From best to worst: CoinBest sanctioned
The Kanto Regional Financial Bureau took administrative action against CoinBest, issuing both a business suspension and a business improvement order.
Details of the administrative action
Business Suspension Order
Suspension of IEO business (business in which cryptocurrency exchanges sell cryptocurrencies issued by issuers on behalf of issuers) from June 14, 2024 to December 13, 2024.
Business Improvement Order
To take necessary measures for the operation of the following items in order to carry out the cryptocurrency exchange business properly and reliably.
① Establishment of a management control system
To analyze and evaluate the root causes of the problems described in “Reasons for the Disposition” below, and strengthen the management system to enable sufficient improvement. In addition, to strengthen the function of the Board of Directors, to establish an effective management control system to ensure compliance with laws and regulations and proper and reliable business operations.
② Establishment of an internal control system (including a system for handling new cryptocurrencies such as IEO operations) and an internal audit system
Based on the analysis and evaluation of the root causes above, to establish a system for handling new cryptocurrencies such as IEO operations, and to establish an effective internal control system and internal audit system to ensure proper and reliable business operations, including ensuring the proper functioning of the second and third lines. In addition, to establish a process for the recruitment and selection of appropriate personnel according to the content and importance of the job.
③ Establishment of a risk management system for money laundering and terrorist financing (hereinafter referred to as “ML/Terrorist Financing”)
Among the matters that are required to be addressed by the end of March 2024 under the “Guidelines for Countermeasures against Money Laundering and Terrorist Financing” (hereinafter referred to as the “Guidelines”), an effective risk management system will be established to prevent the use of the bank for ML/Terrorist Financing, including the establishment of a system for appropriately implementing transaction monitoring, appropriately examining and determining whether a transaction is suspicious and promptly filing a report, and other measures for matters that have not yet been addressed.
In addition, a system for compliance with laws and regulations, including the proper recording of confirmation results pursuant to the Act on Prevention of Transfer of Criminal Proceeds (Act №22 of 2007, hereinafter referred to as the “Criminal Proceeds Act”), will be established.
Plan Submission
Submit a business improvement plan regarding above (specifying specific measures and implementation schedule) by Tuesday, July 16, 2024, and implement it immediately after submission.
After carrying out above, the progress and implementation status of the business improvement plan will be reported every three months by the 10th of the following month until the plan is completed (the initial submission date will be the end of September 2024).
Reasons for administrative action
According to an on-site inspection by the Kanto Regional Financial Bureau and reports from the company based on the provisions of Article 63–15, Paragraph 1 of the Act (dated April 30, 2024 and May 15, 2024), serious problems were found in the company’s management control system, internal control system (including the system for selling new cryptocurrencies), internal audit system, and money laundering and terrorist financing risk management system, as follows.
Management System
The Company prioritizes the acquisition of profits through the early realization of the IEO business, and has not submitted a resolution to the Board of Directors on the important management issue of entering the IEO business, approved an application for review of the sale of new crypto assets to the Japan Cryptocurrency Exchange Association (hereinafter referred to as “JVCEA”) without discussing the allocation of management resources or management risks, and has not submitted a resolution on conflicts of interest transactions of directors, or the appointment and dismissal of the head of the internal management department and the head of the internal audit department, which should have been resolved by the Board of Directors. As a result, the Board of Directors has become a mere formality and is not functioning as a business decision-making body.
As a result, the following deficiencies in the system have been found, and a system for properly and reliably conducting the cryptocurrency exchange business has not been established.
Internal control system (including the system for new cryptocurrency sales (IEO))
As a result of the successive resignations and leave of absence of the director in charge of IEO screening and the general manager for anti-money laundering and terrorist financing measures (hereinafter referred to as the “general manager”) due to the internal control department, which is responsible for the second line of function, the Company has prioritized earning revenue from IEO business without establishing an internal control system, and has applied for IEO without sufficient consideration of establishing the necessary system and securing the necessary personnel for the business, or dealing with the management risks that may arise from conducting the business.
In particular, with regard to the IEO business, the Company has not established the necessary screening system for entering the IEO business, such as by not assigning specialized personnel to handle the business, including not only the director in charge of IEO screening.
Under these circumstances, the IEO review was initiated and it was found that, although the company was in a position to review issuers and their business details, it had worked together with the issuer and business operators, who were in a position to promote the business as an arranger and advisor to the issuer, to apply for an IEO review to the JVCEA. In addition, it was found that the company had submitted an application for review by falsely indicating that a former executive officer was the executive officer in charge, which was not the case at the time. These inappropriate practices indicate significant deficiencies in the internal control system for carrying out IEO operations appropriately and reliably.
Internal Audit System
As the head and staff of the internal audit department, which is responsible for the third line function, have been resigning one after another, and the company has not established an effective internal audit system as a third line, no internal audits have been conducted in accordance with regulations, etc. since the start of operations in December 2020.
Money laundering and terrorist financing risk management system
The company has not established an effective money laundering and terrorist financing risk management system, for example, by not appointing a new general manager from among its directors, while the directors, general managers, and key employees who are the general managers have been resigning or taking leave one after another.
As a result, despite the fact that transactions suspected of money laundering, terrorist financing, or impersonation have been identified, the company has not grasped or verified the actual circumstances of these transactions, and has not considered whether they are suspicious. The company has not established a system for appropriately monitoring transactions, or a system for appropriately examining and determining whether a transaction is suspicious, and measures related to matters required to be addressed in the guidelines are insufficient.
This current situation at the Company is deemed to be a failure to appropriately address the request made by the Financial Services Agency in its April 28, 2021 “Deadline for the Establishment of a System for Measures against Money Laundering and Terrorist Financing,” which states, “The Company must complete the measures required to be addressed in the guidelines and establish a system by the end of March 2024.”
In addition, the company has not kept records of the results of the confirmation of beneficial owners pursuant to Article 20, Paragraph 1, Item 24 of the Enforcement Regulations of the Criminal Proceeds Act, thereby violating the Act.
Of the above, the status of the IEO business is deemed to fall under the category of “a corporation that has not established a system for the proper and reliable execution of the cryptocurrency exchange business” as stipulated in Article 63–5, Paragraph 1, Item 4 of the Act, and therefore a business suspension order will be issued pursuant to Article 63–17, Paragraph 1, Item 1 of the Act. In addition, all of the above are deemed to fall under “when it is deemed necessary for the proper and reliable execution of the cryptocurrency exchange business,” and therefore a business improvement order will be issued pursuant to Article 63–16 of the Act.
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