information they've received so far vers versus what they'll be getting now let me start and then I'll turn it over to Mike who will have some good insights you rais a very important question you know we some of our discussion has reflected whether illicit actors who may have been able to transact and exchange in the past on binance will want to do so in the future you know the likelihood of reducing uh

that illicit activity on the world's largest platform is significant going forward the question you rais is retrospectively and that highlights and underscores why my our sense is or my sense is that the government structured the resolution in the way that it did not only does it have uh boots on the ground it's very invasive to have a a a monitor that can see everything for the next five years extendable to six all the information client information transaction information Etc to be able to monitor for these types of things but also the look back provision that's that's sort of half of the remat the other half of the remit is sort of ongoing compliance program Improvement and testing and so on so forth the look

back provision requires that binance go back and identify what the government believes is to be more than 100,000 suspicious activity reports that should have been filed and it has to go back it's traditional in a look back you go back and correct it can be very timec consuming it be very complicated and you go the the government has required binance to go back and look back at virtually all of its transactions and to identify and file SARS for those transactions retroactively and that is absolutely a trove of information for law enforcement and you know underscore that criminal ple agreement was with uh the criminal divisions uh money

laundering and asset recovery section known as imars and with a separate division in the doj which is a national security Division and I think a large part of the settlement is the priority of uh the Department of Justice to get as you know get as much information as it can to uphold our national interest by prospectively preventing and retrospectively getting it information and identification to help it in its fight against uh illicit finance and sanctions uh violations my guess is that they have been starting the look back but I'm not sure they may be waiting for the plan uh that the uh monitor puts forth so that they're not doing some work and then you know doing

it in more formalized way with the monitor but my guess is in the last period of time that they've been working hard to remediate before this they have you know provided the information that they can and I feel fairly certain that once the monitor is in place there will be a likely a rolling production and it will be you know significant and a significant amount of information on illicit actors and you might see in the coming months and years following those Productions um or you might not see uh government activity uh integrating all of that information into their efforts to support our national security what do you think Mike totally agree and I guess I would add that this really goes to the

core the original Mission incent uh the e in the end in vincen stands for enforcement Network and what vincen was originally stood up to do was to share this information with um federal and state law enforcement agencies so in addition fence and having access to the data IRS criminal investigations has access to the data the FBI has access Customs state law enforcement agencies Us Secret Service and finen in addition as cooperation agreements with the financial intelligence units um of other countries so this information I think uh

will be um a very sort of Target Rich environment and the question will be um Can the law enforcement agencies kind of Marshall the resources to exploit it in a timely timely manner I think the other thing I would add is that this information likely has uh relevance to the National Security intelligence Community both in the United States and abroad so I totally agree with Dorothy's points and it really goes to I think pick of what vense mission is and so for National Security are you referencing like this North Korea type stuff North Korea

H right and one other thing so um you know they they already seem to have a fair amount of information on finance so you know what's the difference between how that was obtained or or what they were able to obtain there versus what they'll be I mean obviously now it's like literally everything but just you know what um yeah what were they able to obtain so far so far and how of course we don't know but the likelihood is that and I think it's reflected in a lot of the language in the consent orders and the plea agreement the likelihood is that in order to bring these uh enforcement actions and charges they had you know a sampling a

significant sampling in the in the plea agreement it spoke only of Iran and the finset agreement it spoke of a lot of other um comprehensively designated countries and sdns that have been designated uh and you know are not shouldn't be uh it would be violation of US law for us persons to transact with them and the matching engine itself enabled that to happen so that was sort of a lot of discussion in these agreements about that so they they they clearly had a a meaningful sample that was sufficient to bring these comprehensive charges and this record-breaking settlement and resolution but what I think those documents also made clear at least tacitly is that there's probably a lot

more they didn't it's likely they didn't sample 100% of everything and that's why they brought in a lookback monitor the lookback neither monitor has to sample 100% of everything but they can if they want and they feel it's appropriate so they'll put together as Mike you know you know is an expert on a plan to you know tackle this and they'll get through it and as they go through they'll see what perhaps their sampling is showing and then decide how much deeper to do or decide whether to sample 100% of everything which is likely because the more information that the government is able to identify through this process on illicit Finance the better and so you know you'll see in these agreements they

