On May 6, 2022, the United States Department of the Treasury issued sanctions on Blender.io, a cryptocurrency mixer. This action exposes any traditional banks and crypto firms serving the users of the mixer to penalties and secondary sanctions. Blender was established in 2017 and gained popularity over the years to secure a spot in the lists of top cryptocurrency mixers. The U.S. treasury claims that North Korean cybercriminals used it to process over $20.5 million in hacked crypto.
“Virtual currency mixers that assist illicit transactions pose a threat to U.S. national security interests” – The U.S. Treasury. This action proves that the U.S. federal government oversight extends to the crypto industry.
The Office of Foreign Assets Control (OFAC) is an agency within the U.S. Treasury appointed with enforcement authority and the responsibility of maintaining those sanctions. The OFAC maintains the Specially Designated Nationals (SDN) list which the Treasury plans to update with any virtual wallet addresses related to the criminal group.
Effect of Sanctions on Banks
While crypto sanctions directly involve crypto firms, traditional banks are not excluded from regulations or invulnerable to consequential penalization. Banks set up their compliance programs to include reliable sanction screening procedures in a traditional finance environment, however, how safe are banks in a world with crypto crime?
Where the OFAC has sanctioned a crypto address, the owner of the address may attempt to integrate its crypto assets in the financial system by transacting with other clients or crypto firms in exchange for cash. Afterwards, the owner may try to deposit the exchanged cash into traditional bank accounts in a money laundering fashion.
The U.S. Treasury requires banks not to engage in any financial activities with the sanctioned entity or any of the clients or firms involved with them through financial transactions on- or off-chain. This includes declining cash deposits and freezing accounts belonging to any of those entities, as well as reporting their monetary transactions to the U.S. Treasury within strict deadlines.
The OFAC holds U.S. banks and financial institutions accountable for any unlicensed violations of the U.S. sanctions, whether inadvertent or deliberate. The OFAC can provide exemptions from sanction orders, but only under limited situations. In turn, banks violating sanction regulations may be liable for severe penalties and in some cases, complete cease of business.
Sanctions Violation Penalty
According to OFAC statistics, the agency assesses an average of over $2.2 million in monetary penalties per year based on the results of the last three years. In 2019, the total settlements of sanction violation enforcements were nearly $1.3 billion.
Noncompliance with sanctions, according to OFAC, has a major impact on national security and foreign relations, and hence a breach of OFAC sanctions. As a result, people who violate OFAC sanctions without first acquiring the required license may face serious legal consequences. Depending on the offense, fines might reach $20 million, and jail terms can last up to 30 years.
If a party breaches the Trading with the Enemy Act (1917) while committing a sanctions violation, it may be fined an additional $65,000 per sanction violation. The penalties for violations of the International Emergency Economic Powers Act rises to $250,000 per violation of sanctions.
How Can Banks Avoid Crypto Sanctions Violations?
On April 28, 2022, Adrienne A. Harris, Superintendent of the New York State Department of Financial Services (NYDFS), issued new guidance for cryptocurrency firms. The document emphasizes the value and contribution of blockchain analytics tools to complying with crypto sanctions.
“Blockchain analytics are already well known in crypto circles and beyond. They make it possible to figure out the connections between millions of digital wallets that are otherwise only identified by a series of “meaningless” numbers,” said Lance Morginn, president of Blockchain Intelligence Group to Protocol.
Blockchain Intelligence Group developed QLUE™, an investigative tool developed in partnership with senior law enforcement investigators and anti-money laundering specialists. It uses proprietary AI to identify, measure, monitor, and report on nefarious crypto activities.
Banks retain a useful amount of information about the sources of cash deposited by their clients in the transaction data. Familiarizing the compliance team with the most common cryptocurrency terminology like bitcoin or crypto exchange, is an essential step toward leveraging that data. The compliance team can use those terms to identify transactions involving cryptocurrency.
Once the bank identifies a client who received funds from a cryptocurrency exchange or entity, it uses QLUE™’s intuitive interface to investigate the public addresses of the said entity. QLUE™ explores the entire history of the crypto exchange and tracksany involvement in sanction violations which would in turn harm the bank for dealing with its clients.
Because there are less means to spend crypto assets, criminals are more inclined to convert them to fiat money and launder it. This renders banks a major component in the processing of cryptocurrency criminal proceeds. Many banks could be unwittingly supporting money laundering and sanction evasion through the use of cryptocurrency. To avoid this, banks must put reliable mechanisms in place, to detect their exposure to crypto exchanges and clients using crypto, as well as assess the risk.
Banks ought to leverage reliable crypto industry expertise and the competitive edge of blockchain analytics tools to avoid being the weak link in an illicit activity on- or off-chain.
Secure your financial institution or crypto business from sanction violations using blockchain analytics.
Written By: Omar Marzouk
Writer, Content marketing at Blockchain Group
