In the settlement filing, the US Federal Trade Commission said Facebook violated a previous order from the Commission served in 2012 by deceiving users about their ability to control the privacy of their personal information.
The Commission alleges that Facebook failed to protect user data from third-parties, used phone numbers provided by users to serve targeted adverts, and misled some users into believing their facial recognition feature was turned off by default when it was not.
In 2018, the social media giant was forced to admit that the personal data of 87 million Facebook users had been leaked to political consultancy firm Cambridge Analytica.
Facebook is to pay the £4 billion fine, making it the biggest penalty the FTC has served to date.
As part of the settlement, the FTC said Facebook chief executive Mark Zuckerberg will have to personally certify the company’s compliance with privacy measures and the company must submit quarterly privacy reviews to show its measures are working.
Failure to comply with the new measures could see Mr Zuckerberg face civil or criminal penalties, the FTC said.
FTC chairman Joe Simons said this will push tech companies to stay accountable for the privacy of their users.
“Despite repeated promises to its billions of users worldwide that they could control how their personal information is shared, Facebook undermined consumers’ choices,” Mr Simons said.
“The magnitude of the five billion dollar penalty and sweeping conduct relief are unprecedented in the history of the FTC.
"The relief is designed not only to punish future violations but, more importantly, to change Facebook’s entire privacy culture to decrease the likelihood of continued violations.”
Mr Zuckerberg addressed the fine in a Facebook post, stating: “We've formally reached a settlement with the Federal Trade Commission about privacy.
"We've agreed to pay a historic fine, but even more important, we're going to make some major structural changes to how we build products and run this company.
“Our executives, including me, will have to certify that all of the work we oversee meets our privacy commitments."
"Going forward, when we ship a new feature that uses data, or modify an existing feature to use data in new ways, we’ll have to document any risks and the steps we're taking to mitigate them. “
The FTC also announced a lawsuit against political consultancy firm Cambridge Analytica.
It was revealed in 2018 that the company - hired to work for US President Donald Trump’s election team and the successful Brexit campaign - had harvested the personal information of tens of millions of US Facebook users, and used this information to target US voters with personalised political campaigns.
The FTC added it had reached settlements with the data analysis firm’s former chief executive Alexander Nix and app developer Aleksandr Kogan – who worked with the company and whose personality quiz app was linked to the Facebook data scandal.
Mr Nix and Mr Kogan have agreed to a settlement which will restrict how they conduct any business in the future, and requires them to delete or destroy any personal data they collected, the agency said.