say at least a 100,000 or at least this amount I think my sense is that there is you know there is a likelihood that there will be a much more comprehensive review that will provide more information over a period of time and part of why this monitorship is so long three years for doj and five for the rest that can be extended is because that may be something that be can be accomplished in one period of time or that may require a significantly greater period of time especially if complications come up or it's difficult and so and so forth I would also just say that you know when I when I was General Counsel at coinbase it was a huge priority to uh prevent finance and to do monitor transaction monitoring and

and and and and customer due diligence know your customer Etc and it was really comprehensive and that's just the day-to-day stuff it's it's very resource intensive and this look back is going to be a massive project that I I think you know I think is expected in general to yield some significant benefits to the customer I mean to the country National Security and our you know the Integrity of our financial system and so Dorothy can you talk a little bit about what the anti-money laundering program consultant will do sure so the anti-money laundering program consultant will primarily do two things um ensure that there is a culture of compliance and that's more complicated than it sounds

and second ensure that obviously the elements of the agreements relating to improvements and enhancements and uh of the compliance program are put into effect um so insuring culture cultural compliance is pretty significant ific um it's not just illicit Finance compliance it's everything and that can involve tone from the top which is critical uh the CEO and Senior board and um senior leadership it involves Investments making sure compliance is sufficiently independent and sufficiently resourced and um that their team is has the expertise that are requisite for this type of level of sophistication and and transactions and program that is necessary to uh to achieving the goal

and it also needs to make sure that there's training um across the organization which is no small feat that there are policies in place that are reasonably and and training and controls and other things that are reasonably designed and effectively implemented to assure compliance with us laws reasonably designed that means that you've based on your business model and your products and your risks it's a risk-based approach to this um that you have addressed in controls could be policies and procedures training uh you know whether the controls are detective preventive automated or manual uh you know what type of mitigative me measures are in place what type of escalation

measures are in place when concerns are identified through alerts or otherwise you know how those are decided what level of um decision making is in place like these are all very complicated sort of policies and procedures and controls and and training undertakings that they need to do um and what often comes up Mike and I have worked together on some some of these types of things including a major financial institution that had huge remediation obligations based on a very significant fine and it took several years to put in place um but things can come up during that uh you analysis both the look back and also the compliance monitor and those can include you know uh uh suspected additional violations of the law and kind of

confirmed additional violations of the law and those need to be reported they may need to be reported immediately to law enforcement you lots of things can come up but let's go back to the compliance framework You' got to have training you've got to have tone from the top you've got to have alignment of the compliance program with uh disciplinary measures and compensation measures like their compens you know staff's compensation and review uh annual review of performance expectations should not only be revenue and product and so on and so forth but should explicitly and very do in a very documented way include uh you know compliance as a priority of of what their job function is there are also obligations to for example formalize how

you deal with law enforcement um so those are all reasonably designed and and Reporting and timing and you know everything that Mike also described effectively implemented is also critical so in the finsen um consent order it described many situations where at some point binance had policies and procedures in place but it had nothing or little to do in the government's view uh with what they were actually doing you know they might not have known about the policies ofers they might not have followed it it might not have been had anything to do with sort of how they actually do business so one of the ways that companies trip up a lot and companies who want to prevent or limit monitors will really want to focus on is

making sure that they have a control and training and so on and so forth um and they're walking the walk in each of these areas around um comprehensive risk and control Frameworks for following their regulatory legal obligations independently testing those with reasonable samples and making sure that their policies and procedures reflect their business and as their business model changes those have to be change as well and that's a big undertaking in any day-to-day company it's a particularly big undertaking in first of all binance and the industry which you know kind of built itself on innovating and doing really cool and interesting stuff but may not have um thought as much or or implemented as much you know those sort

of ticking and tying of making sure everything is addressed reasonably designed effectively implemented and tested independently with in in the uh in in the resolution there was also a discussion of their testing of their compliance policy which has to be independent it could be audit it could be external um and that the sampling was Tiny and it was Terri able and it excluded KY non- kyc uh users and so on and so forth so all of those elements need to be in place and that's what the compliance monitor will ensure so um I did also want to ask about um a situation in which the monitor finds that there's you know something wrong some kind of wrongdoing um so you know I

