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From Banking and Finance Law Daily, May 6, 2015

Virtual currency violations cost exchangers real money

By Lisa M. Goolik, J.D.

Virtual currency exchanger Ripple Labs Inc. and its wholly-owned subsidiary, XRP II, LLC, have consented to pay a $700,000 civil money penalty to settle charges brought by the Financial Crimes Enforcement Network that the companies violated the Bank Secrecy Act by acting as money services businesses and selling virtual currency without registering with FinCEN. The agreed assessment resolves the first civil enforcement action brought by FinCEN against a virtual currency exchanger.

“Virtual currency exchangers must bring products to market that comply with our anti-money laundering laws,” said FinCEN Director Jennifer Shasky Calvery. “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.”

BSA violations. According to the Statement of Facts, Ripple Labs, headquartered in San Francisco, Calif., facilitated transfers of virtual currency, called XRP, and provided virtual currency exchange transaction services. Ripple Labs is the second-largest crypto-currency by market capitalization, after Bitcoin.

On March 18, 2013, FinCEN released guidance clarifying the applicability of regulations implementing the Bank Secrecy Act and requiring virtual currency exchangers and administrators to register as MSBs with FinCEN. FinCEN charged Ripple Labs with willfully violating the requirement, as well as failing to implement and maintain an adequate anti-money laundering program.

FinCEN also charged that XRP II, formerly known as XRP Fund II, LLC, similarly violated the BSA by failing to implement an effective AML program and by failing to report suspicious activity related to several financial transactions.

Settlement details. In addition to paying the civil money penalty, Ripple Labs and XRP II agreed to take remedial steps to ensure future compliance with AML obligations, as well as other enhanced measures. Among other remedial actions, the companies agreed to:

  • only transact XRP and “Ripple Trade” activity through a registered MSB;

  • implement and maintain an effective AML program;

  • comply with the Funds Transfer and Funds Travel Rules;

  • conduct a three-year “look-back” to require suspicious activity reporting for prior suspicious transactions;

  • undertake certain enhancements to the Ripple Protocol to appropriately monitor all future transactions; and

  • retain external independent auditors to review their compliance with the BSA every two years up to and including 2020.

Concurrent action. FinCEN’s assessment is concurrent with an announcement by the U.S. Attorney’s Office for the Northern District of California of a settlement agreement with Ripple Labs and XRP II in an action involving potential criminal charges. In that settlement, the companies agreed to forfeit $450,000. The forfeiture will be credited to partially satisfy FinCEN’s $700,000 civil money penalty.

U.S. Attorney Melinda Haag commented, “By these agreements, we demonstrate again that we will remain vigilant to ensure the security of, and prevent the misuse of, the financial markets.” Richard Weber, Chief of the IRS Criminal Investigation Division, which also collaborated on the investigation, added, “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.”

Companies: Ripple Labs Inc.; XRP Fund II, LLC; XRP II, LLC

MainStory: TopStory BankSecrecyAct EnforcementActions

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