Compliance In The Bitcoin Industry Is Difficult To Navigate, And Ever Changing

In some jurisdictions regulatory compliance is a necessity for a digital currency organization. Adherence to laws, regulations, guidelines and other specifications relevant to operations is absolute. Violations of regulatory compliance regulations will often result in legal action, often resulting in fines. In the US, the Bank Secrecy Act (BSA) is just one of many financial regulations that must be acknowledged to avoid penalization.

“2014 was marked by record setting fines and precedent-setting criminal prosecutions and enforcement actions against financial institutions for violations of BSA/AML and sanctions laws.”
— – 2014 Year-End Review BSA/AML and Sanctions Developments, Harvard Law

The BSA legislation was passed in 1970 by the United States Congress. It requires all US financial institutions to collaborate with the US government in cases of suspected money laundering and fraud.

Businesses that transmit or convert money are considered to be Money Services Businesses (MSBs) and must register with FinCEN in order to be compliant. The definition for MSBs was created to encompass not only banks, but also non-bank financial institutions. Should suspicious actions take place, it is the responsibility of the MSB to file Suspicious Activity Reports (SARS) with FinCEN.

Suspicious activities come in a myriad of guises and can be difficult to detect. Some examples include high rates of rejected transactions, and complaints or enquiries from other financial institutions. Ignoring them can be detrimental to the business in question.

According to a Justice Department press release CommerceWest Bank facilitated consumer fraud schemes, and failed to file SARS. The department charged the bank with a felony violation of the BSA in connection with a third-party payment processor V Internet Corp LLC, based out of Las Vegas. Allegedly CommerceWest Bank allowed this third-party to withdraw millions of dollars from consumer accounts without authorization

“CommerceWest Bank ignored a parade of red flags indicating that a third-party payment processor was defrauding hundreds of thousands of innocent victims,” said General Benjamin  C. Mizer Acting Assistant Attorney of the Justice Department’s Civil Division.  “As the civil and criminal actions filed against CommerceWest Bank today demonstrate, we will hold financial institutions accountable when they choose unlawfully to look the other way while fraudsters use the bank’s accounts to steal millions of dollars from American consumers.”

V Internet’s debit transactions had an abnormally high rate of rejected transactions. According to a press release from the Department of Justice,  50 percent of the transactions were returned by consumers and their banks.  “Many of those returned transactions included sworn affidavits, in which victims stated, under penalty of perjury, that the withdrawals on their accounts were unauthorized.”

In addition, other banks believed that V Internet’s transactions were fraudulent, and expressed their beliefs to CommerceWest. However, theses explicit warnings allegedly fell on deaf ears, and CommerceWest continued business with the third-party failing to terminate their relationship or file SARS. “Instead, CommerceWest and V Internet developed a practice of blocking transactions against accounts at those banks that complained, but allowing the transactions to continue against accounts at all other banks,” said the Department of Justice.

“CommerceWest ignored warning signs and numerous complaints stemming from unauthorized withdrawals, and now it must pay the price for allowing innocent consumers to be ripped-off by fraudsters.”
— – Acting U.S. Attorney Stephanie Yonekura of the Central District of California

“CommerceWest Bank not only failed to comply with its statutory obligation to notify the government of suspicious illegal activity involving consumer fraud,” added the Inspector in Charge, Gary Barksdale of the USPIS.  “The bank also allowed fraudulent activity to continue through its accounts to the detriment of the American consumer.”

The mistakes made by CommerceWest Bank resulted in a US$4.9m civil and criminal resolution. To a startup in the digital currency space, these red flags can be easily overlooked.

HashingSpace Corporation is a bitcoin ASIC mining and hosting company, based out of Washington. In addition to mining, the company offers a slew of other products, including but not limited to HashWallet and ATMs. IdentityMind is recognised as one of the leading providers of compliance services, including Anti Money Laundering (AML). The company spans 4 continents and specializes in Bitcoin and digital currency companies, offering risk monitoring and AML technologies.

"Our compliance platform is used by more than 40 virtual currency businesses, from exchanges, to wallet services, ATMs, remittances, trading platforms, debit cards, and more."
— – Jose Caldera, IdentityMind VP of Marketing & Product

"IdentityMind Global™ provides HashingSpace with the complete suite of risk monitoring and anti-money laundering technology we need to comply with regulation anywhere in the world," said Timothy Roberts, CEO of HashingSpace. "Money laundering is an issue we take seriously, and compliance issues are a complicated obstacle that companies in our space have to stay current with. IdentityMind’s complete risk and AML solution will give us the capabilities we need to identify and prevent these issues."

As legal frameworks for digital currency MSBs evolves, expertise will need to follow suit. This provides room for third-party specialization companies such as IdentityMind to thrive.

"These companies are genuinely trying to do things right, to protect their customers, and prevent their businesses from facilitating criminal activity. We’re proud to provide the KYC, fraud prevention, and monitoring technologies these businesses use to identify and prevent suspicious activity, as part of their AML program to comply with U.S. and international regulations," added Jose Caldera