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Crypto and Russia Sanctions: A Primer and Survival Guide For Crypto Companies

The recent comprehensive economic sanctions by the U.S. and other nations against Russia has propelled the crypto community onto the geo-political stage in a major way. As with other forms of payment and methods of money transmission, cryptocurrency and cryptocurrency exchanges are at risk for exploitation by criminal actors, including those attempting to evade economic sanctions. Several attributes of cryptocurrencies that are usually touted in favor of the technology—pseudonymity, decentralization, digitalization—are now giving government officials, regulators, and lawmakers cause for concern in the sanctions climate. In response, leaders in the crypto community are voicing support of sanctions compliance, and citing aspects of the technology—traceability, immutability, visibility—in reassurance of it. As discussed below, there are several steps that crypto platforms can take to further efforts in blocking and detecting sanctions evasion activity on their platforms.

  1. Cryptocurrency-Related Uses in Sanction Evasion

There are multiple ways that cryptocurrency technology can be harnessed to evade the sanctions on Russia. This is particularly important given this volume of illicit assets that originate or are transmitted through Russia. According to blockchain-tracking analysts, about 74 percent of the global ransomware revenue last year went to entities likely affiliated with Russia.[1]

  • Digital Ruble—The Russian government is developing a digital ruble, its own Central Bank Digital Currency, that it could use to trade directly with other countries that accept the digital currency without first converting it into U.S. dollars. This would undermine and lessen the intended economic pressures of U.S. sanctions on Russia.

  • Anonymity-Enhanced Cryptocurrencies (AECs)—AECs are a relatively new type of cryptocurrency that further reduce the transparency of crypto transactions and financial flows. AECs could be utilized by sanctioned entities to hide their identities and avoid blocks on exchange platforms.

  • Mixing Services—Mixers enable users to conceal or further obfuscate the source or owner of cryptocurrency to prevent others from tracing a transmission back to its source. Like AECs, the use of mixing services would enable sanctioned entities to conceal their identities and escape detection.

  • Multiple Wallet Addresses—Wallets are easy to open, and sanctioned actors can open up multiple wallets to move funds from a flagged or blacklisted wallet to a new wallet on another platform.

  • Decentralized Exchanges—Some decentralized exchanges (or “DEX”) allow for automated peer-to-peer transactions without the need to open an account or custodial relationship with the exchange platform. Sanctioned actors can use DEX in connection with some of these other strategies, including multiple wallet addresses and chain-hopping, to swap and mix crypto currencies and hide the true source of their assets.

  • Foreign Centralized Exchanges—Centralized exchanges in high-risk jurisdictions with inadequate anti-money laundering (AML) compliance standards have been linked to transfers of illicit funds, particularly as preferred cash-out points in the process of laundering funds in cryptocurrency to fiat currency.

  • Chain Hopping—Chain hopping refers to the process of converting one cryptocurrency into a different cryptocurrency at least once before moving the funds to another platform (e.g., a customer account that receives cryptocurrency from an external wallet and subsequently initiates multiple trades among multiple cryptocurrencies, often in rapid succession). Sanctioned actors can use this practice to make it harder to trace their transaction history back to the original blockchain, and has been linked to transfers of illicit funds.

  1. Risk Mitigation Strategies

There are several risk mitigation measures that crypto platforms, such as exchanges and wallets, can utilize to block and detect attempts to engage in sanctioned activity on their platforms:

Blocking access by sanctioned entities:

  • Screen account applications against lists of sanctioned entities
  • Require identifying information, such as names and countries of residence, and validate this information against Internet Protocol (IP) addresses and publicly available information

  • Utilize geofencing controls to block IP addresses from sanctioned countries

Detecting evasion attempts:

  • Regularly screen user accounts against sanctions lists

  • Map transactions beyond sanctioned entities and jurisdictions to identify intermediary points (e.g. non-sanctioned or low-risk jurisdictions) used to conceal transactions involving sanctioned entities and jurisdictions

