Federal prosecutors are investigating compliance lapses at Block, a financial technology firm founded by Jack Dorsey. A former employee provided documents showing insufficient information collected from customers of Square and Cash App, processing of transactions involving countries under economic sanctions, and processing of cryptocurrency transactions for terrorist groups without proper reporting to the government. The compliance program at Block was found to be flawed, according to the documents provided. The company stated that it has a robust compliance program and regularly adapts its practices to meet regulatory obligations.
The former employee also highlighted issues within Square, identifying failures in conducting customer due diligence on international merchant sellers and improper reimbursement of funds frozen for sanctions violations. New customers at both Square and Cash App were allowed to conduct transactions even when triggering sanctions alerts. An outside consultant hired by Block identified almost 50 deficiencies in monitoring suspicious activities, rating customer risks, and screening for sanctions violations. The company stated that it works to address identified deficiencies with the help of legal counsel and consultants and conducts recurring sanctions screening on all merchants.
The board of directors at Block was informed of the compliance lapses within the company, according to the former employee. Lawrence Summers and Sharon Rothstein, two directors at Block, recently announced their departures from the board for personal reasons. Summers served on the audit committee overseeing risk assessment and risk management policies. Block has faced regulatory issues in the past, with its European version of Cash App, Verse, being ordered to determine the identity of clients with compliance issues related to money laundering and terrorist financing.
Cash App, like other mobile payment platforms, poses risks to users and the financial system as criminals may exploit these services for illegal activities such as money laundering. Banks, including Sutton Bank which partners with Cash App, are required to know the true identity of their customers. The FDIC recently settled a consent order with Sutton Bank, alleging unsafe or unsound practices and violations related to anti-money laundering laws. Block stated that the consent order is unlikely to impact its ongoing business relationship with Sutton Bank.
Overall, the compliance lapses at Block, particularly within Square and Cash App, raise concerns about the company’s internal controls and adherence to regulatory requirements. While the company maintains that it has a strong compliance program and works to address identified deficiencies, the ongoing investigation by federal prosecutors highlights the importance of regulatory oversight in the financial technology sector. Block’s efforts to improve its compliance practices and ensure the safety and security of its ecosystem are crucial to maintaining trust among users and regulators.
