Seeking a Bank Account? What the Due Diligence Process Entails for Virtual Currency Businesses

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Since the late 1990s, financial institutions have been terminating client relationships and banning entire industry groups from banking services. Regulatory scrutiny, increased enforcement actions, and large civil monetary penalties are largely to blame. The financial crisis in 2009 caused many banks to consolidate, leaving those that remained in need of limiting their risk exposure. 

After being hit with $461 million in fines for failures related to their anti-money laundering program, J.P. Morgan Chase began backing away from money service business (MSB) relationships in 2014. Several other large global banks followed suit after facing significant civil penalties related to such clients. 

MSBs, correspondent banking relationships, marijuana-related businesses, and the virtual currency industry have been among those hit hardest by the continued effects of de-risking.

In recent years, regulatory agencies have been issuing guidance—for both the virtual currency industry and financial institutions—related to compliance obligations of virtual currency businesses (VCBs). There are currently fewer than a dozen banks actively serving the virtual currency industry in the US market. Such banks have built programs tailored specifically to conducting due diligence on their prospective clients using this guidance.

On May 9, 2019, FinCEN published “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies” (FIN-2019-G001). This document provides a consolidated view of the current FinCEN regulations, administrative rulings, and guidance issued since 2011. (A breakdown of key points is found in a summary by Chainalysis).

VCBs looking to engage with new banking partners should be prepared to present a comprehensive overview of their business. Banks will be particularly interested in understanding the following:

  • Who has invested in the company and who is operating it? 
  • What are the qualifications of executive management and the compliance team?
  • What is the product roadmap? What are the licensing requirements?
  • What is the compliance philosophy? What are the elements of the compliance program?
  • What are the transactional needs?

If the business is an exchange or is conducting MSB activity, an enhanced due diligence review may also include:

  • Review of anti-money laundering policies and procedures
  • An evaluation of the company’s transaction monitoring program and systems
  • On-site visit

Once a VCB has been granted approval for an account, they may be subject to ongoing review and due diligence by the bank. 

A best practice recommendation for maintaining a positive relationship with a company’s banking partner includes keeping an open dialogue between both parties. This is most effectively accomplished by proactively communicating any changes. Changes may include new patterns of transaction activity or any material changes in the business model. 

Licensing changes, compliance staffing changes, regulatory actions or audit findings should also be liberally shared with the banking partner. There should be open communication regarding any enhancements made to improve the company’s compliance program. 

Transparency and a willingness to remediate concerns the banking partner may have goes a long way toward maintaining the overall health of the business relationship.

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Michelle Sabins is SVP Managing Principal, Fintech Consulting Practice at Silvergate Bank and consults for Chainalysis as a regulatory compliance subject matter expert (SME). Michelle is a Certified Regulatory Compliance Manager (CRCM), and Certified Anti-Money Laundering Specialist (CAMS). Previously, Michelle served as CCO and BSA Officer for Silvergate Bank. 

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Michelle Sabins, guest author, SVP Managing Principal, Fintech Consulting Practice, Silvergate Bank

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