On Thursday, April 21, the Office of the Comptroller of the Currency (OCC) issued a consent order against South-Dakota-based Anchorage Digital Bank, the first federally chartered cryptocurrency-focused bank, for alleged deficiencies in the bank’s anti-money laundering (“AML”) compliance program.

While the consent order did not include a monetary penalty, the monetary cost of exiting such an order can be considerable – frequently requiring implementing new monitoring software, increasing the number of staff, hiring external parties to assist with remediation, etc. – as well as the time and resource investment. Accordingly, it can often be in the hundreds of thousands, if not millions, of dollars. Additionally, regulatory enforcement actions are typically not isolated and, instead, are often done as part of “industry sweeps.” In other words, other digital banks and cryptocurrency-focused financial institutions should use this consent order as an indication that they should now examine their own AML compliance programs.

The challenges facing digital banks are not isolated to the United States. A day after the Anchorage Digital Bank consent order, the United Kingdom’s Financial Conduct Authority (FCA) released the results of its 2021 review of the AML compliance programs of digital banks, which are attractive to criminals due to their fast onboarding processes.

Weaknesses identified in the FCA review included insufficient Customer Due Diligence and Enhanced Due Diligence (“CDD/EDD”) policies and procedures, as well as ineffective management of transaction monitoring alerts including inconsistent or inadequate rationale used for discounting alerts.

Digital banks depend on rapid customer growth, where the focus is on a seamless, agile customer journey at onboarding. We believe these agile processes must be integrated into a strong risk-based AML compliance program by investing in sufficient resources, including outsourced subject matter experts, if necessary, and implementing appropriate due diligence and transaction monitoring processes, tools, and technology. This will help digital banks keep pace with compliance requirements such as customer risk ratings at onboarding, ongoing customer due diligence, and suspicious activity monitoring and reporting.

Contact Stout’s AML professionals to inquire about our AML compliance program evaluations, system customization and optimization, and outsourced AML staff resources.