New York Financial Regulators Find Coinbase Violated Anti-Money Laundering Laws
A $50 Million Fine for Coinbase’s Compliance Program Failures
The New York State Department of Financial Services has found that the popular cryptocurrency exchange Coinbase violated anti-money laundering laws by failing to conduct adequate background checks. As a result, Coinbase will pay a $50 million fine and is required to spend an additional $50 million on improving its compliance program.
Background Checks and Compliance Issues
Coinbase disclosed in its annual 10k filing in 2021 that the investigation was ongoing. State regulators first noticed problems at Coinbase in May 2020 during routine supervisory examinations. The Department of Financial Services found "significant deficiencies" in various compliance programs, including:
- Customer Due Diligence Procedures: Insufficient checks on customers to prevent money laundering and other illicit activities.
- Transaction Monitoring Systems: Failure to effectively monitor transactions for suspicious activity.
- Office of Foreign Assets Control (OFAC) Programs: Inadequate measures to prevent transactions with sanctioned individuals or entities.
- Anti-Money Laundering Risk Assessments: Insufficient assessments to identify and mitigate money laundering risks.
Regulatory Findings
The investigation found that Coinbase had a backlog of over 100,000 unreviewed transaction monitoring alerts and 14,000 users requiring enhanced due diligence by the end of 2021. These backlogs were largely caused by Coinbase’s rapid growth in 2021, with sign-ups increasing fifteen times higher than January 2020 and monthly transactions rising 25 times more.
Lack of Staffing and Third-Party Contractors
Regulators found that Coinbase did not have enough staff to keep up with growing compliance needs. Instead, the company relied on over 1,000 third-party contractors to review alerts and conduct due diligence. However, these contractors were not properly trained or overseen by Coinbase.
Consequences of Non-Compliance
As a result of these inaccuracies, regulators wrote that Coinbase failed to report potential instances of money laundering, narcotics trafficking, and CSAM-related activity. The consequences of non-compliance are severe, with fines ranging from $5 million to $50 million per violation.
The Road Ahead for Coinbase
Coinbase must now invest an additional $50 million in its compliance program to rectify these issues. This includes hiring more staff, improving training programs, and enhancing transaction monitoring systems. The company’s reputation is at stake, as regulatory scrutiny continues to intensify.
Industry Implications
This ruling sets a precedent for cryptocurrency exchanges, emphasizing the importance of effective anti-money laundering measures. Other companies in the industry would do well to take note of Coinbase’s mistakes and invest in robust compliance programs to avoid similar consequences.
The investigation highlights the need for stricter regulations in the cryptocurrency space. As the industry continues to grow, regulatory bodies will remain vigilant, enforcing laws that protect consumers and prevent illicit activity.
