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As crypto asset companies and financial institutions grapple with the ever-changing nature of sanctions compliance, it is critical that they understand the risk of exposure to entities located in or near sanctioned jurisdictions.
Compliance teams need a risk mitigation strategy that includes detecting more subtle signs of risk, including exposure to high-risk countries or regions that pose a high risk of sanctions evasion activities.
In this blog post, we’ll uncover the complexities of managing your country risk exposure and explain how you can stay compliant.
Introduction
Financial institutions and crypto companies must look beyond simply avoiding any interaction with individuals and entities on sanctions lists.
There is also the risk of inadvertent transactions with crypto exchanges, miners and other services in countries subject to financial and economic sanctions, including Venezuela, Iran, Cuba, North Korea and Russia.
For example, following Russia’s invasion of Ukraine in February 2022, enforcement agencies in the United States, the European Union, and other nations sought to impose sanctions on both Russia itself and Russian-linked separatist groups operating in captured Ukrainian regions, such as are Donetsk, Luhansk, Kherson and Zaporozhye.
Crypto companies and financial institutions must also be aware of the threat of exposure to digital asset exchange services in Russia that could facilitate sanctions evasion. Enhanced due diligence for these transactions is critical, as compliance teams must be on the lookout for potential interactions with Russian sanctioned entities and individuals.
Looking further, there are a number of other threats that compliance officers need to be aware of in terms of exposure to sanctioning jurisdictions around the world, which we outline below.
Mining
Elliptic expects that the Office of Foreign Assets Control (OFAC) will continue to target mining activities in sanctioned countries such as Iran and Russia. As a result, crypto companies and financial institutions must avoid facilitating transactions that could expose them to mining activities in such jurisdictions.
A further risk is receiving bitcoins from Iranian miners hoping to cash out or spend their mined cryptoassets, as exposure to these transactions could lead to sanctions violations.
Elsewhere, North Korea has previously engaged in cryptojacking campaigns – hacking into computers and using them to mine cryptocurrencies – in an effort to raise funds. Meanwhile, Venezuela – another country subject to a series of sanctions – has implemented a licensing framework for mining digital assets in the country.
Compliance teams must be on the lookout for transactions that could expose them to mining activities in sanctioned countries. This includes the ability to detect transactions received from miners operating in sanctioned countries, as well as making sure you don’t pay transaction fees to those miners.
Avoidance of third country sanctions
To avoid sanctions, a number of jurisdictions regularly target third countries as intermediaries to avoid control and transfer of funds. For example, Iran has been observed targeting nations such as Lebanon, the United Arab Emirates, and Turkey.
Furthermore, Iran and North Korea used financial institutions in Singapore, Malaysia and China in an attempt to evade US and international restrictions.
This activity indicates that exchanges in these third countries must be aware of the risks of sanctions-related activities. Furthermore, exchanges located elsewhere in the world need to be aware of activities involving third country exchanges that may be high risk, where such activity appears alongside other sanctions-related red flags.
Country-specific exposure
There are a number of other risks related to country sanctions that compliance teams need to be aware of. For example, the United States prohibits US persons from having businesses involving any digital assets backed by the Venezuelan government – ​​prompted by the country’s 2017 launch of a crypto-asset.
The US has also blocked transactions in all Venezuelan government assets, including crypto exchanges. In 2018, the Latin American nation approved 16 crypto exchanges in the country to handle Petros, including state-owned platforms that allow users to exchange digital assets for Petros.
Crypto exchanges outside of Venezuela therefore need to be aware of potential ties to those exchanges, such as clients who frequently use them, to mitigate their exposure to sanctions risk.
How Elliptic can help
Elliptic’s configurable country-specific risk rules mean that compliance officers can monitor indirect and direct transactional links to entities in sanctioned countries, including Venezuela, Russia and Iran.
Meanwhile, Elliptic Discovery – our entity intelligence tool – provides comprehensive due diligence profiles for over 1,000 virtual asset service providers (VASPs) worldwide.
Discovery has profiles on hundreds of exchanges in countries such as Russia, enabling compliance teams to apply enhanced monitoring to all transactions involving them and helping them determine whether to continue business as sanctions evolve. They can also use Elliptic’s transaction and wallet review capabilities to ensure compliance with pre-existing sanctions.
To learn more about achieving sanctions compliance and how you can protect your organization from exposure, download our Guide to Cryptocurrency Sanctions Compliance 2023.
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Sanctions Compliance Financial Services
