Coinbase had “inadequate” AML measures; settles for $100M with NYDFS

Coinbase will pay a penalty of $50 million for failing to comply with the New York Banking Law and other state regulations, according to a press release on Jan. 4.

The largest crypto exchange by trading volume will also invest another $50 million over the next 2 years to update its compliance systems as per a plan approved by the NY regulators.

Coinbase has been licensed by the New York State Department of Financial Services (NYDFS) since 2017. During an examination followed by an enforcement investigation, the NYDFS found that Coinbase had “inadequate” measures to prevent money laundering.

The regulators noted that Coinbase’s Know Your Customer and Customer Due Diligence (KYC/CDD) program was “immature and inadequate,” both in terms of how it was designed and implemented. For KYC details, Coinbase only required users to simply check a few boxes and failed to conduct due diligence, the regulators stated.

Additionally, growing at a high pace — Coinbase touts 108 million verified users — it failed to keep up with the high volume of alerts from its Transaction Monitoring System (TMS), according to the press release. This resulted in a backlog of more than 100,000 unreviewed TMS alerts by late 2021, the regulators found.

Consequently, Coinbase failed to timely investigate and report suspicious activity as mandated by the law. The NYDFS investigation discovered that in several cases, Coinbase submitted suspicious activity reports months after the activity took place and became known to the exchange.

Coinbase’s failings made it susceptible to criminal activity, such as fraud, money laundering, suspected child sexual abuse material-related activity, and potential narcotics trafficking, NYDFS said.

Superintendent of NYDFS Adrienne A. Harris stated in the press release:

“Coinbase failed to build and maintain a functional compliance program that could keep pace with its growth. That failure exposed the Coinbase platform to potential criminal activity requiring the Department to take immediate action including the installation of an Independent Monitor.”

The Independent Monitor was instated during the course of the NYDFS investigation in early 2022. The Independent Monitor will continue working with Coinbase to fix the laxities in its compliance systems for one more year, which might be extended at the regulator’s discretion.

On Dec. 20, 2022, Coinbase CEO Brian Armstrong called for regulation of stablecoin issuers and centralized exchanges, saying these entities posed the highest risk for consumer harm.