The Use of Cryptocurrency to evade OFAC Sanctions
By: Ryan Connolly, RBFL Student Editor
On August 8, 2022, OFAC sanctioned the cryptocurrency mixer Tornado Cash. OFAC alleges that Tornado Cash has been used, through its transaction anonymizing services, to launder over $7 billion worth of cryptocurrency since 2019. Among the most notable launderers was Lazarus Group, a North Korean state-sponsored hacking group who had recently committed the largest known virtual currency heist to date. As OFAC steps up its sanctions regime against Russia, Treasury officials are keenly focused on cryptocurrency mixers and how they might be used to evade sanctions and support the Russian war effort. At the same time, cryptocurrency advocates, such as Coinbase, argue that the sanctioning of mixers like Tornado Cash is equivalent to banning highways because criminals might use them to flee law enforcement.
Recently, OFAC’s sanctioning of individuals and entities that utilize cryptocurrency to launder money has been blessed by the judiciary. In affirming the DOJ’s move to prosecute an individual accused of using cryptocurrency to evade OFAC sanctions, Magistrate Judge for the District of Columbia, Zia Faruqui, bluntly stated: “Issue One: virtual currency is untraceable? WRONG” and “Issue Two: sanctions do not apply to virtual currency? WRONG.” Thus, OFAC appears to have the go ahead to continue their crackdown on the usage of cryptocurrency to evade sanctions.
As of March 30, 2023, there are over 23,000 different cryptocurrencies in circulation. With established financial institutions like JPMorgan Chase providing their customers access to cryptocurrency funds, and cryptocurrency exchange Coinbase boasting a $15 billion dollar market cap as of March 2023, there is clearly market demand for licit cryptocurrency services.
With no outright ban on cryptocurrency around the corner, OFAC has opted to provide guidance for entities that transact in cryptocurrency or provide crypto related services. Although there is strict liability for the violation of OFAC sanctions, penalties may be reduced based on mitigating factors, such as adherence to OFAC recommendations.
OFAC published guidance in October of 2021 that focuses on five key principles: (1) management commitment, (2) risk assessment, (3) internal controls, (4) testing and auditing, and (5) training. Safety measures that go to these principles include the use of geolocation tools and the implementation of know-your-customer procedures to prevent facilitating transactions involving sanctioned countries or persons. Entities or individuals that touch cryptocurrency would be wise to ensure they have a compliance program in place that adequately addresses cryptocurrency specific risks, such as its use for sanctions evasion. As such, an entity’s investment in their compliance program should scale proportionately with the riskiness of the activities they engage in, with cryptocurrency mixing certainly qualifying as a high-risk activity. With neither OFAC sanctions nor cryptocurrency likely to diminish in importance, organizations who touch cryptocurrency should prioritize beefing up their compliance programs such that they meet OFAC’s recommendations, lest they incur civil and or criminal penalties for violating sanctions.
Sources:
Treas. Dep’t, U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash, Treas. Dep’t (Aug. 8, 2022), https://home.treasury.gov/news/press-releases/jy0916 [https://perma.cc/JRK5-96D5].
Treas. Dep’t, U.S. Treasury Issues First-Ever Sanctions on a Virtual Currency Mixer, Targets DPRK Cyber Threats, Treas. Dep’t (May 6, 2022), https://home.treasury.gov/news/press-releases/jy0768 [https://perma.cc/BDY5-NJ2K].
Kate Rooney, Coinbase bankrolls lawsuit against Treasury Department following Tornado Cash sanctions, CNBC, https://www.cnbc.com/2022/09/08/coinbase-bankrolls-suit-against-treasury-department-following-tornado-cash-sanctions.html (Sep. 8, 2022) [https://perma.cc/EFE4-UZFP].
Treas. Dep’t, BASIC INFORMATION ON OFAC AND SANCTIONS, https://home.treasury.gov/policy-issues/financial-sanctions/faqs/topic/1501, (Sep. 10, 2002) [https://perma.cc/8CQH-NY25].
Sohini Podder et al., JPMorgan to give all wealth clients access to crypto funds – Business Insider, Reuters (July 22, 2022), https://www.reuters.com/business/finance/jpmorgan-give-all-wealth-clients-access-crypto-funds-business-insider-2021-07-22/#:~:text=July%2022%20(Reuters)%20%2D%20JPMorgan,reported%20on%20Thursday%2C%20citing%20sources [https://perma.cc/7N2P-3GQN].
In re: Criminal Complaint, No. 22-mj-0067, 2022 WL 1573361 (D.D.C. May 12, 2022).
OFAC, Sanctions Compliance Guidance for Virtual Currency, OFAC, https://home.treasury.gov/system/files/126/virtual_currency_guidance_brochure.pdf, (Oct. 2021) [https://perma.cc/Z7BU-6HTY].