Coinbase reaches $100 million settlement with New York regulators
Coinbase, a publicly traded cryptocurrency exchange based in the United States, has agreed to pay a $50 million fine after financial regulators discovered it was letting customers open accounts without doing enough background checks, in violation of anti-money laundering laws.
The settlement with the New York State Department of Financial Services, announced Wednesday, will also require Coinbase to invest $50 million to bolster its compliance program, which is supposed to keep out drug traffickers, sellers of child pornography and other potential offenders to open accounts with the exchange.
It’s the latest hit in the once-bustling global cryptocurrency trade. Several cryptocurrency firms have filed for bankruptcy over the past year, including FTX, which was the world’s second-largest crypto exchange before its collapse in November. Founder Sam Bankman-Fried and other top FTX executives now face federal criminal charges.
Compliance issues at Coinbase were first detected during a routine review in 2020 after the exchange was granted a license to operate in New York in 2017, regulators said. They found issues with the exchange’s anti-money laundering checks dating back to 2018.
Coinbase initially agreed to hire an independent consultant to help it review its day-to-day operations so that they meet the requirements set by anti-money laundering laws to know the identity of customers and monitor their behavior in the event of a breach. ‘Suspicious activity.
But that didn’t solve the company’s problems, and regulators opened a formal investigation in 2021. The exchange had lagged behind on two key operations: digging into the backgrounds of customers whose identities seemed murky at first view and track suspicious activity. alerts generated by its internal monitoring system.
By the end of 2021, Coinbase had a backlog of more than 100,000 alerts about potential suspicious customer transactions that weren’t being properly reviewed, according to the Department of Financial Services. Regulators have also found that Coinbase performs only the most rudimentary “know your customer” checks on people before letting them open accounts. The exchange treated customer background checks as a “simple box-checking exercise,” they said.
In one case, Coinbase unwittingly helped a digital thief steal $150 million from an anonymous company by pretending to be an employee of that company when opening a Coinbase account.
The company’s procedures for checking customer backgrounds were so inadequate that early last year regulators ordered Coinbase to hire an outside monitor – separate from the independent consultant the company had previously agreed to work with. hire – to oversee its compliance, even as the formal investigation was underway.
“We found failures that really warranted an independent monitor rather than waiting for a settlement,” Adrienne A. Harris, New York State Superintendent of Financial Services, said in an interview. “We have been very outspoken about the issues of illicit finance in space. This is why our framework keeps crypto companies on par with banks.
Coinbase was not immediately available for comment.
The settlement, which says Coinbase is still progressing too slowly in its efforts to review its old accounts for suspicious features, will require the exchange to work with the monitor for at least a year as it puts systems in place to improve its compliance operation. New York regulators did not identify the monitor.
Ms Harris said Coinbase’s compliance department had failed to keep up with the exchange’s rapid growth. Founded in San Francisco in 2012, Coinbase has a market capitalization of over $7.6 billion and is the largest US-based crypto trading platform, with 100 million users worldwide. Most of its peers are based in jurisdictions where regulations are generally lighter. FTX, for example, was based in the Bahamas.
But U.S. officials have long worried about the cryptocurrency industry’s potential to weaken global protections against money laundering because, for years, industry leaders have prided themselves on their efforts. to evade regulation.
The industry itself has emerged without the oversight and scrutiny that is routine for banks, brokerages, insurance companies and investment firms. Over the past decade, state and federal authorities have taken every step possible to align exchanges like Coinbase and its foreign counterparts.
New York was one of the first states to require crypto businesses to obtain licenses before seeking state customers, known as BitLicenses. To date, the state has issued about 30.
In August, the Department of Financial Services fined the crypto arm of financial brokerage Robinhood $30 million for violating a host of financial regulations, including anti-money laundering laws. In November, the Treasury Department announced a settlement with another US-based exchange, Kraken, over trading services it provided to clients in Iran that violated US sanctions.
According to the Treasury’s Office of Foreign Assets Control, Kraken enabled approximately $1.7 million in transactions over four years. He agreed to pay over $360,000 to settle the case.
Federal prosecutors have also been examining whether foreign companies are properly screening customer backgrounds. Authorities are investigating possible anti-money laundering violations by Binance, the world’s largest crypto trading exchange, according to reports and a person familiar with the matter.
Until the fall of 2021, Binance allowed customers depositing below a certain amount to open accounts without going through a rigorous identity verification process. Former Binance rival FTX was also under investigation for non-compliance with anti-money laundering rules.
Federal prosecutors in New York have accused Mr. Bankman-Fried of overseeing a scheme to embezzle billions of dollars in customer deposits at FTX.
Coinbase has recently sought to distinguish itself from FTX. In a television ad, the exchange said that customer deposits into its business were safe and secure, and that crypto investors could take comfort in the fact that Coinbase was a publicly traded US company “with regular audits and a transparent accounting”.
In a November regulatory filing with the Securities and Exchange Commission, Coinbase disclosed that it had been investigated by New York financial regulators over its compliance with bank secrecy laws. The company said at the time that it was cooperating with the investigation.
In the same regulatory filing, Coinbase also said it received “subpoenas and requests for investigation” for documents from the SEC regarding some of its client programs and products.
“We’ve seen this argument that regulation and an innovation can’t live together,” Harris said. “But if you’re a good responsible actor, you should be able to keep doing business.”
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