Block Inc., the firm behind Cash App and helmed by Jack Dorsey, has received a $40 million fine from the New York Department of Financial Services (NYDFS).
This penalty, announced on April 10, results from significant deficiencies in the company’s anti-money laundering (AML) and compliance systems regarding its cryptocurrency operations.
Adrienne Harris, the NYDFS Superintendent, stated that companies must enhance their compliance programs in line with their growth. She emphasized that Block’s deficiencies contributed to vulnerabilities that could have been mitigated with adequate oversight.
Harris remarked:
“All financial institutions, whether traditional or new cryptocurrency platforms, must adhere to strict standards that safeguard consumers and uphold the integrity of the financial system.”
Block is mandated to settle the fine within 10 days and will be monitored by an independent supervisor for a period of 12 months. During this time, the company must revamp its AML measures, sanctions screening, and transaction monitoring procedures.
Insufficient oversight of Bitcoin transactions
As per the Consent Order, the regulatory body found that Block did not fulfill state mandates for overseeing digital asset transactions.
The NYDFS indicated that the company’s compliance framework failed to identify or flag Bitcoin transactions tied to wallets linked with illegal or sanctioned activities unless specific thresholds were surpassed.
In particular, alerts were only initiated if a receiving wallet had over 1% exposure to wallets connected to terrorist activities.
Moreover, transactions directed to such wallets were not halted until that exposure exceeded 10%. This threshold-based method was deemed a violation of regulatory expectations that call for proactive risk management.
The authorities pointed out that any interactions with high-risk wallets, even those below 1%, necessitate a strong, risk-based justification. Without this, the company did not meet its responsibilities under federal and state financial crime prevention regulations.
Concerns over mixer transactions
Another significant issue was Block’s management of transactions conducted through crypto mixers, which conceal the origin and destination of funds, making them appealing to illicit actors.
Despite their inherently high-risk nature, Block continued to categorize these transactions as “medium” risk, disregarding multiple warnings from regulators.
The NYDFS also took issue with Block’s inability to manage the volume of transaction alerts. Between 2018 and 2020, the backlog of unresolved alerts surged from 18,000 to over 169,000.
This increase was attributed to the firm’s failure to foresee the compliance obligations associated with Cash App’s rapid expansion. Consequently, some suspicious activity reports (SARs) were filed more than a year after the initial alerts, causing significant delays in investigations.