take it after they file the suspicious activity report which is for past transactions that then whatever finen does at that point you know Direct they they would direct binance um but what if there's something happening you know uh in the present time then is that something that they talk about with binance is that something they go directly to the government to without telling binance like or or maybe there's you know certain types of wrongdoing will fall under one or the other can you talk a little bit about that I think it depends on the wrongdoing I they're definitely going to the monitor will definitely report it to the government um if it's lower level within binance they'll report to the finance leadership as well in the I think unlikely event that it's uh the new senior leadership

of Finance then they would go to the government without telling uh binance but I think in um the most instances if they do find something wrong it's likely going to be within uh the kind of the ranks or the systems of the organization and they would apprise you know the leadership like the chief compliance officer the C the new CEO of binance uh as well as the government so that sound right dorley there are two elements of misconduct um the first is suspicious transactions and first of all if you don't have us persons you're in a different place and if you do have us person you find out what you know maybe

one of your users is a US person and that you had not been able to detect them before so one is a suspicious activity there's transaction monitoring there's kyc there's customer due diligence there's risk ranking of customers and so on and so forth so SARS are reported all the time and I would expect that there would be SARS reported with some level of consistency on a going forward basis as takes place in all Financial organizations and that's the way it's supposed to work on an on on an ongoing basis the second level of app parent or suspected or actual misconduct something like within an organization for example uh um you know

obstruction of evidence uh about what B binance knows but the monitor doesn't know about something that they've discovered by their staff or that they did wrong or so on and so forth that's where it gets really um challenging and can be pretty risky it's smaller level things come up a lot uh during uh these types of monitorships occasional bigger stuff comes up and that can result in some challenges including extension of the monitorship if they feel like it's necessary it can result in can potentially result in some additional charges and additional you know broadening of scope etc etc so um one other thing that I wanted

to ask about was you know there's probably like some uh boundaries in terms of what's appropriate for the monitor to look into and then what's not appropriate so what are kind of the limitations of the mon ERS ship or you know where can binance sort of assert like you know this is off limits or you know not part of the agreement I think the work plan is going to be key to that so the guilty plea and the agreement with finsen requires the independent monitor to submit a detailed work plan uh to the government and I think that's where you'll see uh the real effort to define the scope and to get the balance right between meeting the government's

expectations uh while at the same time being something that's doable practicable and um uh does not exceed the scope of what the government is looking for in terms of you know stopping terrorist financing stopping um the payments to child pornographers adopting the AML compliance program so you know for example um in its efforts to establish a culture of compliance you could look at that very broadly and look at say compliance with local tax rules uh that could be part of a compliance mandate but I think in this instance they would likely I think all parties would likely

agree that that's not within scope so the work plan will be the place uh where the three sides uh hash out what the appropriate scope is for the monitorship hopefully and then earlier Dorothy you said that there are some instances when the compliance monitorship can go very badly so what does that look like and yeah what what what did you mean when you said that so in chafi there have been monitorships uh that started out as maybe three years and then as additional serious violations arise in the scope of the you know close inspection and you know access to full information that the

monitor has um you you know those things can result in additional consents and pleas and other things like that and that those may involve an extension of the monitorships I mean there have been monitorships that have started out with just a few years and have gone you know a decade also in a privately um uh issued report on S of guide to monitorships there was a call out of Governor Chris was some there's a concern in the industry and also it's articulated by the doj in uh the deputy attorney general's recent remarks about monitors ships uh they basic the the doj is not a regulator it's a law enforcement agency finson CC OAC are

regulators and so doj doj wants remediation but it doesn't want to be in the position of being you know kind of the regulator the inspector and that's why you may see the same monitor doing both and you know primary contact Point practically May well be finsen um but the fact of the matter is that you know in this public report uh about how to how to uh think about monitorships and how to scope it you know there was an example of Chris Christie when he was Attorney General of uh of New Jersey um appointing um as John Ashcraft to do some monitor work um that ended up being several years and $50 million and you know in the view of sort of the analysis

