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🇺🇸 Office of Foreign Assets Control (OFAC) Releases Sanctions Compliance Guidelines Brochure for the Virtual Currency Industry
On Friday last week, the Office of Foreign Assets Control (OFAC), which sits within the United States Department of the Treasury, announced instruction booklet (OFAC brochure) detailing ways in which participants in the virtual currency industry can effectively implement harmonized sanctions controls, along with the potential consequences they may face if they do not. The brochure not only outlines the relevant sanctions rules and regulations, but also provides industry best practice and case studies to illustrate the points made throughout the article.
“Consequences of non-compliance” are strongly emphasized in the document, further demonstrating the government’s willingness to take regulatory action against suspected sanctions violators. While penalties for violations are clearly stated, perhaps more emphasis was placed on OFAC’s voluntary self-disclosure guidelines. When enforcement action is taken in the financial services world, cooperation with regulators has always been seen as a strong mitigating factor in determining the appropriate consequence. It looks like the virtual currency sector will be no different. Industry participants should understand that a cover-up is almost always worse than a crime. By forming partnership-style relationships with regulators and engaging in open disclosure of known issues, companies can help reduce the reputational and financial damage caused by enforcement actions.
When describing industry best practices, the OFAC brochure explains that all industry players, not just those that are specifically regulated, should strive to implement appropriate compliance programs. The instructions state that:
All companies in the virtual currency industry, including technology companies, exchanges, administrators, miners and wallet providers, as well as more traditional financial institutions that may have exposure to virtual currencies or their service providers, are encouraged to develop, implement and routinely update, a customized sanctions compliance program risk based. Such compliance programs should generally include a list of sanctions and geographic analysis and other appropriate measures determined by the company’s unique risk profile.
OFAC’s brochure also emphasizes a five-pronged approach, similar in nature to the traditional five pillars of an AML program, when developing an adequate compliance program. Here the cogs are described as management commitment, risk assessment, internal controls, testing/auditing and training.
OFAC’s guidance explains that senior managers within a virtual currency organization should ensure that:
- review and approve sanctions compliance policies and procedures;
- ensure adequate resources — including human capital, expertise, information technology and other resources;
- delegate sufficient autonomy and authority to the compliance unit; and
- appoint a designated sanctions compliance officer with the necessary technical expertise.
Risk assessments in the virtual currency industry should seek to “assess their exposure to OFAC sanctions and take steps to minimize their risks, including developing an appropriate sanctions compliance program — before providing services or products to customers.” The risk assessment should consider the unique risks associated with the products and services offered and the jurisdictions in which the entity operates. Risks related to the entity’s “supply chain, counterparties, transactions and geographies” should be identified and potential risk from other parties mitigated accordingly.
Perhaps the most operationally important aspect of a compliance program is the implementation of internal controls. OFAC stated that “internal controls often involve the use of industry-specific tools such as screening, investigation, and transaction monitoring” and that these tools “can be helpful […] for an effective sanctions compliance program”. Elliptic’s products are designed to help entities maintain adequate internal controls and to ensure that users do not interact with persons or entities known to be subject to sanctions. Our tools allow users to view the wallets of their clients, others, and other clients Lens; implement adequate monitoring of transactions of all incoming and outgoing flows Navigator; and perform significant due diligence on clients and other parties through Discovery. Clearly, there is a regulatory expectation that virtual currency companies implement good compliance controls. Using Elliptic software is a best-in-class solution that can help meet this obligation.
Testing and monitoring considerations generally revolve around setting appropriate standards, determining whether those standards are met, and adequately remediating any instances of system failure. OFAC directly described the following points as best practices when conducting a test or audit of a virtual currency compliance program:
- Overview of the list of sanctions: ensure that verification of the SDN list and other sanction lists functions effectively and appropriately flags transactions for further review;
- Keyword screening: ensure that screening tools appropriately flag geographic keywords in connection with KYC-related screening or other transaction verification;
- IP blocking: ensure that the IP address software properly prevents users from sanctioned jurisdictions from accessing its products and services; and
- Investigation and reporting: revise procedures for investigating transactions identified through the screening process as having potential links to sanctions (for example, transactions involving a blocked person or keyword related to a sanctioned jurisdiction) and procedures for reporting blocked assets or declined transactions to OFAC.
Finally, the OFAC brochure discusses the importance of ongoing training in maintaining a strong compliance program. They highlight the fact that the type and extent of training will vary, based on the “size, sophistication and risk profile” of the organization. They emphasize that training should be provided to “all appropriate employees” and not limited to those working in the compliance function. Training is especially necessary for management and operational employees, whose decisions can potentially have significant regulatory consequences. OFAC noted that training should be completed on a periodic basis, with a frequency of at least once a year.
While there is undoubtedly more information on the subject of sanctions in the virtual currency world, the OFAC brochure provides a welcome reference guide to assist companies as they navigate this evolving regulatory environment. We look forward to continued engagement and partnership with OFAC as we continue in our joint mission to rid blockchain of financial crime.
🇬🇧 Bank of England leader Cunliffe stresses need for crypto regulations
Bank of England Deputy Governor for Financial Stability, Jon Cunliffe, talked last week to the looming threat of systemic financial risk, as crypto and fiat financial systems become increasingly intertwined. Cunliffe was quick to note that the current crypto-asset sector is small, but emphasized that there is more direct engagement with the traditional financial sector every day and that current regulatory efforts are not keeping pace with innovation. He warned that global financial stability could be at risk in the long term, unless regulators address these risks in the near future through revised regulatory guidelines and rulemaking.
🇰🇷 South Korea’s People Power Party proposes delaying upcoming crypto tax law
The People’s Power Party, South Korea’s opposition political party, put forward a proposal this week that would prevent the implementation of the cryptocurrency tax update until early 2023. Furthermore, the proposal would modify the law as currently written, which calls for a 20% tax on capital gains from cryptocurrency above 2.5 million won. The modified approach would instead impose a 20% tax on profits between 50 million and 300 million won and a 25% tax on profits of 300 million won. Proponents of the proposal note that the legal definition of “virtual currency” remains unclear and that potentially punitive tax regulations should be avoided until all regulators and stakeholders agree on a common definition.
🇬🇧 The Fantasy Soccer NFT platform is regulated by the UK Gambling Regulator
As the NFT boom continues, one industry player has caught the attention of the UK Gambling Commission: fantasy football NFT publisher Sorare. The commission noted that “any activity UK consumers take on the site falls outside the gambling regulations that a licensed operator would be required to comply with.” The lack of regulations and consumer protection measures may put some off, but given the platform’s popularity, it is unlikely that anything short of regulatory action will dissuade users from their side, Sorare countered, arguing that they have received legal opinions stating that they are not, in fact, engaged in regulated gambling activities.
🌎 G7 to publish guidelines on CBDC issuance
A consortium of G7 countries, including the UK, Canada, Germany, Italy, France, Japan and the US, will issue a thirteen-point guidance document outlining best practices for Central Bank Digital Currency (CBDC) issuance. Among the key aspects described by the group are “transparency, rule of law and sound economic governance”. The G7 guidelines will also discuss the rise of digital payment systems and the popularity of cryptocurrencies, and address the role that CBDCs can play in the new digital economy. This represents a significant step forward in CBDC discussion and implementation in the West, although China remains several steps ahead in the race and has already begun a national pilot for its digital yuan.
CBDCs Sanctions Regulation
