As a result, Coinbase will have to pay a USD 50 million fine to the New York State Department of Financial Services and is also required to spend USD 50 million on improving its compliance program. Coinbase disclosed that this investigation was in progress in its annual 10k filing in 2021.
State regulators first noticed problems at Coinbase in May 2020 during routine supervisory examinations. The Department of Financial Services found deficiencies in various compliance programs, including customer due diligence procedures, transaction monitoring systems, Office of Foreign Assets Control (OFAC) programs, and anti-money laundering risk assessments. Upon closer examination into potential legal violations, regulators also found issues with Coinbase’s retention of books and records and reporting to the state department.
The regulators found that by the end of 2021, Coinbase had a backlog of over 100.000 unreviewed transaction monitoring alerts, plus a backlog 14.000 users requiring enhanced due diligence. These backlogs were due in part to the company’s dramatic growth in 2021 — the filing says that Coinbase signups in May 2021 were fifteen times higher than January 2020, and by November 2021, there were 25 times more monthly transactions than in January 2020.
Regulators say that Coinbase did not have enough staff to keep up with growing compliance needs. When Coinbase laid off 18% of its workforce in June 2022, CEO Brian Armstrong said that the cuts were a result of over-hiring after the company’s 2021 boom.
According to the filing, it was instead the responsibility of over 1.000 third-party contractors to catch up with the backlog not full-time employees. Regulators found that Coinbase didn’t properly oversee or train these contractors, so many of the alerts reviewed by third parties were rife with errors, the filing says.
Furthermore, the training that Coinbase provided was not scalable for the size of the contractor force, and attendance at the training sessions was not adequately tracked, regulators said. The quality control process was not always performed by the contractor organizations to the standards that Coinbase provided, and initially, Coinbase did not have a system in place to audit the quality control that was done.
As a result of these inaccuracies, regulators wrote that Coinbase failed to report potential instances of money laundering, narcotics trafficking and CSAM-related activity to authorities. The filing also states that since 2018, Coinbase has been aware of its failures to meet state standards for money laundering and financial terrorism compliance.
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