and and and study you know that amount of money and time and expense was not commensurate with the public benefit for that resulted from that and it reflected a concern that's been ongoing of cronyism which is where you know doj monitorships tend to have tended or been seen to tend to prefer former prosecutors who have worked there and know them and so on and so forth so the deputy attorney general has really tried to address those things by putting forth a really clear process so that the process is what dictates how the monitor works not the doj being the regulator and also by you know prioritizing things that will limit the risk of kind of cronyism and so on and so forth and and

you know that's a good sign for industry that's good news so what effect do you think this monitor will have on binance's business overall like do you expect that users will leave um should users think any differently in terms of like their privacy or any other issues um you know about being you know on the platform um yeah I was just curious what your perspective it was from the user side sure the good news is if you're a Hamas or an Al-Qaeda or a ransomware um entity or you know you know like a bad a really bad actor and you know that for the next five years there's a monitor with a you know huge scope looking at every transaction and

access to all the data and so on and so forth the monitor doesn't have to look at every transaction but it can do sampling and so on and so forth but it can um you know are you going to want to be on that platform and that's the beauty of the settlement is it's not only does it address stuff historically like with the Look Back review but it also protects our country and our national security by providing in disincentives for really bad actors to be on the largest exchange and platform in the world and so you know will that have an effect in limiting and narrowing the ability of Bad actors to compromise our national security and to support all these terrible things like uh you know what Mike described I think that will

really have a profound effect and as Mike described it will resonate across the industry and I think overall it will have a profound effect on uh the ability to uh limit illicit finance and terrorist finance and uh any and money laundering Laur if I could just add I think um in terms of what this means for the binance business you know too soon to say um and it could really depend on a lot of things but the early indications are pretty positive um and I think there are two things that I would point to uh one is the detail uh that the government has used in specifying how the monitorship will work that's a

positive and the second and probably more important positive is that Finance has embraced uh the monitorship so you have their Chief compliance officer publicly saying uh he's excited about commencing the monitorship is going to embrace it as a business accelerator sees it as feeding a competitive commercial advantage and I think that sort of attitude and tone from the top are a really good sign that this bodess well for the business in the long term yeah and I was going to ask so I'll just ask it more directly but this is the perfect segue like are there any tips that you would offer to either binance or Richard Tang for you know how they can best cooperate with the monitorship

to make sure that it's successful and doesn't you know go badly I'll be happy to start then I think Michael should should add on as well so the biggest tips are to be credible and candid you know if if it takes you longer to produce the information that they need be candid as to why be candid as to how if a deadline slips a little bit but there are reasons why um then that's that's workable that's credible credibility is key cooperation is key that tone from the top that was reflected recently in uh the C's interview and make it lemonade out of lemons which I really he I think they honest at least the CCO honestly buys into and I think a lot of people in the

industry also buy into even though it's a little bit painful to get through the process of monitoring and and and and Remediation um so it's credibility uh producing information full access if there's a suspicion by the monitor that documents or people are not being produced in a voluntary and cooperative and easy way uh you know that may be an issue you also want to make sure you you know you have the resources and you have the capability and the expertise in house to manage what is a huge set of projects change management plans and that you have the you know the expertise and so on and so forth and you w to um you know you wanna you want to basically I think those are the main points is

credibility cooperation investment and expertise good new Gore think that's perfectly said so CZ can actually technically return to binance after 3 years do you think that would happen and do you think the government would be okay with it or what what's the uh outlook for that actually happening a lot can happen in three years uh so it's really hard to predict um you know there can be other look the thing that we haven't talked about which is actually key so it's a great opportunity from your question to mention it is that this global settlement all companies want a global settlement so they can settle they can pay and they can focus all of their resources the monitoring their mediation and the Improvement of their

programs and so on and so forth so that they can kind of graduate from the monitoring and move on and pursue their business and achieve a lot of their goals in terms of you know Innovation and so on so forth responsibly um but the fact of the matter is that at the podium you saw the chairman of the CC you saw secretary Yellen you saw attorney general Garland and there was and others and there were there was one person who was missing which is the head of the SEC know the SEC is followed an enforcement action it wasn't part of the global settlement we can speculate as to why perhaps you know the SEC required a admission that the tokens that they're trading are securities and they wouldn't trade them going forward regardless of

