The US Department of the Treasury (Treasury) has released the results of its review of economic and financial sanctions first announced in December 2020 by then President-elect Biden (Report). From that review, Treasury has issued recommendations to “preserve and enhance” the effectiveness of sanctions. This long-anticipated announcement came out the same week as the Office of Foreign Assets Control (OFAC) issued new “Sanctions Compliance Guidance for the Virtual Currency Industry” (Guidance) as a resource to help participants in the virtual currency industry navigate and comply with US sanctions administered by OFAC. Both actions signify efforts to revamp the US approach to the administration of economic and financial sanctions under the Biden Administration.
These actions, coupled with Treasury’s recognition of the harm virtual currencies and alternative payment platforms could have on the efficacy of US sanctions and its intent to improve institutional knowledge and capabilities in these areas, suggest that companies should expect increased sanctions enforcement activity targeting the virtual currency industry. Accordingly, to mitigate such emerging sanctions risks, companies involved in this sector are advised to establish and maintain a tailored, risk-based sanctions compliance program.
Sanctions policy review and recommendations
Treasury’s Report includes recommendations to change how US sanctions policies and regulations are developed and structured, signaling support for multilateral approaches, recognition of the need to consider and address humanitarian impacts, and the need to confront emerging challenges to sanctions’ effectiveness, including the growing use of digital currencies and online payment platforms. Treasury found that although sanctions are an effective foreign policy tool, the United States faces new modern challenges, including risks from new payments systems, the increased use of digital assets, and cybercriminals. To counter these emerging challenges, Treasury outlines five recommendations in its report, which are detailed below.
A structured policy framework that links sanctions to a clear policy objective. Treasury emphasizes that economic and financial sanctions should be tied to clear, discrete objectives and support an overarching US government policy or strategy. Accordingly, Treasury plans to adopt the use of a policy framework to inform its recommendations on the use of sanctions, asking whether a sanctions action:
- supports a clear policy objective within the broader US government strategy
- has been assessed to be the right tool for the circumstances
- incorporates anticipated economic and political implications for the sanctions target(s), US economy, allies, and third parties and has been calibrated to mitigate unintended impacts
- includes a multilateral coordination and engagement strategy and
- will be easily understood, enforceable, and, once sanctions objectives are met, reversible.
Incorporating multilateral coordination. Treasury’s report highlights that sanctions are most effective when there is coordination with allies and partners, which enhances the credibility of US leadership and the shared goals of both the United States and its allies. Coordination of sanctions policy can be accomplished through collaboration and sharing of policy frameworks and information, continuing efforts to harmonize sanctions regimes, and efforts to build sanctions coordination into existing multilateral fora.
Calibrating sanctions to mitigate unintended economic, political, and humanitarian impact. Treasury recommends that sanctions are appropriately tailored to mitigate unintended economic and political impacts on domestic workers and businesses, as well as impacts on allies and non-targeted international populations. Additionally, the Report provides that Treasury should address, on a systematic level, the obstacles that sanctions pose to humanitarian efforts through establishing legitimate humanitarian channels in heavily sanctioned jurisdictions and to provide additional exceptions to support the provision of legitimate humanitarian goods and aid.
Ensuring sanctions are easily understood, enforceable, and adaptable. The Report contends that sanctions are only as effective as their implementation, which relies on good communication and engagement with stakeholders. Treasury recommends that it communicate and coordinate more effectively with the industry stakeholders affected by financial sanctions. The Report also states that Treasury should improve its public messaging and engagement, both domestically and internationally, with respect to its sanctions.
Investing in modernizing Treasury’s sanction technology, workforce, and infrastructure. Lastly, the Report stresses the importance of investing in Treasury’s sanctions workforce and operational capabilities, which should consist of the proper expertise, technology, and staff. In particular, the Report asserts that Treasury needs to invest in improving its institutional knowledge and capabilities in the emergence of digital assets and online payment platforms.
Sanctions compliance guidance for the virtual currency industry
As recently reported in ES Flash Update and following on recent actions highlighting sanctions risks in the virtual currency industry, on October 15, 2021, OFAC published “Sanctions Compliance Guidance for the Virtual Currency Industry” (Guidance) as a resource to help members of the virtual currency industry navigate and comply with US sanctions administered by OFAC. On the same day, the Financial Crimes Enforcement Network (FinCEN) released a report on ransomware trends in the first half of 2021, detailing recent virtual currency activity likely associated with major ransomware payments.
