OFAC ups the ante on cryptocurrency fraud

March 2019 | FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

March 2019 Issue

As part of its efforts to respond to fraudulent activity within the burgeoning cryptocurrency market, the US federal government has been upping the ante on its regulatory sanctions and enforcement.

Among the actions taken is the Treasury Department’s Office of Foreign Assets Control (OFAC) issuance of compliance guidance related to cryptocurrency sanctions, as well as, for the first time, the identification of individuals involved in a ransomware attack via their cryptocurrency addresses.

“OFAC has taken an incremental approach to addressing the potential misuse of digital currencies,” says Sean Kane, counsel at Dechert LLP and former deputy assistant director for policy at OFAC. “They first put the digital currency world on notice in early 2018 by issuing five FAQs outlining their sanctions compliance obligations, and underscoring that OFAC planned to target the misuse of digital currencies to evade US sanctions. That was shortly followed by the issuance of administrative subpoenas to various digital currency businesses, requesting additional information on their OFAC compliance policies.”

In November 2018, OFAC began to fulfill its remit by identifying two digital currency addresses it alleged were used by two Iranians to facilitate a ransomware scheme. “Although the action itself had a minor impact, it did suggest that the agency has some ability to monitor and trace digital currency transactions,” asserts Mr Kane. “This, alongside its efforts to advise digital currency businesses of their compliance obligations, is a warning shot to the cryptocurrency industry that future enforcement is likely.”

Effectiveness

In the view of Beau Barnes, a lawyer at Kobre & Kim, it is too early to tell if OFAC’s efforts will prove to be effective in tackling scams related to cryptocurrencies. “OFAC’s primary mission is to use sanctions not to punish, but to change the behaviour of rogue states and actors by leveraging the strength of the US economy and US financial system,” he says. “To support that mission, the agency publishes guidance on how to comply with sanctions, issues licences to alleviate the burden of sanctions in certain circumstances and enforces violations of sanctions. It is effective when its sanctions change behaviour and when individuals and businesses comply with those sanctions.”

“With OFAC having made its first public foray into the cryptocurrency space last year, the scene has now been set for future sanctions activity – evolving from a softer to a stronger approach.”

Essentially, the role that OFAC plays is considered persuasive rather than coercive, particularly given the small steps the agency has taken so far in targeting digital currencies and digital currency providers.

“Their actions suggest they are trying to nudge the digital currency world into more robust compliance with US sanctions,” says Jeremy B. Zucker, co-chair of Dechert LLP’s international trade and government regulation practice. “The digital currency world has taken notice and stepped up efforts to implement and administer compliance programmes. However, in an industry that sometimes assumed itself to operate out of reach of government oversight, there has sometimes been a culture clash. That increases the risk that OFAC will feel compelled to take more aggressive action by directly targeting digital currency businesses for violations of US law.”

Light touch to rigorous

With OFAC having made its first public foray into the cryptocurrency space last year, the scene has now been set for future sanctions activity – evolving from a softer to a stronger approach.

“Based on its actions in 2018, I expect OFAC to be very active in the crypto industry in 2019,” believes Mr Barnes. “First, we will likely see more sanctions designations of individuals and organisations that include their cryptocurrency addresses as identifiers. Second, we will likely see additional compliance guidance issued by OFAC in the form of FAQs and informal statements, signalling what compliance steps it expects from the crypto industry. Finally, I expect that OFAC will bring enforcement actions against individuals and businesses operating in the crypto industry for sanctions violations.”

In Mr Kane’s view, OFAC’s regulatory compliance and sanctions enforcement regime will indeed transform from its current softer approach to one that expects more exacting compliance with US sanctions. “Those expectations will only increase as digital currencies become a bigger part of the international financial system,” he suggests. “It took several years before OFAC moved aggressively to enforce against banks and other financial institutions, but given the increased prominence of US sanctions as a foreign policy tool, it is less clear that businesses operating in the digital currency sector will be given as much time to implement rigorous compliance policies and standards.”

Highly technical and complex, the cryptocurrency market poses some unique challenges for agencies such as OFAC, challenges which must be overcome before US sanctions laws are routinely complied with and violators regularly held to account.

Fraser Tennant