On May 5, 2015, FinCEN assessed a $700,000 fine against Ripple Labs Inc., a San Francisco-based virtual currency trading company, and its wholly-owned subsidiary, XRP Fund II, LLC, for violations of the Bank Secrecy Act (BSA).
In March 2013, FinCEN issued guidance that required any exchanger of virtual currency to register as a Money Services Business (MSB) under the BSA. The BSA requires that all MSBs implement and maintain an anti-money laundering (AML) program, and that they report any suspicious transactions. In connection with its AML program, an MSB also must implement Know-Your-Customer (KYC) procedures.
Despite the new FinCEN guidance, Ripple Labs, the second-largest virtual currency trader by market capitalization after Bitcoin, failed to register as an MSB. During the month of April 2013, Ripple Labs sold approximately $1.3 million worth of XRP, the company’s virtual currency, despite its failure either to register as an MSB or implement AML and KYC procedures. In July 2013, Ripple Labs incorporated XRP Fund II, LLC, which also engaged in the sale of XRP without initially registering as an MSB.
On the same day that FinCEN announced its penalty, Ripple Labs also entered into a settlement with the United States Attorney’s Office for the Northern District of California, under which Ripple Labs agreed to forfeit $450,000 to settle related criminal charges. Ripple Lab’s forfeiture will be credited towards the $700,000 civil penalty. In addition to the monetary penalties, Ripple Labs agreed to conduct all future XRP activity through a registered MSB and to implement sufficient AML and KYC controls. Ripple Labs also agreed to review transactions for the past three years and to report any suspicious activity, to retain independent auditors responsible for reviewing the company’s compliance program every two years through 2020 and to implement an effective monitoring program covering all future transactions.
Announcing FinCEN’s penalty, Richard Weber, Chief of IRS Criminal Investigation, said, “Federal laws that regulate the reporting of financial transactions are in place to detect and stop illegal activities, including those in the virtual currency arena. Unregulated, virtual currency opens the door for criminals to anonymously conduct illegal activities online, eroding our financial systems and creating a Wild West environment where following the law is a choice rather than a requirement.”