  • Develop transaction monitoring protocols to detect “red flag” indicators for sanctions evasion and money laundering. FinCEN has recently identified several red flag indicators, including:

    • Customer transactions initiated from or sent to IP addresses from non-trusted sources; locations in Russia, Belarus, FATF-identified high-risk jurisdictions with AML deficiencies, and comprehensively sanctioned jurisdictions

    • Customer transactions connected to wallet addresses listed on OFAC’s Specially Designated Nations and Blocked Persons List

    • Use of foreign-located exchanges in FATF-identified high-risk jurisdictions with AML deficiencies, including inadequate “know-your-customer” or customer due diligence measures

  • Develop transaction monitoring protocols to detect “red flag” indicators of activity associated with ransomware payments, such as:

    • Customer accounts that receive cryptocurrency from an external wallet and subsequently initiates multiple, rapid trades among multiple cryptocurrencies with no apparent related purpose, followed by a transaction off the platform

    • Initiating transfers of funds involving a cryptocurrency mixing service

Anticipate potential threats:

  • Utilize blockchain analytics programs to detect high-risk behavior

  • Stay up-to-date on trends identified in regulatory guidance

Crypto platforms should make sure to have compliance programs in place to avoid fines by regulators, and consult with experienced attorneys for additional guidance and expertise.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 76
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About this Author

Associate

Pouneh Almasi is an associate in the Intellectual Property Practice Group in the firm's San Francisco office.  

Areas of Practice

Pouneh’s practice focuses on intellectual property litigation with an emphasis on copyright and trademark issues.  She is also a member of the firm’s Blockchain Technology & Digital Currency Team.

During law school, Pouneh worked as a judicial extern to the Honorable Jacqueline Scott Corley at the Northern District of California in San Francisco...

415-774-3103
Sarah Aberg Government Contracts Attorney Sheppard Mullin Law Firm New York
Special Counsel

Sarah Aberg is special counsel in the White Collar Defense and Corporate Investigations Group in the firm's New York office.

Areas of Practice

Sarah's practice encompasses litigation, internal investigations and white collar defense, with a focus on financial services and securities. She has conducted multiple criminal trials and numerous internal investigations into a wide variety of allegations, including mail and wire fraud, mortgage fraud, insider trading, market manipulation, money laundering,...

212-634-3091
Reid Whitten, partner, Sheppard Mullin Law Firm
Partner

Reid Whitten works with clients around the world to plan, prepare, and succeed in global business transactions.

In the areas of U.S. and international sanctions, export and defense export controls, and anti-corruption regulations, he supports clients in detecting and deterring potential compliance issues as well as conducting and defending investigations and enforcements. Mr. Whitten also advises on anti-dumping, anti-money laundering, and anti-boycott regulations.

Mr. Whitten is a thought leader on cross-border business regulations. He teaches a seminar on The Law of...

202-469-4968
Fatema Merchant, international, trade, Lawyer, Sheppard Mullin
Associate

Fatema Merchant is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office.

Fatema’s practice focuses on investigations and compliance counseling related to international trade laws.  She has extensive experience with U.S. Foreign Corrupt Practices Act and U.S.-Sanctioned Countries investigations, compliance, due diligence, and training.  Fatema also advises clients on compliance with International Traffic in Arms Regulations, Export Administration Regulations, Customs and Anti-Money Laundering...

202-469-4930
Yasamin Parsafar IP Attorney Sheppard Mullin
Associate

Yasamin Parsafar is an associate in the Intellectual Property Practice Group in the firm's San Francisco office.

Areas of Practice

Ms. Parsafar’s practice focuses on protecting her clients’ intellectual property rights through counseling, prosecution, enforcement and litigation.

Counseling, Prosecution and Enforcement.  Ms. Parsafar counsels clients on intellectual property acquisition, protection and enforcement strategies.  She assists with matters before the...

415.774.2927
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