With ransomware attacks using virtual currency exchanges on the rise, the United States is engaged in a “whole of government” effort to try to stop ransomware attacks. This effort also calls for the private sector to implement sanctions and anti-money laundering and countering the financing of terrorism (AML/CFT) controls to prevent sanctioned persons and other illicit actors from exploiting virtual currencies.
Ransomware attacks using virtual currencies on the rise
The FinCEN report analyzed ransomware Suspicious Activity Reports (SARs) filed during the first half of 2021 and found that ransomware is an increasing threat to the US financial sector, businesses, and the public. Monthly ransomware-related SARs filings have increased significantly: 635 SARs were filed and 458 transactions were reported between January 2021 and June 2021, representing a 30% increase from the 2020 calendar year. Ransomware-related SARs during the first half of 2021 consisted of a total value of $590 million, almost $200 million more than what was reported for the entirety of 2020, which totaled $416 million.
OFAC’s guidance and expectations of the private sector
OFAC’s Guidance demonstrates that sanctions compliance requirements apply to the virtual currency industry in the same manner as they do to traditional financial institutions, with the same risk of civil and criminal penalties—up to $1 million per violation and/or up to 20 years’ imprisonment—for failing to comply. As such, OFAC encourages all companies in the virtual currency industry, including technology companies, exchangers, administrators, miners, and wallet providers and their service providers, to develop, implement, and frequently update a tailored, risk-based sanctions compliance program. Such programs should include robust AML/CFT controls and party screening, among other things.
Companies operating in the virtual currency industry should also conduct thorough transaction monitoring and investigation. OFAC’s Guidance highlights methods by which companies can identify transactions involving virtual currency addresses or other identifying information associated with sanctioned individuals and entities listed on the Specially Designated Nationals and Blocked Persons (SDN) List or other sanctions lists, or located in sanctioned jurisdictions. OFAC recently began including certain known virtual currency addresses as identifying information for persons listed on the SDN List, which a company may access using OFAC’s Sanctions List Search. Virtual currency payment providers and those who use them should employ tools and procedures sufficient to identify and block transactions associated with blocked persons, including transactions related to virtual currency addresses on the SDN List.
OFAC also recommends that companies incorporate into their sanctions compliance programs geolocation tools and IP address blocking controls, which can identify and prevent transactions from IP addresses that originate in sanctioned jurisdictions. Virtual currency companies are advised to collect and review any other information—including, among other things, address information from a customer or counterparty, email address information, or invoice or other transaction details—that may indicate that the transaction involves a sanctioned jurisdiction. Virtual currency companies that fail to incorporate these internal geolocation controls risk being the target of an OFAC enforcement action for failing to prevent users in sanctioned jurisdictions from accessing and using platforms for prohibited conduct.
Like traditional financial instructions, in the event a US person determines that it holds virtual currency required to be blocked under OFAC regulations, it must deny all parties access to that virtual currency. The US person must also ensure that they comply with OFAC regulations related to the holding and reporting of blocked assets. Blocked virtual currency must be reported to OFAC within 10 days and on an annual basis thereafter, so long as the virtual currency remains blocked. However, US persons are not required to convert the blocked virtual currency into traditional fiat currency—such as US dollars—or hold such blocked property in an interest-bearing account.
Conclusions
The long-awaited report of sanctions policy review presents a case for the strategic use of sanctions as one of several tools in the US government’s toolbox and a recognition of the need for careful consideration and balancing of humanitarian, diplomatic, and other collateral impacts of sanctions. It also recognizes that addressing collateral impacts on US companies and allies can strengthen the effectiveness of sanctions in the long-term by helping to win multilateral support, strive for more direct targeting, and discourage migration to alternative payment systems.
Meanwhile, ransomware attacks using virtual currency continue to rise, and the United States is employing a “whole of government” approach to try to stop ransomware attacks. While banks have traditionally been the “front line” for US sanctions enforcement, the most recent Guidance similarly deputizes the virtual currency exchange industry to monitor and police sanctions violations and sanctions evasion. Accordingly, companies operating in the virtual currency industry are advised to incorporate sufficient controls and diligence procedures to ensure compliance with OFAC sanctions regulations and minimize the risk of OFAC enforcement and associated civil and criminal penalties.
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