Federal Reserve & California Regulators Levy $63 Million in Penalties Against Silvergate for Anti-Money Laundering Violation

The Federal Reserve Board and California's Department of Financial Protection and Innovation (DFPI) have imposed a combined $63 million in penalties on Silvergate Capital Corporation and its subsidiary, Silvergate Bank, for inadequate transaction monitoring in violation of anti-money laundering (AML) laws.

The announcement, made on Monday, July 1, 2024, comes as part of a coordinated effort between federal and state authorities. The penalties break down as follows:

• $43 million fine from the Federal Reserve Board
• $20 million payment to the California DFPI
• $50 million in penalties assessed by the U.S. Securities and Exchange Commission (SEC), offset by the payments to the Federal Reserve and DFPI

DFPI Commissioner Clothilde Hewlett emphasized the importance of this action, stating, "This settlement, in coordination with federal regulators, is not only a significant win for the state, but, most importantly, for consumer protection and maintaining a trusted financial marketplace in California."

The SEC has also charged Silvergate Capital Corp., its former CEO Alan Lane, and former COO Kate Fraher with violating federal securities laws.

Silvergate, a California-chartered bank since 1988, had shifted its focus from traditional community banking to servicing digital financial asset companies, including cryptocurrency exchanges, starting in 2014. This move positioned the bank as a critical link between crypto assets and the U.S. dollar.

On March 8, 2023, Silvergate announced its intent to voluntarily liquidate the bank. Subsequently, on May 23, 2023, the DFPI and Federal Reserve Board issued a joint cease and desist order to facilitate the implementation of Silvergate Bank's voluntary liquidation plan.

As part of the regulatory action, Silvergate is required to preserve all records of financial activity for the next seven years. The DFPI has indicated it will continue exploring options to make these funds available to consumers harmed by fraudulent and deceptive acts involving crypto assets.

This case highlights the ongoing regulatory scrutiny faced by banks, particularly those operating in areas intersecting with cryptocurrency and digital assets. The substantial penalties serve as a reminder to financial institutions of the severe consequences of failing to maintain adequate AML safeguards, even as they navigate emerging financial technologies and markets.

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