United States: In Warning To Bitcoin And Other Virtual Currency Businesses, FinCEN Issues First Enforcement Action For Virtual Currency Activity

The US government took its strongest step yet in its oversight of other virtual currency yesterday, fining prominent “Bitcoin alternative” company Ripple Labs Inc. $700,000 for what the government called a willful violation of the anti-money laundering laws. 
 
In Ripple, the Financial Crimes Enforcement Network (FinCEN) targeted one of the more prominent virtual currency companies for its first virtual currency civil enforcement action. Ripple does not rely on Bitcoin but instead issues its own virtual currency and operates an open payment network using that virtual currency. Unlike many smaller Bitcoin and other virtual currency companies, Ripple has several prominent financial institution investors and it boasts of a compliance staff with years of anti-money laundering (AML) experience. Ripple’s own virtual currency, XRP, is the second largest in market capitalization behind Bitcoin.
 
Concurrently with the FinCEN settlement, Ripple entered into a settlement agreement resolving a criminal investigation by the US Attorney’s Office for the Northern District of California (USAO) for the same AML failures cited in the FinCEN order, agreeing to pay a criminal forfeiture amount of $450,000, payment of which will partially satisfy FinCEN’s $700,000 penalty. 
 
AML Obligations for Virtual Currency Companies
 
FinCEN, the regulator responsible for enforcement of the Bank Secrecy Act, found that Ripple operated as a money services business (MSB) and sold virtual currency without implementing an adequate anti-money laundering program. Notably, FinCEN and the USAO did not find that any actual money laundering or illegal activity took place using Ripple or its virtual currency. Rather, FinCEN’s action is based on Ripple’s alleged failures to: (1) register as an MSB; (2) implement an adequate AML program; and (3) report three suspicious transactions (two of which Ripple declined to process).
 
FinCEN’s principal finding was that Ripple failed to follow FinCEN’s March 2013 guidance identifying conduct that causes virtual currency companies to become MSBs (the 2013 guidance). The 2013 guidance generally identifies as an MSB a person that accepts and transmits convertible virtual currency or that buys or sells convertible virtual currency in exchange for currency of legal tender or another convertible virtual currency. MSBs must register with FinCEN, appoint an AML compliance officer, and implement an AML program reasonably designed to address money laundering risks raised by its business, including by reporting suspicious transactions to FinCEN.
 
During the two years after FinCEN issued the 2013 guidance, it notified virtual currency companies privately if it thought they were acting as unlicensed MSB under the 2013 guidance, and it issued a series of interpretative letters explaining the guidance. While the private notifications and interpretive letters caused some companies to change their business models or register as MSBs, until now FinCEN had not publicly punished any company for failing to follow the 2013 guidance.
 
While the 2013 guidance is focused on virtual currency businesses, the underlying MSB rules may apply to any company offering innovative payment solutions. Yesterday’s enforcement action signals that such companies now risk enforcement action unless they either register as MSBs or can convince FinCEN that such registration is not required. This poses a legal hurdle for startups and emerging companies, and their investors, who are unsure of whether their cutting-edge payment solutions are subject to rules originally designed for brick-and-mortar businesses. 
 
Low Tolerance for AML Compliance Delays
 
According to a joint statement of facts, FinCEN and the USAO determined that Ripple Labs Inc. and its subsidiary XRP II, LLC violated the registration, AML program, and transaction reporting requirements of the Bank Secrecy Act (BSA) and its implementing regulations.1 Specifically, Ripple Labs engaged in sales of its XRP virtual currency without registering with FinCEN as a money services business and also without implementing and maintaining an effective AML program. In July 2013, a new Ripple subsidiary did register with FinCEN but was found to have lacked an effective AML program and to have failed to file suspicious activity reports.  
 
Notably, the joint statement of facts states that Ripple failed to register as an MSB until April 29, 2013, or for about six weeks after the March 18, 2013 guidance. Similarly, Ripple’s subsidiary registered as an MSB on September 4, 2013, and FinCEN and the USAO faulted the subsidiary for not adopting its written AML program until three weeks later, on September 26. Other violations occurred for a longer period: the joint statement of facts states that Ripple’s subsidiary did not perform a risk assessment until six months after registration, and it did not conduct AML training until nearly a year after its formation.
 
Finally, FinCEN and the USAO found that the Ripple subsidiary did not conduct an independent review of its AML program until nearly a year after it began virtual currency sales, by which time it was aware of the USAO investigation. While many financial institutions conduct annual reviews of their AML program, the AML rules require only the frequency of the MSB’s review “be commensurate with the risk of the financial services provided.”2 Thus FinCEN appears to be interpreting its regulation to require a review within the first year of MSB operations, or at least upon learning of potential government investigations.
 
Broad Remedial Measures
 
As part of the settlement, Ripple (and relevant subsidiaries) agreed to take several remedial actions aimed to give the government greater visibility into virtual currency transactions. Two of these actions are particularly noteworthy. First, Ripple agreed to improve its monitoring tools for identification and possible reporting to the government of funds flows and counterparty information regarding Ripple transactions. Second, Ripple also agreed to offer incentives (such as free XRP virtual currency) for customers to provide identification information, and then to cut off any Ripple customer who does not provide that information within 180 days of the settlement.
 
Other remedial measures are similar to those commonly seen in AML enforcement actions. Ripple agreed to comply with MSB registration and AML program requirements and to make enhancements to the company’s AML controls and training program. Ripple also agreed to external audits of its program through the year 2020, and to a three-year lookback review of historical transactions for potential suspicious activity reporting.


1 See 31 U.S.C. § 5330, 31 C.F.R. § 1022.380 (registration); 31 U.S.C. § 5318(a)(2), (h), 31 C.F.R. § 1022.210 (AML program); and 31 U.S.C. § 5318(g), 31 C.F.R. § 1022.320 (SAR reporting).

2 31 C.F.R. § 1022.210(d)(4).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Dickinson Wright PLLC
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Dickinson Wright PLLC
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions