After several nations implemented strict sanctions against Russia, following the Ukrainian invasion, there were several concerns raised about the possibility that Russia would use cryptocurrencies to evade sanctions. Visa, Mastercard and PayPal have suspended services in Russia; they have been barred from SWIFT and the Russian Central Bank’s assets were seized. As the country is home to at least $214 billion worth of crypto and the third biggest crypto mining destination in the world, it’s no surprise that many people will turn to an alternative financial system.
The Ukrainian government has already pushed for a blanket ban on crypto transactions from Russian individuals, regardless of sanction status.
After several nations implemented strict sanctions against Russia, following the Ukrainian invasion, there were several concerns raised about the possibility that Russia would use cryptocurrencies to evade sanctions. Visa, Mastercard and PayPal have suspended services in Russia; they have been barred from SWIFT and the Russian Central Bank’s assets were seized. As the country is home to at least $214 billion worth of crypto and the third biggest crypto mining destination in the world, it’s no surprise that many people will turn to an alternative financial system. The Ukrainian government has already pushed for a blanket ban on crypto transactions from Russian individuals, regardless of sanction status.
Both North Korea and Iran have been known to use cryptocurrencies to evade sanctions in the past. It’s alleged that North Korean cyber-attacks have stolen millions of dollars worth of cryptocurrency between 2020-2021 - funds which may have been used to fund the country’s missile programmes.
However, when it comes to Russia, the global community has responded in a proactive manner. The Bank of England, Office of Financial Sanctions Implementation (OFSI) and the Financial Conduct Authority (FCA) have already issued new guidance to cryptocurrency exchanges and businesses related to possible sanctions evasion. The first criminal prosecution involving the use of crypto assets to evade US sanctions was launched in May 2022, and more are expected to follow.
New Guidelines and Actions
While some legal experts have argued that digital money such as bitcoin or Ethereum should not be subject to US sanctions because they are created outside of the traditional financial system, the Treasury’s Office of Foreign Assets Control (OFAC) clearly does not agree.
Similarly, FCA has taken a stand in their guidance as well, stating that financial sanctions regulations do not differentiate between crypto-assets or any other assets and that using cryptocurrencies to circumvent economic sanctions would be considered a criminal offense under the Sanctions and Anti-Money Laundering Act 2018. The Office of Financial Sanctions Implementation (OFSI) has also warned firms that if they have reasonable cause to suspect that they are in possession or control of funds of a sanctioned person, they are required to freeze them or make them unavailable to the designated person and report them immediately. Financial institutions have been reminded to check the FCA register to identify whether any cryptocurrency firms they deal with are duly registered and to take every measure possible to avoid undermining imposed sanctions.
In addition, FCA issued a warning to crypto operators to shut down crypto ATMs while the EU’s sanctions announcements clarified that all crypto assets fall under the scope of “transferable securities”.
The crypto industry has also responded positively in enforcing sanctions. Cryptocurrency exchange Coinbase blocked nearly 25,000 Russia-linked addresses, while Binance identified and blocked wallets linked to sanctioned persons or known affiliates of sanctioned persons.
The National Crime Agency issued a new glossary code for SARs which include reporting activity connected to money laundering involving sanctioned entities or persons so that swift preventative measures can be taken.
The Likelihood of Crypto Sanctions Evasion: An Objective View
While there has been widespread alarm about the possibility of deploying evasive tactics through cryptocurrencies, many digital money experts believe that the risk is lower than perceived. Cryptocurrency mining and ransomware attacks can be lucrative, but in light of the extensive sanctions against Russia, it’s highly unlikely that these tactics can generate even revenue to replace regular business activity, especially for a major economy like Russia. While cryptocurrencies are booming, there still isn’t a large enough market to handle the volume of transactions that would be required.
According to Michael Mosier, the former acting director of the Financial Crimes Enforcement Network, there “just isn’t enough liquidity” to run a G-20 economy on cryptocurrency.
Tigran Gambaryan, Binance’s vice president of global intelligence and investigations, has also said that crypto is an inefficient way for any government to evade sanctions. “There are other ways to move billions of dollars using a financial system that already exists, rather than using cryptocurrency,” he stated.
According to Gambaryan, moving large sums of money into cryptocurrency would be extremely conspicuous. If owners attempted to convert the currency to fiat outside Russia, it would raise significant red flags with exchanges. There are, of course, obfuscation techniques that can be deployed. “Tumblers” receive cryptocurrencies from various accounts and scramble them to conceal their source, but they are not by nature designed to move large sums of money and can be slow and cumbersome to manage.
All cryptocurrency transactions take place on the blockchain - a public ledger and permanent record that would tie organizations to their illicit funds.
However, experts agree that compliance firms may not be aware of all of the wallets controlled by proxies of individuals on the sanctions list. OFAC has named specific wallets in the past, and will probably do so again, which is why regular sanctions checks are more important now than ever before.
Protecting Businesses Against Sanction-Evading Operations
Companies dealing in crypto assets can protect themselves against inadvertently doing business with sanctioned entities and individuals by ensuring that their customer risk assessments reflect the current sanctions measures and political climate. Accurate Know-Your-Customer and Customer Due Diligence processes need to be implemented at the start of every relationship and must continue during the entire course of business, to identify customers who attempt to obscure the source or ownership of their funds.
Automated sanctions lists can assist businesses with screening customers and transactions against up-to-date sanctions lists, even if these sanctions are constantly shifting and increasing in intensity.
Suspicious activity should be reported diligently and quickly and compliance teams should be thoroughly trained in order to understand how blockchain analytics solutions can be applied to identify high-risk wallet addresses.
It’s also important to know the red-flag indicators that suggest an increased risk of sanctions evasion, including:
- Customers who are residents in or conducting transactions from or to a jurisdiction subject to sanctions or a high-risk country
- Transactions from or to wallet addresses associated with sanctioned entities or transactions involving a crypto-asset exchange or wallet provider with poor CDD procedures
- The use of concealment techniques (e.g. VPNs or proxies, mixers and tumblers) to conceal the source of funds or the location of the customer
- Any other key indicators of possible money laundering or sanctions evasion
Conclusion
Economic sanctions exist to change the behavior of regimes that act in an unethical manner. Undermining these sanctions by allowing sanctioned entities and individuals to transact freely is extremely dangerous, and may lead to criminal prosecution and harsh penalties for all parties involved.
Businesses should therefore make every effort to remain firmly on the right side of the law, by doing everything in their power to comply with and enforce sanctions through effective sanctions screening and customer due diligence processes. To learn more about sanctions screening, sanctions.io's Ultimate Sanctions Screening Guide is an excellent resource to get started.
