Ripple Fined $700K by FinCEN for MSB, AML Violations

Ripple Labs has been fined $700,000 by the FinCEN for failing to register as an MSB and not employing adequate

Ripple Labs has been fined $700,000 by the Financial Crimes Enforcement Network (FinCEN) for failing to register as a Money Services Business (MSB) and not employing adequate anti-money laundering (AML) measures.

FinCEN noted in its press release that this was the first time it had taken civil action against a virtual currency exchanger.

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The agency charged both Ripple Labs Inc., headquartered in San Francisco, and its wholly owned subsidiary, XRP II LLC, incorporated in South Carolina. FinCEN said that “Ripple Labs willfully violated several requirements of the Bank Secrecy Act (BSA)” during a period from late 2013 to early 2014. The company operated as an MSB while selling its XRP currency without registering with FinCEN and failed to implement AML controls.

XRP II, which was set up specifically to sell XRP to third parties, allegedly took over its parent’s XRP sales prior to its registration as an MSB on September 4, 2013. It continued to operate without an AML policy until September 26, and without a compliance officer until late January 2014. It also only completed its first AML risk assessment in March 2014.

In March 2013, FinCEN released guidance noting that its regulations were equally applicable to those engaging in virtual currency transactions. Said Richard Weber, Head of the IRS Criminal Investigation:

“Federal laws that regulate the reporting of financial transactions are in place to detect and stop illegal activities, including those in the virtual currency arena. Unregulated, virtual currency opens the door for criminals to anonymously conduct illegal activities online, eroding our financial systems and creating a Wild West environment where following the law is a choice rather than a requirement.”

The charges also noted how know-your-customer (KYC) protocols were breached in the sale of $250,000 worth of XRP to “Bitcoin Jesus” Roger Ver, whom FinCEN describes as follows:

“Open source information indicates that this individual, an investor in Ripple Labs, has a prior three-count federal felony conviction for dealing in, mailing, and storing explosive devices and had been sentenced to prison.”

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The fine is concurrent with that of the Northern District of California’s Department of Justice against XRP II for $450,000. The penalty would be credited to partially satisfy Ripple’s $700,000 obligation.

Ripple is undertaking a number of remedial measures: XRP transactions and Ripple Trade would operate through a registered MSB; the implementation of an AML program; conducting a 3-year “look back” for any suspicious behavior; and the retaining of external auditors to review compliance with BSA for every two years until 2020.

The traded price of Ripple’s XRP currency remains mostly unchanged during the past 24h.

Ripple the First

The development raises a number of interesting issues pertaining to the regulatory state of digital currency.

One can’t help but ask why Ripple was the first to face such action and if we will see this play out with other cryptocurrencies. Bitcoin and its currency, for example, aren’t centrally managed in the same way as Ripple. Bitcoin’s currency is generated through mining on a distributed network, not issued by any central entity. The same applies to many altcoins. Thus, regulatory concerns are confined to resellers, payment processors and exchanges.

Cryptocurrencies that are pre-mined are more likely to fall into a similar bucket as Ripple. Even then, authorities may be more likely to pursue a commercial entity than a pseudonymous developer in his basement (at least on matters related to FinCEN). Indeed, the FinCEN charges noted how Ripple’s XRP ranks second to Bitcoin in market cap. The majority of cryptos are therefore unlikely to ever garner such attention, although there may be exceptions. GAW’s Paycoin may very well meet the criteria, notwithstanding a plethora of other issues.

Critics of Ripple have pointed at its recent compliance measures, charging that it is too centralized. However, once the pain of the legal action wears off, mainstream finance may feel safer with something subject to the same scrutiny as traditional financial institutions.

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