Fines for Fintech Compliance Violations Are Increasing. So Are Illegal Activities.

Plus, could autonomous AI agents soon be doing your crypto transactions and paying bills on-chain? Maybe.

Number of the Week: $24 million (explanation below)

Fines for Fintech Compliance Violations Are Increasing. So Are Illegal Activities.

Gretchen Morgenson is nobody’s fool. The exclusive story that she broke last week for NBC News about federal prosecutors examining financial transactions at Block and alleged widespread compliance lapses at its Square and Cash App subsidiaries was met with barely a shrug in the market.

Internal documents provided by a former employee to prosecutors from the Southern District of New York and reviewed by NBC News reportedly show crypto transactions for terrorist groups and transactions involving nations subject to U.S. sanctions—Cuba, Iran, Russia and Venezuela—were processed by Block and Square, respectively. Most of the transactions involved credit cards, dollar transfers and bitcoin and were not reported to the government as required. Further, they did not compel Block executives to correct internal processes to prevent such transactions once they were notified of the breaches. “From the ground up, everything in the compliance section was flawed. It is led by people who should not be in charge of a regulated compliance program,” said the former employee, who was granted anonymity by NBC News. 

This comes on the heels of a February report that two other whistleblowers alleged inadequate due diligence to establish the true identity of Cash App customers, which poses an accessibility threat conducive to money laundering, terrorism financing and other illegal activities. In the current incident, Block officials told NBC News that “it believed it had voluntarily reported the ‘thousands of transactions’ described by the former employee to the Office of Foreign Assets Control,” the U.S. Treasury department responsible for enforcing economic sanctions. (The former employee contends otherwise.)

The alleged know-your-customer (KYC) and other compliance failings at Block aren’t an isolated incident in fintech, of course, but it begs the question: Is this the price of advancing digital financial innovation? It’s complicated, particularly given the appetite and aptitude of bad actors to exploit new technologies to their criminal, financial or geopolitical advantage. A short list of recent alleged compliance failings at crypto and payment companies underscores the prevalence of those seeking innovative, anonymous or easy ways to launder money, finance terrorism and fund illegal activities. But it also points to the reluctance of fintech CEOs to proactively respond to threats or abide by federal and state compliance requirements to protect the integrity of the U.S. financial system, either because of lax compliance and internal controls or profit motives—or both.