On May 5, Ripple Labs Inc. (Ripple), and its subsidiary XRP II LLC (XRP II), an exchanger of virtual currency called XRP, agreed to pay a total of $700,000 to resolve investigations by the Financial Crimes Enforcement Network (FinCEN) and U.S. Department of Justice relating to Bank Secrecy Act (BSA) violations. The settlement marks the first FinCEN action, and the first action taken concurrently by FinCEN and the DOJ, against a virtual currency exchanger.
Ripple consented to the assessment by FinCEN of a civil money penalty in the amount of $700,000. The penalty will be partially satisfied by a $450,000 forfeiture to DOJ pursuant to a settlement agreement in which DOJ agreed not to criminally prosecute Ripple.
Ripple admitted to the conduct set forth in the statement of facts that formed the basis of both the DOJ and FinCEN actions. The statement of facts indicated that from at least March 6, 2013 through April 29, 2013, Ripple sold over $1.3 million worth of XRP while not being registered with FinCEN as a money services business (MSB), despite March 18, 2013 FinCEN guidance that such activities required registration. Although Ripple transferred its XRP business into a subsidiary called XRP II that was registered as an MSB in July 2013, that subsidiary failed to comply with applicable anti-money laundering (AML) requirements by not developing a written AML program until September 2013, hiring an AML compliance officer until January 2014, and conducting any AML training until nearly a year after it began selling XRP.
As part of the consent agreement with FinCEN, Ripple and XRP II agreed to transact its virtual currency business through an MSB registered with FinCEN and to take remedial steps to ensure future compliance with the BSA. The remedial framework requires the new MSB and XRP II to take all necessary steps to implement and maintain an effective AML program and to comply with the BSA funds transfer rules. It also requires external audits of XRP II’s AML compliance program through the year 2020, enhanced transaction monitoring and a lookback review of Ripple and XRP II’s transactions in virtual currency.
Today, FinCEN Director Shasky Calvery noted the Ripple settlement in her remarks at the West Coast Anti-Money Laundering Forum. “Virtual currency exchangers” she noted, “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 Director stated that FinCEN has a team of experts that keep pace with the virtual currency area, and share their knowledge with foreign and domestic regulators and prosecutors. In addition, she noted that FinCEN, working with examiners in the Internal Revenue Service (to which FinCEN delegates authority to examine MSBs), recently launched a series of supervisory examinations of virtual currency businesses.
Director Shasky Calvery also discussed the use of real estate to launder money, noting that FinCEN continues to see the use of shell companies, entities formed for the purpose of holding property or funds that do not themselves engage in any significant business activities, by international corrupt politicians, drug traffickers and criminals to purchase luxury residential real estate in cash. Although FinCEN issued an advanced notice of proposed rulemaking in 2003 considering whether to subject persons involved in real estate closings to BSA requirements, FinCEN decided not move forward until it better understood the money laundering risks. Director Shasky Calvery stated that FinCEN has yet to fully define risks associated with real estate closings and settlements or to consider appropriate initiatives to address those risks.
Finally, Director Shasky Calvery briefly noted that FinCEN is in the process of considering the 126 comments received regarding its 2014 notice of proposed rulemaking (NPRM) that would clarify customer due diligence requirements and impose certain requirements to identify and verify beneficial ownership for certain customers. She did not discuss the timing of any final regulations or possible changes to the NPRM.