Block, the financial technology company co-founded by Twitter’s Jack Dorsey, is currently under investigation by federal prosecutors due to alleged compliance lapses at its central units, Square and Cash App. The investigation stems from discussions with a former employee who provided undisclosed documents highlighting various shortcomings in compliance practices. The allegations against Block include inadequate customer information collection, processing transactions involving countries under U.S. sanctions, and facilitating cryptocurrency transactions for terrorist groups. Despite being made aware of these breaches, Block reportedly failed to rectify its processes, raising concerns about its regulatory challenges. The Southern District of New York, where the investigation is taking place, has not commented on the matter.
The compliance issues extend to Block’s Square unit, where instances of insufficient due diligence on international merchant sellers and improper reimbursement of frozen funds for sanctions violations were identified. According to Edward Siedle, a former attorney for the SEC who now advocates for the former employee, compliance lapses were known to Block leadership and the board in recent years. Additionally, Cash App’s design reportedly increases the risk of compliance lapses due to customers’ rapid depletion of stored balances, limiting the company’s ability to block or reject funds in certain situations. While Block defended its compliance program by highlighting voluntary transaction reporting to OFAC, specific deficiencies mentioned in the documents provided to prosecutors were not addressed.
Furthermore, Block’s regulatory challenges include a settlement between Sutton Bank, a partner of Cash App, and the FDIC over alleged violations of anti-money laundering regulations. Despite Sutton Bank settling issues concerning customer identification, Block stated that the consent order is unlikely to affect its ongoing relationship with the bank. The allegations come amidst recent departures from Block’s board of directors, including Lawrence Summers, the former U.S. Treasury Secretary, and Sharon Rothstein, raising questions about corporate governance and oversight. Block saw significant profits from Bitcoin sales via its Cash App platform in Q4 2023, with a 90% increase in gross profit compared to the previous year. The company earned $66 million from Bitcoin transactions, driven by a surge in the average market price of Bitcoin and an appreciation of its Bitcoin inventory.
Cash App’s success in Bitcoin trading has propelled Block’s growth, with $205 million in gross profit generated in 2023, reflecting a 31% year-over-year increase. The platform’s embrace 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 saw a 20% increase in Cash App Card monthly active users, totaling 23 million, outpacing the growth rate of total monthly activities. Block also recently unveiled its accomplishment of designing a standalone three-nanometer (3nm) Bitcoin mining chip. Despite these positive developments, the ongoing federal investigation into compliance lapses poses a significant challenge for Block and raises concerns about its regulatory practices and internal controls.
In conclusion, Block, the financial technology company co-founded by Jack Dorsey, is facing scrutiny from federal prosecutors over alleged compliance lapses at its central units, Square and Cash App. The investigation follows disclosures made by a former employee, revealing deficiencies in compliance practices, including inadequate customer information collection and processing transactions involving countries under U.S. sanctions. While Block has defended its compliance program and highlighted voluntary transaction reporting, specific deficiencies mentioned in documents provided to prosecutors have not been addressed. Additionally, regulatory challenges involving a settlement with a partner bank and recent board departures raise questions about corporate governance and oversight at Block. Despite recent successes in Bitcoin trading and the development of new technologies, such as a 3nm Bitcoin mining chip, the ongoing investigation presents a significant challenge for the company and underscores the importance of maintaining strong regulatory compliance and internal controls in the financial technology sector.
