A significant civil money penalty of $3,500,000 was levied by the Department of the Treasury’s Financial Crimes Enforcement Network, or FinCEN, against Paxful, Inc. and Paxful USA, Inc. for deliberate breaches of the Bank Secrecy Act (BSA), which is the cornerstone United States anti-money laundering, or AML, legislation designed to protect the financial system from misuse by criminals. Paxful, a peer-to-peer (P2P) trading platform for convertible virtual currency, or CVC, facilitated over $500 million worth of suspicious transactions tied to numerous illicit actors. The company allowed transactions originating from or destined for sanctioned countries, including North Korea, Iran, and Venezuela, and engaged with Backpage.com, a platform seized by the Department of Justice in 2018 for its role in enabling sex trafficking and prostitution. This enforcement action highlights a persistent regulatory focus on virtual asset providers and their mandatory obligations under the BSA to maintain robust AML controls.

Virtual Currency Money Laundering

FinCEN’s enforcement action explicitly stated that Paxful intentionally disregarded its mandatory BSA responsibilities for an extended period, which directly enabled the facilitation of suspicious activity involving high-risk jurisdictions and known illicit operations. The platform’s willful non-compliance resulted in a significant vulnerability in the U.S. financial system, permitting half a billion dollars in suspicious activity to flow through its exchange. This facilitated activity included transactions with entities in North Korea and Iran, nations subject to stringent U.S. sanctions, and also involved funds related to the activities of [suspicious link removed]. The core issue of virtual currency money laundering in this context stems from Paxful’s failure to implement basic gatekeeping mechanisms, essentially allowing the platform to be exploited as a conduit for moving criminally derived or prohibited funds across borders with minimal oversight. Paxful admitted to the breaches, which encompassed critical failures, including the lack of registration with FinCEN as a money services business, or MSB, and a fundamental absence of an effective, compliant AML program.

Breaches of Bank Secrecy Act Requirements

The charges brought by FinCEN against Paxful centered on a trifecta of fundamental breaches of the BSA, the primary legal framework for anti-money laundering compliance in the United States. Firstly, Paxful failed to fulfill its legal obligation to register as a money services business with FinCEN, an essential foundational step for any entity involved in money transmission services, including CVC platforms. Secondly, the company lacked the development, implementation, and maintenance of an effective and risk-based AML program. An adequate AML program, as mandated by the BSA, requires financial institutions to establish comprehensive internal controls, designate a compliance officer, provide ongoing training, and conduct independent audits to mitigate money laundering and terrorism financing risks effectively. Thirdly, and perhaps most critically for law enforcement and intelligence, Paxful was found to have failed in its duty to file Suspicious Activity Reports, or SARs. SARs are vital reports that financial institutions must submit to FinCEN when they detect transactions or activity that suggest money laundering, fraud, or other illegal acts. These failures collectively demonstrated a profound organizational disregard for the law, transforming the platform into a high-risk environment for criminal financial flows. The penalty determination considered mitigating factors, such as the company’s decision to remove the leadership responsible for the violations and its initiation of remediation, including a review to identify and report previously unfiled SARs.

The Critical Role of SAR Filing Deficiencies

The obligation to identify and report suspicious activity extends explicitly to transactions involving virtual assets, confirming that CVC platforms are treated no differently than traditional financial institutions under the BSA. Paxful’s failure to file SARs significantly hampered the ability of law enforcement to trace and combat illicit financial networks. The platform’s transactions, which exceeded $500 million in suspicious value, often involved actors and jurisdictions that pose the highest risk of money laundering and sanctions evasion, making the absence of SARs a particularly severe deficiency. The company neglected to adopt monitoring procedures commensurate with the high volume and nature of its virtual asset activity, suggesting a willful blindness to the potential for abuse. The case underscores that for institutions dealing in virtual assets and prepaid access, the coverage and capacity of their procedures to monitor for potentially suspicious transactions must be robust and supported by the operational scale of the business. Financial institutions are reminded to proactively assess their monitoring systems to ensure they can adequately process the volume of relevant activity and support timely and accurate SAR submissions.

Compliance Remediation and Future Risk Mitigation

This enforcement action serves as a definitive reminder for all financial institutions, especially those operating in the virtual asset space, that a strong “tone at the top” and a robust culture of compliance are non-negotiable prerequisites for operation. For new and existing entities, AML programs must be designed to be risk-based and proportional to the institution’s size, location, and the nature and volume of its services. Effective compliance requires proactive measures to mitigate exposure to high-risk parties and prohibited jurisdictions. Businesses are encouraged to leverage geolocation data and Internet Protocol, or IP, addresses to screen against high-risk areas and sanctioned countries. Furthermore, understanding the nature of customer businesses is essential for mitigating the inherent risk of illicit activity. The Paxful case highlights the value of timely remediation; institutions that identify compliance deficiencies are expected to take immediate, appropriate action, including promptly correcting reporting issues to ensure the accurate and timely filing of SARs. This commitment to corrective action is crucial for mitigating future legal and financial consequences.

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Key Points

• FinCEN assessed a $3,500,000 penalty against the convertible virtual currency platform Paxful for systemic violations of the Bank Secrecy Act.
• The platform facilitated over $500 million in suspicious activity involving illicit actors and high-risk jurisdictions, including sanctioned countries like North Korea and Iran.
• Paxful admitted to critical failures, including not registering as a Money Services Business, lacking an effective AML program, and failing to file Suspicious Activity Reports (SARs).
• The enforcement action reinforces that BSA obligations, including SAR filing, apply fully to virtual asset transactions.
• The case stresses the mandatory requirement for a robust, risk-based AML compliance culture in the virtual asset ecosystem.

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Related Links

• FinCEN Advisory on Ransomware and the Use of Virtual Currency
• Department of the Treasury Statement on Countering the Financing of Terrorism
• Financial Action Task Force (FATF) Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers
• Bank Secrecy Act Compliance for Money Services Businesses

Other FinCrime Central Articles About Trading Activities Used as a Cover-up for Money Laundering

• 66 Illegal Trading Crypto and FX Platforms Under AML Scrutiny in France
• HK SFC Suspension Highlights Money Laundering Risks in Electronic Trading
• Oil Trader Jailed and Fined $300,000 in Global Bribery and Money Laundering Scandal

Source: FinCEN

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