Photographer: George Frey/Bloomberg

U.S. Targets Virtual Cash, Fining Ripple for Lax Controls

Updated on

U.S. authorities effectively tightened their grip on virtual currencies, reaching a settlement with a San Francisco-based start-up that regulators accused of negotiating a quarter-million-dollar deal with a convicted explosives dealer.

Ripple Labs Inc. agreed to pay $700,000 to settle allegations of poor money-laundering controls with the U.S. Justice Department, the Internal Revenue Service and Financial Crimes Enforcement Network, or FinCEN, the enforcement arm of the U.S. Treasury Department.

Tuesday’s settlement is the first civil enforcement action against a virtual currency exchanger, FinCEN said in a statement. It enforces rules that FinCEN laid out in 2013 that required all virtual currency exchangers to register with the agency.

Ripple sold its XRP, the second-largest virtual currency, even though it hadn’t registered with FinCEN, the Justice Department said in a statement. Ripple failed to maintain appropriate anti-money laundering controls under federal banking laws, the department said.

Monica Long, a Ripple Labs spokeswoman, said the company is pleased to resolve this matter, adding that it hasn’t willfully engaged in criminal activity and cooperated with investigators while bolstering compliance efforts in a “Wild West” industry.

“An early company in an emerging, undefined fintech category, Ripple Labs was one of the first to proactively build out a compliance and risk program,” Long said.

Cryptocurrency Market

The virtual currency industry consists largely of start-up companies seeking to carve out a piece of the cryptocurrency market dominated by Bitcoin. Tuesday’s ruling underscores the costs such companies may bear -- in the form of potential enforcement actions, or in compliance and legal costs.

Ripple Labs “acknowledged that digital currency providers have an obligation not only to refrain from illegal activity, but also to ensure they aren’t profiting by creating products that allow would-be criminals to avoid detection,” said U.S. Attorney Melinda Haag of the Northern District of California. “We hope that this sets an industry standard.”

In late 2013, the company negotiated a $250,000 transaction with an individual who had prior felony convictions for dealing in explosive devices and had been sentenced to prison, the Justice Department said in a statement, adding the company hadn’t followed its own “know your customer” requirements.

That individual was a Ripple Labs investor, according to the statement of facts in the case.

Ripple was co-founded in 2012 by Internet entrepreneur Jed McCaleb, according to a company blog. McCaleb also started Mt. Gox, which dominated the world of Bitcoin until its bankruptcy last year.

As part of the settlement, Ripple Labs will have external audits through 2020 and beef up its anti-money laundering controls and training program. A subsidiary of the firm, XRP II LLC, was cited in the settlement for failing to file suspicious activity reports and for lax money laundering controls.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE