US-listed crypto exchange Coinbase has secured a $100 million settlement with New York regulators over anti-money laundering failures, including a backlog of more than 100,000 unaudited transactions and an addiction to social media -Profiles to verify the identity of customers.
The New York State Department of Financial Services said Wednesday that Coinbase would pay a $50 million fine for weak compliance measures and spend another $50 million on a two-year program to improve its systems.
The DFS said Coinbase’s anti-money laundering enforcement systems were “immature and inadequate,” leaving the exchange “vulnerable to serious criminal conduct,” including “examples of fraud, possible money laundering, alleged activities related to child sexual abuse and potential drug trafficking”.
Issues related to anti-money laundering compliance have dogged the crypto industry since its inception, with critics arguing that the primary use case for limitless digital tokens is to facilitate illicit activity. Despite corporate efforts to convince policymakers of their credentials, Senator Elizabeth Warren reinforced that message last month, warning that crypto “has become the tool of choice for terrorists, for ransomware gangs, for drug dealers, and for rogue states who want to launder money”.
The deal comes as regulators step up their scrutiny of crypto exchanges following the collapse of FTX, once one of the world’s largest crypto companies, in November and the arrest of its founder Sam Bankman-Fried last month.
Coinbase received a license from New York’s DFS in 2017 to allow customers to trade with cryptocurrencies on its platform, but the government ministry said on Wednesday it has since determined that compliance measures are inadequate for an exchange of this size. The onboarding requirements for customers at Coinbase are “a simple check-the-box exercise,” the DFS added.
Paul Grewal, Chief Legal Officer at Coinbase, said the company has “taken significant action to address these historical shortcomings and remains committed to being a leader and role model in the crypto space.”
The regulator said that Coinbase’s due diligence file on its retail customers has historically consisted of “little more than a copy of a photo ID” and that it “did what was necessary” to verify retail customers’ due diligence information , citing self-reported social media profiles and missing information that was “clearly inaccurate and/or incomplete”.
By the end of 2021, the backlog of Coinbase customers requiring enhanced due diligence surpassed 14,000, New York-based DFS said. It detailed a case where a client criminally charged with crimes of child sexual abuse in the 1990s was able to open a Coinbase account.
“This publicly available information was not discovered by Coinbase at the time of onboarding, and as such, the customer was not deemed high-risk and no specifically tailored controls or restrictions were imposed,” the regulator said, adding that the customer was involved in suspicious transactions was more than two years before Coinbase finally noticed the activity.
It was also noted that Coinbase has poor transaction monitoring systems where suspicious activity is flagged and investigated. By the end of 2021, Coinbase’s backlog of unverified transaction monitoring alerts reached more than 100,000, many of which were months old, the regulator found.
FTX’s implosion has shaken confidence in crypto companies that have struggled to calm their customers’ nerves. Shares in Nasdaq-listed Coinbase have plunged 86 percent over the past year and have a market capitalization of $8.5 billion.
Additional reporting by Scott Chipolina
Source: Crypto News Deutsch