A Guide to Anti-Money Laundering for Crypto Firms
One of the ways the US punishes violations of international law, human rights abuses, and other state-sponsored criminal activities is by imposing economic sanctions against countries, entities, and individuals. The US’ sanctions regime is implemented and enforced by a dedicated branch of the Treasury Department, known as the Office of Foreign Assets Control (OFAC).
What Does OFAC Do?
OFAC administers and enforces the US’ sanctions programs against designated targets around the world in order to achieve the US government’s foreign policy and national security goals. In its supervisory role, OFAC works to ensure that US persons comply with sanctions regulations and may impose fines where it discovers that violations have occurred.
OFAC sanctions are implemented in two ways, using ‘comprehensive sanctions’ to target entire countries, and ‘non-comprehensive’ or ‘selective’ sanctions to target specific individuals and entities. There are two types of sanctions regulation, primary and secondary sanctions:
- Primary sanctions regulations apply directly to persons within US’ jurisdiction, preventing them from doing business with US sanctions targets. .
- Secondary sanctions extend US sanctions compliance obligations to third parties resident in foreign countries not directly subject to US jurisdiction.
OFAC primary and secondary sanctions generally impose the following restrictions and prohibitions:
- Import and export bans on goods, services, and technologies
- Investment bans
- Asset freezes for target countries, organizations, and individuals
- Travel bans for individual targets
The targets of OFAC sanctions are designated on OFAC sanctions lists, which are updated as new designations are added and withdrawn. OFAC may grant licenses that exempt certain US firms from sanctions restrictions under certain circumstances. Firms should apply to OFAC to obtain a general license, or submit a written request for a specific license.
What is the OFAC Sanctions List?
The OFAC Sanctions List contains information on the current targets of US sanctions. There are several different OFAC sanctions lists, each dealing with a group of targets. The two main OFAC sanctions lists are:
- The Specially Designated Nationals List: The SDN list contains the names of individuals and companies which are controlled by, or acting on behalf of, countries targeted by United States sanctions.
- The Consolidated Sanctions List: A list containing all sanctions information not incorporated into the SDN list.
Other types of OFAC sanctions lists include the Sectoral Sanctions Identifications List (targeted at Russia), the Foreign Sanctions Evaders List, the more specific non-SDN Palestinian Legislative Council List, and the Iranian Sanctions List.
OFAC Sanctions: Russia
Following the invasion of Ukraine in February 2022, the US, and other members of the international community, imposed sanctions against Russia and President Vladimir Putin’s government. US President Joe Biden characterized the US’ sanctions as exceeding any measures previously imposed against Russia, stating that “Putin’s aggression against Ukraine will end up costing Russia dearly, economically and strategically”.
Building on existing sanctions, in place since the 2014 invasion of Crimea, OFAC imposed the following key sanctions against Russia:
OFAC sanctions on Russian banks: The US imposed sanctions against Russia’s largest banks, which were prohibited from processing payments through the US financial system and had their assets frozen. The Russian banks and financial institutions designated by the sanctions include:
- National Wealth Fund of the Russian Federation and the Ministry of Finance (Russia’s Central Bank)
- Public Joint Stock Company Sberbank of Russia (Sberbank)
- VTB Bank Public Joint Stock Company (VTB Bank)
Debt and equity prohibitions: OFAC expanded debt and equity restrictions to more sectors of Russia’s economy. Under the restrictions, OFAC prohibits US persons from conducting ‘transactions and dealings’ with Russian state-owned enterprises, and businesses operating in Russia’s financial services sector. The restrictions apply to 13 major Russian firms, including 6 of its largest financial institutions.
OFAC sanctions on Russian elites: OFAC imposed targeted sanctions against several Russian oligarchs and members of Putin’s inner circle that ‘participate in, or benefit from, the Russian regime’s kleptocracy’, and others that ‘serve in leadership roles of companies’. The individuals targeted include:
- Sergei Borisovich Ivanov, close confidant of Vladimir Putin
- Nikolai Platonovich Patrushev, Secretary of the Russian Federation Security Council
- Igor Ivanovich Sechin, former Deputy Prime Minister of Russia and CEO and Chairman of the Board of Russian oil company, Rosneft.
- Senior executives at Russian state-owned banks
- Dmitry Peskov, Press Secretary for Vladimir Putin
- Alisher Usmanov, founder of Russian mining company, Metalloinvest
- Nikolay Tokarev, chief executive of Russian energy company, Transneft
- Russian billionaire brothers Boris and Arkady Rotenberg
- Katerina Tikhonova and Mariya Putina, daughters of Vladimir Putin
- Dmitry Medvedev, former President and Prime Minister of Russia
- Russian Prime Minister Mikhail Mishustin
Energy restrictions: In early March 2022, President Biden issued a ban on all imports of Russian oil. The ban was subsequently expanded in April to include imports of Russian gas, coal, and other energy products.
