Working in coordination with a number of law agencies in the U.S., FinCEN has assessed a civil money penalty for “willful violation of the Bank Secrecy Act by acting as a money services business without registering with FinCEN.”
The crimes enforcement network claims that Ripple failed to maintain adequate anti-money laundering (AML) procedures to ensure clients were not using the service to avoid taxation and hiding the source of funds, among other things. The statement also claims that the firm failed to report suspicious activity related to several financial transactions.
U.S. Attorney Melinda Haag commented on the matter:
“By these agreements, we demonstrate again that we will remain vigilant to ensure the security of and prevent the misuse of the financial markets. Ripple Labs Inc. and its wholly-owned subsidiary both have acknowledged that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they are not profiting by creating products that allow would-be criminals to avoid detection. We hope that this sets an industry standard in the important new space of digital currency.”
Reports indicate that Ripple ignored know your customer requirements (KYC) when dealing with customers, most notably when the company sold US$250,000 in XRP to Roger Ver, who is also an investor in Ripple Labs. The FinCEN document outlined a failure to file suspicious activity reports (SARs) despite being required to do so in multiple instances.
FinCEN Director Jennifer Calvery said that these events should serve as a reminder that all US-based digital currency businesses must comply with AML regulations. She also stated:
“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.”
Ripple Labs has agreed to resolve a criminal investigation in exchange for substantial remedial measures, part of which requires Ripple to migrate a portion of the virtual currency management to a separate legal entity.
The agreement also outlined modifications to the Ripple Protocol including:
- reporting regarding any counterparty using the Ripple protocol;
- reporting as to the flow of funds within the Ripple protocol;
- reporting regarding the degree of separation.
Ripple spokesperson Monica Long stressed that the company does not believe it “willfully engaged” in criminal behavior and instead saw the fines as the difficulties of running a business in an emerging field such as digital money. Long added:
"Ripple Labs was one of the first to proactively build out a compliance and risk program … Ripple is infrastructure technology for banks to build compliant payment networks. The settlement announced today does not impede our ability to execute on those bank integrations."
The financial and legal penalties put forth by FinCEN deal a serious blow to the growth of Ripple’s virtual currency network. However, it is clear that financial enforcement agencies remain vigilant and this latest shakedown may prove a benchmark example of how government agencies are keeping a closer eye on the emerging virtual currency market.