whether it was us persons I'm speculating that could be something and it perhaps you know there are other elements of what the SEC would require that you know they couldn't reach an agreement um and so that's a you know that's a big threat hanging over the head of binance that they really need to resolve in order to really move forward and you know there may be other jurisdictions and other concerns and so on and so forth and there alternatively may be you know just per you know great tone from the top great implementation great design great remediation so on and so forth so it could really go you know a variety of different directions so it's very hard to predict why don't we zoom out now because this you know as we've discussed probably isn't just

going to be the one time we've already seen that the New York Department of Financial Services did also reach a settl coinbase where they appointed independent monitor um Robin Hood crypto also ended up uh with an independent compliance consultant so um talk a little bit about you know where you see this going like do you think this is going to be become a trend or you know what in what cases do you expect we'll see more of this and how do you think the industry can avoid it um since as you mentioned it's costly I think in the absence of comprehensive regulation at the national and international level it's definitely a trend uh that when companies in the crypto space get into trouble uh I would expect to see uh monitors and independent Consultants

appointed more often than not I think it um one interesting question will be uh how do the monitors make sure they're giving consistent advice across multiple engagements right so if we get this situation where the monitors are de facto Regulators of individual companies how do we make sure that they're being relatively consistent across each other especially when one's appointed by the DFS and other is appointed by doj uh so this is a problem that I think we'll need to think about and solve in the future but to answer your question I think it's definitely an a trend that's with us for the foreseeable future yeah I would also say that you know the my

Our advice to companies is keep in mind that binance sort of it by SES that binance got wind of this a few years ago and started some remediation efforts a couple years ago and those really ramped up particularly a year ago when they hired real serious compliance expertise and so on so forth and that a lot the documents suggest that a lot of the kind of remediation of their compliance program is very well underway if not you know certain major Milestones have been completed so that's good news and the good news is and that's a takeaway for industry so if you're not dealing with an enforcement matter at the moment you really want to make sure you have that

uh robust demonstrable internal uh control and risk framework that's reasonably designed and effectively implemented it's far more compli and tested and verified and validated it's far more complicated than um you know industry might cons might presume um you know Mike and I both have done internally and externally major internal control uh control framework building from scratch or restructuring and so on so forth it's it's pretty big and comprehensive it has to be tested has to be validated and it has to be documented and so on so forth so you're really going to want to put get that in place if you're in the in the midst of an enforcement action or you think you might be or so on and so forth again the

more you can remediate you know now and before the more you can invest in that type of remediation the likelihood of you getting a monitor is lower although I think still pretty decent um for the reasons we discussed and the your the time duration the cost and the scope of the monitor can also be negotiated and reduced because you've already done what you needed to do and then you can you know there are also issues around you know if you find issues do you self-report them those can um you know help you with any fines or penalties and can really uh bring credibility uh to the negotiations about whether monitor should be in place I think OJ and certainly cftc recently

said explicitly it really depends on how much we trust you and it really depends on whether you're recidivist and whether you've self-reported and so on and so forth so those are all different things that industry should think about and I think they should think about it early and often um because the investment now I think will'll pay dividends later all right well this has been a highly Illuminating conversation where can people learn more about each of you and your work so for me I'm on LinkedIn and Twitter and telegram darthy D DT um and uh Mike I think Lon is best Michael Dawson I'm at Wilmer hail so if you put that in the search you won't get the uh former midfielder for the Tottenham

Hotspur you'll get the crypto Financial regulatory lawyer in Washington DC great well it's been a pleasure having you both on Unchained thank you thank you so much being here thanks so much for joining us today to learn more about Dorothy and Michael and the Finance settlement with ZJ check out the show notes for this episode Unchained is produced by me Laura Shin with all from Kevin fukes Matt pilard W vanov Megan gavis Nelson Wong Shashank and Mar CUA thanks for listening Unchained is now a part of the coindesk podcast Network for the latest in digital assets check out markets daily 7 days a week with new host Noel atcherson follow the coindesk podcast

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