Key Insights:

• Federal investigators probe Jack Dorsey’s Block for failing to screen customers and report transactions linked to sanctioned countries adequately.
• Documents suggest Block processed transactions without proper due diligence, raising significant compliance concerns in both Square and Cash App units.
• Block asserts a strong compliance program despite allegations and previous regulatory penalties faced by its European counterpart and banking partners.

Federal prosecutors are investigating potential compliance failures within Jack Dorsey’s fintech company, Block, which includes popular services like Square and Cash App. The investigation follows allegations by a former employee who claimed the company engaged in insufficient customer screening and failed to report thousands of transactions that should have been disclosed to government authorities. These transactions reportedly include dealings with entities in sanctioned countries such as Cuba, Iran, Russia, and Venezuela.

The former employee provided prosecutors from the Southern District of New York with documents that show insufficient information is collected from Square and Cash App customers to assess their risks. Block allegedly processed multiple cryptocurrency transactions for terrorist groups, raising further concerns.

Details Emerge from Internal Documents

Documents provided by the former employee reveal that Block may have processed transactions without adequate due diligence on their customers. For Square, there were instances where international merchants were not properly vetted, and in some cases, funds frozen due to sanctions violations were erroneously reimbursed. Cash App, on the other hand, faced challenges due to its operational model, which only sometimes holds customer balances for long, reducing the efficacy of post-transaction sanctions checks.

In response to these allegations, a Block spokeswoman asserted that the company maintains a “responsible and extensive compliance program,” which is regularly updated to address emerging threats and changes in the regulatory landscape. Block claimed to have voluntarily self-reported these questionable transactions to the Office of Foreign Assets Control (OFAC), which subsequently issued a no-action letter indicating the closure of the investigation without further action.

Further Scrutiny and Regulatory Actions

The investigation by the Southern District of New York is not the only regulatory challenge faced by Block. Previously, the company’s European counterpart, Verse Payments Lithuania UAB, was penalized for failing to comply with anti-money laundering and terrorism financing laws. Verse’s former head was also fined for not ensuring the company’s compliance, and Block ultimately shut down Verse in 2023.

Additionally, Cash App’s banking partner, Sutton Bank, recently settled a consent order with the Federal Deposit Insurance Corporation (FDIC), addressing deficiencies in its anti-money laundering and customer identification processes. The FDIC order mandated improvements to Sutton Bank’s internal programs and directed it to ensure compliance with the Bank Secrecy Act.

Block’s Efforts and Commitment

Block has emphasized its commitment to compliance, noting investments in its internal systems and external consultants to bolster its monitoring and screening capabilities. The company stated that its compliance program includes key components expected by OFAC, including systems, tools, and processes for sanctions screening. However, documents from an outside consultant reveal almost 50 deficiencies in these systems, which Block argued was common given the scope of the report.

The former employee’s allegations extend to Block’s leadership, claiming that the company’s compliance issues were known to both its leadership and its board of directors. In recent months, the company has seen the departures of two directors: Lawrence Summers, the former US Treasury Secretary, and Sharon Rothstein, a director since 2022. Block maintains that these departures were due to personal and professional reasons unrelated to the compliance investigation.

The compliance investigation into Block by federal prosecutors is part of ongoing scrutiny of the fintech sector, which faces significant regulatory challenges due to its nature. Block’s responses and subsequent actions indicate an awareness of the seriousness of these issues, though how the company resolves its compliance concerns moving forward remains to be seen.

Editorial credit: Frederic Legrand – COMEO / Shutterstock.com