Coinbase $100M Settlement w/ NY DFS

Crypto is in the news again for all the wrong reasons but this time it is not for loss of crypto assets or fraud. Rather, it is the lack of fraud prevention and safeguards that has landed this well-known crypto firm in hot water. What company is it and what did they do? Let’s discuss.

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Following the discovery of "serious failings" in Coinbase Inc.'s anti-money laundering compliance regime, New York's financial services regulator struck a settlement with Coinbase Inc., one of the largest cryptocurrency exchanges, for $100 million, the agency announced on Wednesday.

According to the agreement with the New York State Department of Financial Services, Coinbase must pay the state a $50 million fine. As part of the settlement, Coinbase, a California-based company with licenses in New York, would also put $50 million into bolstering its compliance program over the following two years.

DFS Superintendent Adrienne A. Harris stated in a statement that "it is essential that all financial institutions protect their systems from bad actors, and the department's expectations with respect to consumer protection, cybersecurity, and anti-money laundering programs are just as stringent for cryptocurrency companies as they are for traditional financial services institutions."

According to Harris, "Coinbase failed to develop and sustain a practical compliance program that could keep up with its expansion." Because of this breakdown, the Coinbase platform was potentially exposed to illegal conduct, necessitating rapid departmental action, including the installation of an independent monitor.

Following the failure of FTX Trading Ltd., lawmakers, regulators, and law enforcement are putting pressure on the cryptocurrency business, which led to Wednesday's settlement. The settlement with DFS, according to Coinbase, is an important step in its commitment to "continuous improvement, our engagement with key regulators, and our push for greater compliance in the crypto space — for ourselves and others." Coinbase claims to have more than 108 million verified users and $101 billion in assets on its website.

In a statement released on Wednesday, Coinbase Chief Legal Officer Paul Grewal said the company has made significant improvements in relation to its past failings and "remains committed to being a leader and role model in the crypto space, including partnering with regulators when it comes to compliance."

We think we've invested more in compliance than any other cryptocurrency exchange in the world, and we want our users to feel secure using our services, Grewal added.

The consent order issued on Wednesday states that DFS examined Coinbase in 2020 for the time frame of July 1, 2018, through December 31, 2019, and discovered serious flaws in a number of compliance areas, including its customer due diligence procedures and its screening program for the Office of Foreign Assets Control of the U.S. Treasury Department. The department also discovered that since 2017, Coinbase had been conducting insufficient yearly anti-money laundering risk assessments.

According to the settlement order, the department compelled Coinbase to employ a third-party consultant to evaluate its compliance program and provide areas for improvement. As a result, Coinbase adopted a remediation plan to strengthen its compliance program.

According to the ruling, the agency launched an enforcement inquiry into the compliance problems identified during the 2020 exam in 2021. The examination revealed weaknesses in Coinbase's compliance and sanctions management systems, as well as issues with the company's record-keeping procedures and ability to fulfill some reporting requirements to DFS.

The compliance order said that Coinbase did take specific actions to address the problems identified by the department and the independent consultant "in late 2020 and in 2021." "However, significant flaws persisted, and over the course of 2021, it became apparent that Coinbase's compliance system was unable to handle the expanding amount of Coinbase's activity, a scenario that was made worse by unprecedented expansion in its user base."

Coinbase's compliance situation "reached a catastrophic stage" during the DFS inquiry, according to DFS, including a backlog of more than 100,000 unreviewed transaction monitoring alerts by the end of 2021.

According to the consent order, one instance of illegal activity made possible by Coinbase occurred in the spring of 2021 when a person posing as an employee of an unnamed corporation was able to open an account on the company's behalf without authorization or the proper personal identification required by Coinbase policy.

The ruling stated that the requester filled out an online form to request a fifty-fold increase in the daily withdrawal cap, "which was granted despite a complete lack of account activity and, consequently, no evidence that the previous criteria were inadequate for the customer's activities."

The ruling stated that the individual transferred more than $150 million from the company's bank account, to which the individual had obtained unauthorized access, to the company's Coinbase account, converted the money into virtual currency, and then moved it to a wallet off of Coinbase's network.

Six days later, according to DFS, Coinbase discovered the activity and helped law enforcement with an investigation that ultimately resulted in the recovery of the cash.

In a memorandum of agreement agreed in February 2022 between DFS and Coinbase, Coinbase was required to hire an impartial monitor to look over any compliance issues. According to the consent order, the monitor concluded in August that Coinbase had strengthened its compliance procedures and made headway in addressing its flaws, "even if more improvement is required."

In an effort to address its problems and generally strengthen its compliance operation, Coinbase has recently devised a more focused remediation plan, according to DFS, and expended "quite substantial time and money."