Federal prosecutors have initiated an inquiry into Block, the financial technology firm co-founded by Twitter’s Jack Dorsey. The investigation centers on alleged compliance deficiencies within its core entities, Square and Cash App.
Insiders familiar with the matter disclosed that discussions with a former staff member have unearthed undisclosed documents highlighting various compliance inadequacies, as reported by NBC News on Wednesday.
Concerns Over Block’s Compliance
Allegations leveled against Block encompass insufficient collection of customer information, processing transactions involving nations under U.S. sanctions, and facilitating cryptocurrency transactions for extremist organizations. These revelations pose a significant regulatory hurdle for Block, with the former employee asserting that numerous transactions went unreported to the government, as mandated.
“The compliance section was flawed from the ground up; it’s overseen by individuals ill-suited for a regulated compliance program,” the former employee told NBC News.
Despite being made aware of these breaches, Block purportedly failed to address its procedures, according to information shared with prosecutors. The Southern District of New York, where the investigation is unfolding, declined to comment. Compliance issues extend to Block’s Square division, where instances of inadequate due diligence on international merchant sellers and improper reimbursement of frozen funds for sanctions violations were uncovered.
Edward Siedle, a former Securities and Exchange Commission (SEC) attorney now representing the former employee, engaged in discussions with prosecutors on behalf of his client. He stated, “From the documents, it’s evident that compliance lapses were known to Block leadership and the board in recent years.”
Additionally, Cash App’s structure reportedly heightens the risk of compliance lapses due to customers’ rapid depletion of stored balances.
“Due to the product’s nature, customers tend not to maintain stored balances in Cash App for long periods, limiting our ability to block or reject funds. In nearly all cases, balances are depleted by the time of review,” a document revealed.
While Block defended its compliance program, citing voluntary transaction reporting to the Office of Foreign Assets Control (OFAC), specific deficiencies highlighted in documents provided to prosecutors remained unaddressed.
Moreover, Block’s regulatory challenges include a settlement between Sutton Bank, a Cash App partner, and the Federal Deposit Insurance Corp. (FDIC) over alleged anti-money laundering regulation violations. While Sutton Bank resolved issues concerning customer identification, Block stated that the consent order is unlikely to impact its ongoing relationship with the bank.
These allegations surface amid recent departures from Block’s board of directors, including Lawrence Summers, the former U.S. Treasury Secretary. Summers resigned in February, followed by Sharon Rothstein in April, raising concerns regarding corporate governance and oversight.
Block Witnesses Surge in Bitcoin Sales Through Cash App
Block recently reported substantial profits from Bitcoin sales via its Cash App platform in Q4 2023. With a remarkable 90% increase in gross profit compared to the previous year, Block earned $66 million from Bitcoin transactions, driven by a surge in Bitcoin’s average market price and appreciation of its Bitcoin inventory. Total Bitcoin sales amounted to $2.52 billion, marking a noteworthy 37% increase year over year.
Cash App’s success in Bitcoin trading continues to propel Block’s growth. In 2023, the platform generated $205 million in gross profit, reflecting a 31% year-over-year increase. The platform’s adoption of cryptocurrencies has attracted a significant number of new customers, with over 1 million first-time Bitcoin purchasers recorded in January 2023.
In December alone, the platform witnessed a 20% increase in Cash App Card monthly active users, totaling 23 million, surpassing the growth rate of total monthly activities.
Block also recently announced its achievement in developing a standalone three-nanometer (3nm) Bitcoin mining chip.