Continuing its aggressive anti-money laundering enforcement agenda, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced yesterday that it had commenced the first-ever civil enforcement action against a virtual currency exchanger.  FinCEN announced that it had assessed a $700,000 civil money penalty against Ripple Labs Inc. and its wholly-owned subsidiary, XRP II, LLC.  Ripple is the second largest cryptocurrency by market capitalization, after Bitcoin.

FinCEN found that Ripple Labs willfully violated multiple provisions of the Bank Secrecy Act by acting as a money services business (MSB) and selling its virtual currency known as XRP.  Ripple Labs failed to register with FinCEN as a MSB and failed to implement and maintain an adequate anti-money laundering program designed to protect its products from use by money launderers or terrorist financiers.  Ripple Labs’ subsidiary, XRP II, also willfully violated the BSA by failing to implement an effective AML program and by failing to report suspicious activity related to several financial transactions.  Ripple Labs and XRP II agreed with FinCEN’s conclusions and consented to imposition of the civil money penalty.  In a companion civil settlement with the U.S. Attorney’s Office for the Northern District of California, Ripple Labs agreed to forfeit $450,000 and avoided criminal prosecution.

In a Statement of Facts and Violations released as part of the settlement documents, and agreed to by Ripple Labs and XRP II, FinCEN and U.S. Attorney’s Office described the following suspicious transactions that were not properly reported:

On September 30, 2013, XRP II negotiated an approximately $250,000.00 transaction by email for a sale of XRP virtual currency with a third-party individual. XRP II provided that individual with a “know your customer” (“KYC”) form and asked that it be returned along with appropriate identification in in order to move forward with the transaction. The individual replied that another source would provide the XRP virtual currency and did not “require anywhere near as much paperwork” and essentially threatened to go elsewhere. Within hours, XRP II agreed by email to dispense with its KYC requirement and move forward with the transaction. Open source information indicates that this individual, an investor in Ripple Labs, has a prior three-count federal felony conviction for dealing in, mailing, and storing explosive devices and had been sentenced to prison, see United States v. Roger Ver, CR 1-20127-JF (N.D. Cal. 2002);

In November 2013, XRP II rejected an approximately $32,000.00 transaction because it doubted the legitimacy of the overseas customer’s source of funds.  XRP II failed to file a suspicious activity report for this transaction; and

In January 2014, a Malaysian-based customer sought to purchase XRP from XRP II, indicating that he wanted to use a personal bank account for a business purpose.  Because of these concerns, XRP II declined the transaction but again failed to file a suspicious activity report for the transaction.

As part of this global settlement, Ripple Labs agreed to implement a series of remedial measures including the following:

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

FinCEN’s latest enforcement action is an outgrowth of its efforts to regulate the growing virtual currency industry.  Two years ago, FinCEN issued guidance specifying that virtual currency exchangers and administrators are “money transmitters” under the BSA and are required to register with FinCEN and institute certain recordkeeping, reporting, and AML program measures.  In a speech delivered today at the West Coast AML Forum, FinCEN Director Jennifer Shasky Calvery touted her agency’s enforcement action against Ripple Labs and warned other virtual currency businesses of the consequences of non-compliance:

Virtual currency exchangers – like all members of regulated industry – must bring products to market that comply with our anti-money laundering laws. 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.

The regulatory framework for money services businesses, which include virtual currency exchangers and administrators, has been in existence for years.  To clarify these regulatory requirements, FinCEN issued guidance just over two years ago, noting that virtual currency exchangers and administrators are “money transmitters” under the Bank Secrecy Act (BSA) and its implementing regulations.  As such, they are required to register with FinCEN as a money services business and institute certain recordkeeping, reporting, and AML program measures.

Since issuing the guidance, FinCEN has regularly engaged with the virtual currency industry through administrative rulings and outreach efforts to further clarify our regulatory coverage.  We are extremely fortunate to have a team of experts who work very hard to keep pace with the quickly evolving technology in this area.  They share what they have learned through extensive training efforts with law enforcement, regulators, and prosecutors domestically and globally.  These are the people who are on the front lines of investigating illegal use of emerging payment systems.  They also share their experiences with industry so that companies will be able to avoid being compromised by unlawful actors, and being used as a vehicle for illicit finance.

The FinCEN Director also noted that her agency, working with BSA examiners at the Internal Revenue Service, recently initiated a series of supervisory examinations of virtual currency businesses:

 Working closely with our delegated BSA examiners at the Internal Revenue Service (IRS), FinCEN recently launched a series of supervisory examinations of businesses in the virtual currency industry.  As with our BSA supervision of other parts of the financial services industry, these exams will help FinCEN determine whether virtual currency exchangers and administrators are meeting their compliance obligations under the applicable rules.  Where we identify problems, we will use our supervisory and enforcement authorities to appropriately penalize non-compliance and drive compliance improvements.