Block Inc., the company behind Cash App and led by Jack Dorsey, is fined $40 million by the New York Financial Services Agency (NYDFS).
The penalty announced on April 10 is due to the widespread lapse of the company’s Money Laundering (AML) and compliance systems related to cryptocurrency operations.
NYDFS Principal Adrienne Harris said businesses must expand their compliance programs as they grow. She said that the block’s shortcomings created vulnerabilities that could be avoided with proper surveillance.
Harris said:
“Whether traditional financial services companies or emerging cryptocurrency platforms, all financial institutions must adhere to strict standards that protect the integrity of their consumers and the financial system.”
The block must pay a fine within 10 days and will be placed under the supervision of an independent monitor for 12 months. During this period, the company will need to overhaul the AML control, sanctions screening, and transaction monitoring processes
Weak surveillance of Block’s Bitcoin transactions
According to Consent orderfinancial regulators have discovered that the block does not meet state requirements for monitoring digital asset transactions.
According to NYDFS, the company’s compliance program did not detect or flag any Bitcoin transactions linked to wallets related to illegal or authorized activities unless certain thresholds were exceeded.
Specifically, the alert was not triggered unless there was an exposure of more than 1% to the wallet connected to the terrorist in the receiving wallet.
Furthermore, such transactions into the wallet were not blocked until its exposure exceeded 10%. The threshold-based approach violated the expectations of regulators that mandate aggressive risk management.
Officials stressed that engagement with high-risk wallets requires a solid risk-based basis, even under 1%. Without it, the company would not have reached its obligations under federal and state financial crime prevention laws.
Working in a mixer
Another area of concern was the handling of blocks of transactions routed through Crypto mixers, hiding the origins and destinations of funds, and an attractive service for criminals.
Despite its high risk nature, the block continued to classify these transactions as “medium” risk rather than “high”, and ignored repeated warnings from regulators.
The NYDFS also criticized blocks for not being able to handle the amount of transaction alerts. From 2018 to 2020, the company’s backlog of raw alerts ranged from 18,000 to 169,000.
The surge was criticized for not predicting compliance demands associated with Cash App’s rapid growth. As a result, several suspicious activity reports (SARs) were submitted more than a year after the initial alert, resulting in a significant delay in the investigation.
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