Federal Prosecutors Investigate Block Over Alleged Compliance Lapses in Crypto Transactions

Federal prosecutors are examining Block, the financial technology firm founded by Jack Dorsey, over alleged compliance failures spanning years, according to reports from NBC News. These investigations center around the company’s main units, Square and Cash App, and raise concerns about inadequate monitoring of financial transactions, particularly in the realm of cryptocurrency.

A former employee provided prosecutors with documents revealing what they claim to be systemic deficiencies in compliance practices at Square and Cash App. These lapses allegedly include insufficient customer information gathering to assess risks, processing transactions involving countries subject to economic sanctions, and handling cryptocurrency transactions for terrorist groups. Despite being alerted to these breaches, Block purportedly did not address the issues adequately, and many of the transactions in question were not reported to the government as required.

The transactions under scrutiny involve entities from countries such as Cuba, Iran, Russia, and Venezuela, with some as recent as last year. This revelation underscores the severity and longevity of the alleged compliance lapses at Block.

Block, however, maintains that it operates with a responsible and extensive compliance program, regularly adapting its practices to meet evolving regulatory standards. The company asserts its commitment to improving the safety and security of its ecosystem, emphasizing its significant investments in compliance efforts.

The company’s compliance program includes systems, tools, and processes for sanctions screening, as well as investigating and reporting on sanctions issues in accordance with regulatory obligations. Block claims to have voluntarily reported thousands of transactions to the Office of Foreign Assets Control (OFAC), though discrepancies exist regarding the actual reporting of these transactions.

Furthermore, Square, one of Block’s main business units, is implicated in the investigation for alleged failures in customer due diligence on international merchant sellers and improper reimbursement of frozen funds for sanctions violations. New customers triggering sanctions alerts were reportedly allowed to transact before the alerts were resolved, and employee flagging of customer biography information against sanctions keyword lists was reportedly inadequate.

Cash App, another key unit of Block, faces scrutiny due to its design, which allegedly increases the risk of compliance lapses. The nature of the product limits the company’s ability to block or reject funds, contributing to potential vulnerabilities in compliance processes.

Despite Block’s claims of a robust compliance program, the investigation raises questions about the efficacy of its internal systems for monitoring suspicious activities, rating customer risks, and screening for sanctions violations. An outside consultant hired by Block identified almost 50 deficiencies in these systems last year, indicating potential weaknesses in the company’s compliance infrastructure.

The scrutiny from federal authorities underscores the importance of robust risk management and compliance measures in the fintech industry, especially concerning cryptocurrency transactions. As regulatory oversight intensifies, companies like Block face increasing pressure to enhance their compliance frameworks to mitigate risks and ensure adherence to regulatory standards.