A $100 million settlement between Coinbase and background check irregularities

The well-known cryptocurrency exchange Coinbase was found to have broken anti-money laundering regulations by not carrying out sufficient background checks, according to New York finance officials. Coinbase must spend an additional $50 million on enhancing its compliance program in addition to paying a $50 million fine to the New York State Department of Financial Services.

The ongoing nature of this probe was disclosed by Coinbase in its 2021 annual 10k filing.

During regular supervisory inspections in May 2020, state regulators became aware of issues at Coinbase. The Office of Foreign Assets Control (OFAC) programs, transaction monitoring systems, client due diligence procedures, and risk assessments for anti-money laundering were among the compliance programs that the Department of Financial Services identified as having “serious shortcomings.” Regulators discovered problems with Coinbase’s “retention of books and records” and reporting to the state department after more thorough investigation into possible legal infractions.

The lawsuit states that “the compliance problem within Coinbase reached a critical point throughout the Department’s inquiry.” The regulators discovered that by the end of 2021, Coinbase had a backlog of 14,000 users who needed increased due diligence in addition to a backlog of over 100,000 unreviewed transaction monitoring alerts.

The statement states that Coinbase signups were fifteen times higher in May 2021 than in January 2020, and by November 2021, there were twenty-five times more monthly transactions than in January 2020, which contributed to these backlogs.

According to regulators, Coinbase lacked the workforce necessary to meet the expanding compliance requirements. Yet when Coinbase eliminated 1100 employees, or 18% of its employment, in June 2022, CEO Brian Armstrong claimed that the layoffs were the result of overstaffing following the business’s 2021 boom.

Instead of full-time workers, over 1,000 independent contractors were in charge of clearing the backlog, according to the filing. The complaint states that regulators discovered that Coinbase did not adequately supervise or educate these contractors, which resulted in “a considerable fraction of the alerts evaluated by third parties was replete with inaccuracies.”

Regulators stated that attendance at the training sessions was not properly recorded and that the training Coinbase offered was not scaleable for the size of the contractor workforce. “The contractor organizations did not always carry out the quality control procedure in accordance with the requirements that Coinbase provided, and at first, Coinbase did not have a framework in place to audit the quality control that was done.”

Regulators said that Coinbase neglected to alert law enforcement to possible cases of money laundering, drug trafficking, and CSAM-related activities as a result of these mistakes.

Additionally, according to the lawsuit, Coinbase has known since 2018 that it has fallen short of state requirements for compliance with anti-money laundering and anti-financial terrorism laws.

While working to address these problems, Coinbase has made only gradual progress, according to the filing: “Progress in certain areas did not occur until recently, and work remains unresolved to the present.”

Regulators wrote that the risks of this non-compliance weren’t just speculative.

The department discovered that one former Coinbase client had been charged criminally with possessing material containing child sexual assault in the 1990s (CSAM). After more than two years of “suspicious transactions perhaps related with unlawful activities,” Coinbase discovered the behavior, closed the account, and worked with law enforcement.

Another user set up a phony Coinbase account in the company’s name and moved $150 million to their new account by posing as an employee of the company and managing to acquire unlawful access to the bank account of that company. When the company in question contacted Coinbase six days after the fraud occurred, Coinbase didn’t notice it; the money was eventually recovered after a police inquiry.

These fees appear at a time when customers are beginning to lose faith in well-known bitcoin exchanges. After declaring bankruptcy, Sam Bankman-Fried, the founder and former CEO of FTX, was charged with wire fraud and conspiracy to misappropriate client funds. Bankman-Fried has pleaded not guilty to all allegations.

Coinbase’s chief legal officer, Paul Grewal, stated that the company has taken “considerable steps to address these prior shortcomings and is committed to being a leader and role model in the crypto sector, including cooperating with regulators when it comes to compliance.” We think that we have invested more in compliance than any other cryptocurrency exchange in the world, and we want our users to feel secure using our services.