Coinbase Settles with DFS Over Compliance Issues

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  • Coinbase has agreed to pay a $50 million fine after flouting anti-money laundering laws
  • The exchange came to an agreement with the New York State Department of Financial Services
  • Issues were found with Coinbase’s customer registration process

Coinbase has agreed to pay a $50 million fine after being found by financial regulators to have allowed customers to open accounts without performing adequate background checks, violating anti-money laundering laws. In addition to the fine, the settlement with the New York State Department of Financial Services (DFS), which was announced on Wednesday, will also require Coinbase to invest $50 million to strengthen its compliance program. This program is designed to prevent individuals involved in illegal activities such as drug trafficking and the sale of child pornography from opening accounts with the exchange.

Issues Date Back to 2020

The DFS detected compliance issues at Coinbase during a routine examination in 2020, following the exchange’s acquisition of a New York BitLicense in 2017. The investigation revealed that Coinbase had been non-compliant with anti-money laundering controls dating back to 2018. In an initial attempt to address the issue, Coinbase agreed to hire an independent consultant to help reorganize its operations to meet the requirements of anti-money laundering laws, including the need to identify customers and monitor their behavior for suspicious activity.

However, this did not resolve the problems and the DFS opened a formal investigation in 2021. The investigation found that Coinbase had failed to thoroughly investigate the backgrounds of customers with questionable identities and had not properly followed up on suspicious activity alerts generated by its internal monitoring system. In fact, by late 2021, Coinbase had a backlog of over 100,000 alerts regarding potential suspicious customer transactions that had not been properly examined.

The exchange was also found to have conducted only basic Know Your Customer checks before allowing individuals to open accounts, treating such checks as a “simple check-the-box exercise.”

Coinbase Admits it has “Fallen Short”

A blog post from Paul Grewal, Coinbase’s chief legal officer, admitted that the exchange had “fallen short” of its responsibilities, but added that it was committed to remaining in New York and staying on the right side of regulators. However, Coinbase is still facing a probe from the Securities and Exchange Commission over suggestions it improperly let US citizens trade digital assets that should have been registered as securities.