Introduction
Sanction circumvention techniques come in many forms and have been around as long as sanctions themselves. Cryptocurrency technology has the potential to become the latest tool to assist sanctioned individuals and entities in avoiding the effects of these economic restrictions and presents sanctions enforcement agencies with what might be their most sophisticated challenge to date.
Use of cryptocurrency to circumvent sanctions
In December 2017, the president of Venezuela announced the launch of the 'petro', a new digital fiat currency to help the country “advance in issues of monetary sovereignty, to make financial transactions and overcome the financial blockade1.” A month after the currency was launched in February 2018, the Trump Administration prohibited US individuals and entities from using any digital currency produced by the Venezuelan government. On the face of it, the Venezuelan Government's attempt to use the petro to amongst other things, circumvent US sanctions, has not been met with success. However, it highlights the growing role that cryptocurrency may have in avoiding international sanction regimes and the potential difficulties of enforcing sanctions involving transactions on new digital financial infrastructures.
Despite the underwhelming outcome of the first sovereign cryptocurrency, other countries under US sanctions appear to be following suit. Iran and Russia have both invested in research and technology with a view to integrate blockchain technology into their financial systems. Sovereign cryptocurrencies with their own independent central authority are attractive as they offer independence from US and EU banking regimes at the same time as providing countries with an efficient and internally-transparent financial system. On this basis, Iran's former president, Hassan Rouhani, openly proposed the concept of a Muslim cryptocurrency to decrease reliance on the US dollar in the Middle East, which many commentators inferred would constitute an attempt to circumvent US sanctions.
The ease and speed at which sanctioned individuals are able to trade using cryptocurrency online is also unsettling for enforcement agencies. Some peer-to-peer cryptocurrency exchanges incorporated in jurisdictions with relaxed Anti-Money Laundering laws do not require KYC checks from their users. This presents opportunities for sanctioned individuals and organisations to enter into illicit financial transactions with other users. Privacy coins such as 'Monero' and 'Dash' advertised for their anonymity settings, are also worrying as they record transactions in a private and censorship-resistant manner.
Sanctions Regimes responses to Cryptocurrency
The US Office of Foreign Assets Control ("OFAC") has confirmed that sanction compliance obligations are the same, regardless of whether a transaction is denominated in digital currency or traditional fiat currency. This is perceived to be such an issue that OFAC published FAQs on virtual currencies which detail their response to the use of cryptocurrency for illicit purposes such as avoiding sanctions. The guidance confirms that persons under the OFAC jurisdiction, including firms that engage in online commerce or process transactions using digital currencies, are responsible for ensuring that they do not engage in unauthorized transactions prohibited by OFAC sanctions.
Closer to home, the UK Government confirmed that 'crypto assets' come under the definition of 'funds' and 'economic resources' in sanctions rules, and are therefore caught by UK's post-Brexit sanctions regimes. UK financial sanctions apply to all persons within the territory and territorial sea of the UK and to all UK persons, wherever they are in the world. This means all UK nationals, and legal entities established under UK law, including their branches, must comply with UK financial sanctions that are in force, irrespective of where their activities take place. The list of people, entities and ships that are currently designated or specified under current UK sanctions regimes can be found here.
Enforcement examples
The OFAC is alive to the risks posed by the use of cryptocurrencies and have increasingly targeted those who have used cryptocurrencies to assist the circumvention of sanctions, as well as those who use cryptocurrencies to carry out illicit transactions. These responses have ranged from sanctioning two individuals involved in a North Korean state-sponsored money laundering scheme, to designating a Russian cryptocurrency exchange for the facilitation of financial transactions for ransomware actors. On top of this, the OFAC recently entered into high-profile settlements with US cryptocurrency platforms BitPay and BitGo for internal failures in their compliance programs which violated sanction programs. In September 2020, the OFAC also added 23 digital currency addresses to its sanctions list alleged to be connected to Russia-linked election inference activities.
Conclusion
The virtual currency industry, which includes technology companies, wallet providers, exchange platforms and cryptocurrency traders themselves, plays an increasingly important role in preventing sanctioned individuals from using cryptocurrencies to evade sanctions. Failure to take this responsibility seriously can result in severe consequences. In the UK, extensive powers have been given to enforcement agencies to impose penalties for financial sanctions, which include an unlimited fine and/or a maximum term of imprisonment up to 10 years.
Companies and individuals that make use of digital currencies in their course of business should consider developing a tailored compliance programme with a risk-based approach to ensure they comply with sanctions regimes. Compliance officers and departments may wish to consider employing screening technologies that utilise geo-data to screen potentially sanctioned clients and harvest relevant data to share with regulators. On top of this, developing a risk management framework for assessing the general risk exposure level is useful for evaluating the most relevant risk mitigation strategies. Finally, bespoke training should be carried out with a view to educate relevant employees on what to look out for above and beyond the information provided by sanctions agencies.
If you suspect that you have facilitated a breach of financial sanctions, you should seek legal advice at the earliest possible opportunity. This is a complex area of law which requires specialist knowledge. You can contact a member of the White Collar Crime and Investigations team for more information.