OFAC sanctions enforcement: In order to ensure sanctions on Russia have a consistent impact, OFAC is focusing heavily on compliance. On March 31st, 2022, OFAC designated 21 entities and 13 individuals that were facilitating the Kremlin’s attempts to evade sanctions, and fuelling the ongoing conflict.
OFAC Sanctions Programs and Country Information
OFAC administers the US’ sanctions programs against designated targets around the world. The US currently maintains sanctions programs that apply to, or are related to, entire countries, such as Belarus, Cuba, China, and Somalia, along with programs that apply to specific practices or industries, such as the Counter Narcotics Trafficking Sanctions, the Cyber-Related Sanctions, and the Non-Proliferation Sanctions.
While the SDN list and Consolidated list contain the names of the US’ designated targets, the sanctions programs themselves set out the legislative details behind US sanctions. The programs also contain additional advisory information specific to their targets, including how to implement effective screening measures, and the red flag characteristics of sanctions evasion.
Key examples of US sanctions programs include:
North Korea: The US imposes economic sanctions against North Korea in order to punish its repeated violations of international law, which include human rights abuses, cyber-attacks, and weapons proliferation. OFAC’s North Korea sanctions program is updated regularly to reflect changes to the geopolitical landscape. Recent changes to OFAC’s North Korea sanctions include:
- The extension of secondary sanctions to non-US third parties doing business with North Korea
- Restrictions on US correspondent accounts that provide services to designated targets of the North Korea sanctions program
- Prohibitions on non-US subsidiaries of US companies carrying out transactions with North Korean persons
Iran: The US has imposed sanctions against Iran since 1979 in response to its aggressive posture in the Middle East and, more recently, its attempts to develop nuclear weapons and support for groups such as Hezbollah and Hamas. The US imposes primary and secondary sanctions against Iran and introduced new sanctions after President Trump’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA), an international agreement intended to halt Iran’s nuclear weapons program.
The US’ most recent sanctions against Iran include measures targeting the inner circle of Iran’s leader, Ayatollah Ali Khamenei, and measures against 18 Iranian Banks. In 2021, President Biden suggested that economic sanctions might be lifted if Iran complied with the terms of the JCPOA.
OFAC Virtual Asset Sanctions
As the use of cryptocurrencies continues to spread around the world, the US has expanded the scope of its sanctions programs to include state-sponsored criminal activity involving virtual assets.
In October 2021, OFAC published its Sanctions Compliance Guidance for the Virtual Currency Industry. The guidance included benchmarks by which US crypto firms could assess the adequacy of their sanctions screening solutions, along with best practice approaches to sanctions compliance and advice on how to respond to suspicious activity alerts.
The best practice guidance highlighted the importance of crypto firms knowing how to block virtual currency transactions that are found to be in violation of sanctions. When a firm finds a potential sanctions violation, for example, it must hold the asset and then report it to OFAC within 10 business days. Additionally, the guidance emphasizes the need for cryptocurrency service providers to:
- Screen customers against OFAC sanctions lists
- Screen transactions to identify links to sanctions targets
- Use fuzzy logic capabilities to account for discrepancies in customer names, including alternative spellings, misspellings, variations in capitalization, spacing, and punctuation
- Conduct ongoing sanctions screening to account for changes to OFAC sanctions lists and new regulatory requirements
Who Has to Comply With OFAC Sanctions?
All individuals, banks, financial services companies and other obligated institutions operating under US jurisdiction must comply with OFAC sanctions. For banks and other financial services firms, this means integrating an OFAC sanctions search into internal AML/CFT programs, and ensuring that new customers and clients are screened against the list before a business relationship begins.
OFAC sanctions violations carry the risk of significant criminal penalties. Fines for sanctions violations can range from several thousand dollars to millions of dollars, while individuals that breach the rules may face up to 30 years in prison. In 2021, OFAC fined Union de Banques Arabes et Francais $8.57 million for sanctions compliance violations. The second largest fine that year was issued against the Bank of China for $2.32 million.
Why is it Important to Have a Sanctions Screening Tool?
Performing an OFAC sanctions search manually can be administratively challenging, costly, and inefficient. Human error may also lead to inaccuracies and the risk of penalty fines. Using an automated OFAC sanctions screening tool minimizes that risk: financial crime technology not only builds accuracy into AML programs but helps firms to quickly and efficiently achieve the compliance standards that regulators like OFAC require.
Originally published June 21, 2014, updated June 14, 2022
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