According to the latest reports from New York Times, Coinbase has agreed to pay a $50 million fine for inadequate background checks on customers and will invest an additional $50 million in compliance measures as part of a settlement with New York regulating authorities.
The settlement finalized between Coinbase and the New York State Department of Financial Services on Wednesday, January 04, 2023, Coinbase will be required to invest $50 million in improving its compliance program. This program is designed to prevent individuals involved in illegal activities such as drug trafficking and selling child pornography from opening accounts with the exchange.
The regulatory authority detected the security deficiencies in the exchange in 2018 and started an investigation in 2021. As part of the settlement, Coinbase has agreed to hire an independent firm to address issues with its compliance program. While the company had previously established an in-house system for suspicious monitoring activity, the regulator in New York is seeking further measures to ensure compliance.
Despite these efforts, the company’s compliance issues persisted, leading regulators to initiate a formal investigation in 2021. The study revealed that Coinbase failed to verify specific customers’ identities adequately and needed to follow up on suspicious activity alerts generated by its internal monitoring system.
In 2021, regulators discovered that Coinbase had a backlog of over 100,000 alerts about potentially suspicious customer transactions that needed to be adequately investigated. They also found that the exchange performed only essential “know your customer” checks on individuals before allowing them to open accounts, treating background checks as a superficial “check-the-box exercise.
A digital thief could steal $150 million from a company through Coinbase by pretending to be an employee of the company and opening a Coinbase account. The regulators ordered Coinbase to hire an outside monitor to oversee its compliance last year due to the company’s inadequate customer background checks, even as an investigation was ongoing. The company had already agreed to hire an independent consultant to address the issue.
The Coinbase chief legal officer, Paul Grewal, stated,
Coinbase remains committed to being a leader and role model in the crypto space, which means partnering with regulators regarding compliance and other areas.
Coinbase Adopted Measures
As part of its regular efforts to improve compliance, Coinbase is utilizing the Transaction Monitoring System (TMS), which allows the company to identify patterns potentially indicative of fraudulent, illegal, or money laundering activity and flag them for further review.
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Coinbase has implemented measures to assess customer risk, apply additional controls to “high-risk customers,” and comply with the United States Bank Secrecy Act and the Travel Rule. These measures have been taken, but Coinbase claims they are necessary to protect the security and privacy of its users.