Feds Slap Virtual Currency Exchange with Hefty Fine for Bank Secrecy Act Violations

The U.S. Treasury’s Financial Crimes Enforcement Network, known mostly as FinCEN, has issued its first fine against a virtual currency exchange.
Ripple Labs (formerly OpenCoin) and its wholly-owned subsidiary, XRP II, which distribute and exchange their own cryptocurrency, XRP, is being fined $700,000 by FinCEN for acting as a money services business (MSB) and selling its virtual currency without proper registration and safeguards as is required by federal law.

With the spread of several U.S. online exchanges trading bitcoins and other virtual currencies over the past couple of years, enforcement by federal and state authorities has yet to fully develop over the cryptocurrency landscape.
As of 2015, Ripple is the second-largest cryptocurrency by market capitalization, after Bitcoin. On March 18, 2013, FinCEN released guidance on regulation that applies provisions of the Bank Secrecy Act (BSA) to certain participants in the virtual currency arena – namely, virtual currency exchangers and administrators. The rules require these bitcoin and other virtual currency companies to register as a MSB (money services business) with FinCEN.
FinCen also alleges that Ripple Labs failed to “implement and maintain an adequate anti-money laundering (AML) program designed to protect its products from use by money launderers or terrorist financiers.”
“Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws,”said FinCEN Director Jennifer Shasky Calvery. “Innovation is laudable but only as long as it does not unreasonably expose our financial system to tech-smart criminals eager to abuse the latest and most complex products.”
In a settlement between authorities and Ripple/XRP II, the companies resolved potential criminal charges and forfeited $450,000. The $450,000 forfeiture in that action will be credited to partially satisfy FinCEN’s $700,000 civil money penalty.
FinCEN worked with the U.S. Attorney’s Office for the Northern District of California in its enforcement action.

‘We Hope This Sets An Industry Standard’

“By these agreements, we demonstrate again that we will remain vigilant to ensure the security of, and prevent the misuse of, the financial markets,” said U.S. Attorney Melinda Haag. “Ripple Labs Inc. and its wholly-owned subsidiary both have acknowledged that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they are not profiting by creating products that allow would–be criminals to avoid detection. We hope that this sets an industry standard in the important new space of digital currency.”
A spokesperson for Ripple Labs told CoinDesk that the company does not believe it “willfully engaged” in criminal activity, adding that the company has not been prosecuted for any of its actions.
“Ripple Labs was one of the first to proactively build out a compliance and risk program,” Ripple Labs spokesperson Monica Long told CoinDesk. “We’ve been consistent in our message of supporting a compliant and healthy Ripple ecosystem.”
Most of the violations against Ripple Labs and XRP II appear to have occurred between 2013 and early 2014, according to a detailed addendum.
FinCEN said that Ripple Labs and XRP II have agreed to take the following steps:

  • only transact XRP and “Ripple Trade” activity through a registered MSB;
  • implement and maintain an effective AML program;
  • comply with the Funds Transfer and Funds Travel Rules;
  • conduct a three-year “look-back” to require suspicious activity reporting for prior suspicious transactions;
  • retain external independent auditors to review their compliance with the BSA every two years up to and including 2020.

Ripple Labs will also undertake certain technical and security enhancements to the Ripple Protocol to appropriately monitor all future transactions, FinCEN.

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