Why it matters

The Financial Crimes Enforcement Network (FinCEN) announced its first civil enforcement action involving virtual currency, ordering Ripple Labs and a subsidiary to pay a $700,000 fine for failure to register as a money services business, failure to comply with certain reporting requirements and failure to implement an effective anti-money laundering (AML) compliance program. The action—which also includes a settlement with a U.S. Attorney’s Office in California where Ripple agreed to forfeit $450,000 to avoid criminal charges—was triggered by the company’s violations of the Bank Secrecy Act when, according to government documents, it sold its virtual currency without registering as a money services business and failed to put in place an effective AML compliance program. In addition to the forfeiture and fine, Ripple agreed to several remedial actions, such as strengthening its AML compliance efforts and conducting a three-year “look back” for possible suspicious transactions, that provide a template for other virtual currency companies on how to conduct business. “We hope that this [action] sets an industry standard in the important new space of digital currency,” U.S. Attorney Melinda Haag said in a statement.

Detailed discussion

Taking the lead in a criminal investigation, the U.S. Attorney’s Office for the Northern District of California was joined by FinCEN in this action against Ripple Labs Inc. and its wholly owned subsidiary, XRP II, for three sets of Bank Secrecy Act violations. In addition to a $450,000 asset forfeiture to the Department of Justice and the $700,000 civil money penalty assessed by FinCEN, the DOJ ordered remedial action.

Headquartered in San Francisco, Ripple provides virtual currency exchange transaction services and facilitates transfers of virtual currency. After Bitcoin, Ripple is the second-largest cryptocurrency by market capitalization.

On March 18, 2013, FinCEN released guidance that clarified the applicability of Bank Secrecy Act (BSA) regulations to participants in the virtual currency arena. Importantly, the Guidance stated that two categories of participants—“exchangers” and “administrators” of virtual currencies—are money services business (MSBs) under the statute and are required to register with FinCEN as such.

According to the enforcement action, Ripple acted as an MSB and sold XRP—its virtual currency—without registering with FinCEN after the effective date of the Guidance; Ripple also failed to implement and maintain an adequate AML program. After XRP II assumed Ripple Labs’ functions in 2013 until Oct. 1, 2014, it too violated the BSA by failing to implement an effective AML program and acting as an MSB without registering with FinCEN, as well as failing to report suspicious activity related to several financial transactions.

In one example found in the Statement of Facts, Ripple failed to follow its own internal “know your customer” requirements in September 2013 and negotiated a $250,000 transaction with an individual who had prior felony convictions for dealing in explosive devices and had been sentenced to prison. A curious aspect of this example was the fact that the person was already known to the company as an investor.

For these willful violations of the BSA, the $450,000 forfeited to the DOJ was used to offset part of FinCEN’s assessment of the $700,000 civil money penalty against both Ripple and XRP II.

The DOJ action also included an agreement between Ripple and XRP setting forth a series of remedial and future steps to enhance their compliance with AML obligations. Going forward, Ripple and XRP will only transact XRP and “Ripple Trade” activity through a registered MSB, comply with the Funds Transfer and Funds Travel Rules, and implement and maintain an effective AML program (including an AML compliance officer and conducting AML compliance training for employees). In addition, the companies promised to conduct a three-year “look back” for suspicious activity and retain external, independent auditors to review their BSA compliance every two years until 2020.

“Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws,” FinCEN director Jennifer Shasky Calvery said in a statement about the action. “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.”

To read FinCEN’s assessment of a civil money penalty, click here.

To read the Statement of Facts and Violations, click here.

To read the Remedial Framework, click here.

To read the settlement agreement with the U.S. Attorney’s Office, click here.