A Guide to Anti-Money Laundering for Crypto Firms

New OFSI Guidance Orders Crypto Exchanges to Report Suspected Sanctions Breaches

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The Office of Financial Sanctions Implementation (OFSI) has issued guidance for service providers in the crypto market, stating relevant firms must report suspected sanctions breaches to authorities. The updated guidance brings crypto exchanges and wallet providers in line with the reporting obligations faced by banks and other financial institutions.   

This move by the OFSI follows guidance issued by the Financial Conduct Authority (FCA) earlier this year. A statement from the two bodies noted that “the use of cryptoassets to circumvent economic sanctions is a criminal offense under the Money Laundering Regulations 2017 and regulations made under the Sanctions and Anti-Money Laundering Act 2018.”

While using cryptocurrencies to evade sanctions was already illegal in the UK under laws that cover all “economic resources”, the new guidance from OFSI explicitly references “crypto assets” among the financial instruments that must be frozen if sanctions are imposed upon an entity. The US and EU made similar updates that included explicit references to crypto assets in their revised guidance issued in February and March, respectively.

New reporting obligations 

Under the new guidance, cryptoasset exchanges and custodian wallet providers must report to OFSI if:

  • There is reasonable cause to suspect that an individual, entity, or ship is a designated person
  • If that designated person is a customer, and frozen assets are held for them
  • There is reasonable cause to suspect that a person has committed an offense under financial sanctions regulations

OFSI notes that firms only need to report the above information if it becomes apparent while carrying out business. Failure to report clients designated for sanctions to OFSI will be a criminal offense.

Crypto sanctions evasion detection

According to a red alert update issued by the Joint Money Laundering Intelligence Taskforce (JMLIT) earlier this year, designated persons are expected to be using crypto services, associates, and close contacts to evade sanctions, move significant sums of money, and protect their personal or commercial holdings. 

Ukrainian prosecutors witnessed this in July when they reportedly seized €850,000, 830 kilograms of silver, six pieces of land, and three apartments, all of which were the proceeds of illegal crypto trades with users from Russia and Russia-occupied territories. 

In the red alert update, JMLIT includes a 34-point list of indicators suspected of being used to evade sanctions, including:

  • Designated persons communicating changes to the beneficial ownership of their corporate structures
  • The use of trust arrangements or complex corporate structures involving offshore companies
  • Changes to ultimate beneficial ownership from Russian nationals to persons of other nationalities
  • Numerous transfers of shares from sanctioned entities to non-sanctioned entities
  • Payments from venture capital and private equity vehicles – many of which are located in offshore jurisdictions, the Middle East, East Asia, or other jurisdictions that continue to support the Russian government

Key takeaways

Firms should ensure that appropriate levels of due diligence, including source of funds and source of wealth checks, align with their risk appetite and any new reporting obligations. Complex corporate ownership structures should also be reviewed carefully as part of any enhanced due diligence for high-risk clients to ensure any reports to OFSI includes relevant, detailed information. 

To stay up to date with the latest information on financial sanctions, including amendments to the consolidated list of asset freeze targets, compliance staff should consider subscribing to OFSI’s free email alert service.

 

The Evolving Use of Sanctions

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The Office of Financial Sanctions Implementation (OFSI) has issued guidance for service providers in the crypto market, stating relevant firms must report suspected sanctions breaches to authorities. The updated guidance brings crypto exchanges and wallet providers in line with the reporting obligations faced by banks and other financial institutions.    This move by the OFSI follows guidance issued by the Financial Conduct Authority (FCA) earlier this year. A statement from the two bodies noted that “the use of cryptoassets to circumvent economic sanctions is a criminal offense under the Money Laundering Regulations 2017 and regulations made under the Sanctions and Anti-Money Laundering Act 2018.” While using cryptocurrencies to evade sanctions was already illegal in the UK under laws that cover all “economic resources”, the new guidance from OFSI explicitly references “crypto assets” among the financial instruments that must be frozen if sanctions are imposed upon an entity. The US and EU made similar updates that included explicit references to crypto assets in their revised guidance issued in February and March, respectively.

New reporting obligations 

Under the new guidance, cryptoasset exchanges and custodian wallet providers must report to OFSI if:
  • There is reasonable cause to suspect that an individual, entity, or ship is a designated person
  • If that designated person is a customer, and frozen assets are held for them
  • There is reasonable cause to suspect that a person has committed an offense under financial sanctions regulations
OFSI notes that firms only need to report the above information if it becomes apparent while carrying out business. Failure to report clients designated for sanctions to OFSI will be a criminal offense.

Crypto sanctions evasion detection

According to a red alert update issued by the Joint Money Laundering Intelligence Taskforce (JMLIT) earlier this year, designated persons are expected to be using crypto services, associates, and close contacts to evade sanctions, move significant sums of money, and protect their personal or commercial holdings.  Ukrainian prosecutors witnessed this in July when they reportedly seized €850,000, 830 kilograms of silver, six pieces of land, and three apartments, all of which were the proceeds of illegal crypto trades with users from Russia and Russia-occupied territories.  In the red alert update, JMLIT includes a 34-point list of indicators suspected of being used to evade sanctions, including:
  • Designated persons communicating changes to the beneficial ownership of their corporate structures
  • The use of trust arrangements or complex corporate structures involving offshore companies
  • Changes to ultimate beneficial ownership from Russian nationals to persons of other nationalities
  • Numerous transfers of shares from sanctioned entities to non-sanctioned entities
  • Payments from venture capital and private equity vehicles - many of which are located in offshore jurisdictions, the Middle East, East Asia, or other jurisdictions that continue to support the Russian government

Key takeaways

Firms should ensure that appropriate levels of due diligence, including source of funds and source of wealth checks, align with their risk appetite and any new reporting obligations. Complex corporate ownership structures should also be reviewed carefully as part of any enhanced due diligence for high-risk clients to ensure any reports to OFSI includes relevant, detailed information.  To stay up to date with the latest information on financial sanctions, including amendments to the consolidated list of asset freeze targets, compliance staff should consider subscribing to OFSI’s free email alert service.   [cta_card title="The Evolving Use of Sanctions" cta_img="" category="" bodytext="Take a look at the newest trends and updates from key sanction regimes worldwide." cta_text="Download now" cta_url="https://complyadvantage.com/insights/global-sanctions/"]

Originally published September 9, 2022, updated September 9, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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