Treasury Sanctions Review Highlights Virtual Currency Risks
Nothing surprising, but significant nonetheless
Treasury published its long-awaited sanctions review last week, and although some criticize it for being short on substance, I believe it offers some critical insights.
First, I want to flag that my firm, FiveBy Solutions, has written an advisory focusing on the spotlight on virtual currency risks. Treasury recognizes that virtual currencies are here to stay, and in conjunction with a recent OFAC guidance published this month, the Department is attempting to provide a path for compliance to firms in the virtual currency space.
But the document itself is pretty straightforward. It highlights that the days of slapping a country with a “maximum pressure campaign” have come to an end. We will most likely no longer see anything and everything related to Iran or Venezuela included on the SDN list without whole-of-government coordination or engagement with our foreign partners and allies.
And that strategy will almost certainly apply to any designation.
Yesterday, we saw the de factor manager of Libya’s al-Nasr prison, Osama al-Kuni Ibrahim, sanctioned under Executive Order 13726 for committing serious human rights abuses against migrants in Libya. Treasury’s action was implemented in coordination with the UN, EU, the UK, and Australia. The designation was precise, coordinated with allies, and linked to a specific policy objective: to block property and suspending entry into the United States of persons contributing to the situation in Libya, including implementing actions or policies that threaten the peace, security, or stability of Libya; threatening the transition to a Government of National Accord; misappropriating state assets; or engaged in human rights violations.
We will almost certainly see more reflection and analysis of possible secondary and even tertiary effects of sanctions. How will they impact the country’s economy, its population, and firms both in the United States and in the target country? What kind of unintended consequences will we see? Will our actions cause or exacerbate humanitarian crises? These are all questions that policymakers have traditionally explored before designations were issued, but these norms seem to have been all but abandoned during the last administration, as President Trump focused on putting “maximum pressure” on Iran.
These strategies should not slow the pace of designations, but make US sanctions more surgical and deliberative, as well as likely more effective. Treasury will need to make significant investments in intelligence tools and resources to provide analytic support to OFAC, and the sanctions review does flag the need for enhancements to these capabilities, as well as messaging to ensure designations are clear, enforceable, and adaptable.
But what about virtual currencies?
Treasury highlighted digital currencies, alternative payment platforms, and other tech tools that allow malign actors to operate outside the dollar-dominated global financial system, curtailing the efficacy of US sanctions, as well as new technologies that would allow adversaries to develop payment systems that would diminish the dollar’s role as the world’s reserve currency.
Deputy Treasury Secretary Wally Adeyemo highlighted in a recent online event hosted by the Center for a New American Security that most crypto transactions are, in fact, legitimate. He did, however, stress that the administration would be targeting crypto exchanges that are “fundamentally in the business of furthering” cyber-criminal activity, pointing to the recent designation of crypto exchange SUEX as an example of an exchange that facilitated financial transfers linked to at least eight ransomware variants.
Virtual currencies, while gaining popularity, are still not widely accepted payment, and illicit actors will eventually have to convert them to fiat currencies to get their payday. Therefore, focusing on mixers that work to obscure the origin of the funds—especially ones whose transaction history indicates strong links to illicit activity—is a way to ensure effective targeting.
Although the guidance is short in technical recommendations, based on several settlements OFAC has made this year for violations of US sanctions, Treasury expects firms to use all available tools to ensure they are not dealing with sanctioned entities or embargoed jurisdictions. Geolocation and IP blocking tools can help firms mitigate jurisdictional risk. Closely examining email addresses can help determine any links to sanctioned entities or previously flagged email domains. And monitoring transactions for red flags, which for virtual assets are quite similar to regular financial transactions (think: structuring, unusual virtual asset activity that doesn’t match regular customer transaction patterns, or transactions involving the use of multiple virtual currencies, or multiple accounts, with no logical business explanation, etc.).
In all, although the sanctions review does not offer granularity about the Biden administration’s strategy involving our sanctions programs, it does offer insights into priorities: virtual assets, precision in determining sanctions targets, and resources to assess possible unintended consequences and impacts.