Fintech giant Block is under close scrutiny by federal prosecutors in the Southern District of New York following allegations of significant regulatory compliance failures involving its key business units – Square and Cash App, NBC News reported on May 1.
Federal prosecutors launched the investigation after a former employee revealed numerous flaws in the company’s transaction monitoring systems.
According to sources familiar with the matter, the former employee provided federal prosecutors with internal documents showing that Square processed transactions with entities in countries under U.S. sanctions, such as Cuba, Iran, Russia and Venezuela.
Additionally, the documents allege that Block has facilitated multiple crypto transactions for groups linked to terrorism, essentially going unreported to government agencies as required by law.
According to the report, the former employee alleged that Square and Cash App failed to adequately collect and review customer information, hindering proper risk assessment. The former employee also claims the company failed to correct its procedures even after he became aware of the breaches.
Multiple alleged failures
The Block’s Square business unit is alleged to have failed to conduct customer due diligence on international sellers and improperly refunded funds that had been frozen due to sanctions violations.
Additionally, Block allowed new customers of Square and its consumer-facing service Cash App to make transactions even after activating penalty alerts.
Square reportedly handled transactions involving entities in sanctioned countries, including Cuba, Iran, Russia and Venezuela. Meanwhile, Block is said to have handled crypto transactions for terrorist groups.
The transactions were carried out via credit cards, cash and Bitcoin.
Block allegedly failed to report the relevant transactions to the U.S. government as required and failed to correct his practices when notified of the problems. Block’s senior management and board of directors are said to be aware of the various compliance deficiencies.
Block also allegedly failed to collect sufficient information from Square and Cash App customers for risk assessment purposes. An outside consultant found nearly 50 deficiencies in Block’s internal systems, which are used to monitor suspicious activity, assess customer risk and screen sanctions violations.
Internal unrest
A spokesperson for Block said the company has a “responsible and comprehensive compliance program” and is “continually” addressing “emerging threats” and regulatory issues. Block also stated that his decision to hire an outside consultant is a testament to his commitment to compliance and said that 50 deficiencies are “not unusual.”
The company also told the news outlet that it had already voluntarily reported thousands of the questionable transactions flagged by the former employee to the Office of Foreign Assets Control (OFAC), which later issued a letter indicating that the regulator would not take administrative action. action against the company.
However, the former employee claims the company failed to report “thousands” of other transactions.
According to NBC, the revelations have led to significant internal turmoil within Block, with recent announcements of unexpected board member departures further fueling concerns about the company’s governance and compliance culture.
Federal regulators and law enforcement agencies continue to monitor the situation closely as further investigation could result in significant fines and necessitate extensive reforms within the company’s operations.
In addition to its support for traditional payments, Block is known for its extensive work with crypto. The company’s Cash App offers support for Bitcoin and recently launched the Bitkey hardware wallet. There is also a crypto mining initiative underway.