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Effective compliance with sanctions is critical for any organization aiming to operate legitimately in the crypto space and avoid significant fines. Amidst a rapidly evolving sanctions landscape, the need to meet sanctions requirements is now more critical than ever before.
As such, financial institutions and crypto companies should take immediate steps to implement available compliance solutions and mitigate risk. Those who fail could find themselves in the crosshairs of regulators, risking large fines or penalties.
Consequences of non-compliance
With the Office of Foreign Assets Control (OFAC) treating sanctions violations as a fundamental threat to national security, organizations found guilty of violations face potential fines in the millions of dollars.
With such high-impact breaches, you need the right block analysis solutions to ensure you can programmatically identify and block engagement with sanctioned entities at scale in real time.
As OFAC Director Andrea Gacki noted in October 2021: “When virtual currency firms fail to implement effective sanctions compliance controls – including vetting clients located in sanctioned jurisdictions – they can become a vehicle for illicit actors to threaten national security security of the USA.
“OFAC will continue to hold accountable firms, in the virtual currency industry and elsewhere, whose failure to implement appropriate controls results in sanctions violations.”
How blockchain analytics solutions can protect your organization from sanctions risk
Designed specifically to help you tackle crypto and sanctions efficiently and effectively, blockchain analytics solutions integrate seamlessly into your technology stack and workflows to minimize the impact on your day-to-day operations.
In this blog, we’ll walk through the key block analysis solutions you can use to address the challenges of sanctions compliance.
Wallet verification
By using wallet screening and risk scores, organizations can automatically identify whether a particular wallet is controlled by a sanctioned entity, before allowing customers to withdraw funds. This means that if an entity on OFAC’s Specially Designated Nationals (SDN) or Alternative Sanctions list tries to contact your organization, they will not be able to obtain their funds and will not be able to take them elsewhere.
Wallet verification in action
The screenshot below shows an attempt to withdraw from a cryptoasset exchange to one of the Ethereum addresses on the OFAC list belonging to Russian cybercriminal Danilo Potekhin. Our wallet verification solution recognized the owner and automatically assigned the wallet a maximum risk score of 10, thanks to its association with a sanctioned person.
This gave the exchange a clear indication that its client was attempting to send funds to an OFAC-sanctioned entity and automatically barred the withdrawal.
Screening of transactions
When it comes to sanctions risk management, organizations must be aware of the risks they present to themselves through their clients’ transactions and use transaction screening software to automatically identify potential exposure to sanctioned entities. Similar to wallet screening, the most effective solutions use numerical risk scores to outline threats and automatically block those that exceed a predetermined threshold. This enables a scalable programming approach – minimizing costs without sacrificing security.
Checking transactions in action
The screenshot below shows a deposit of 1,756 Ether tokens ($2 million) made to a crypto exchange that can be traced back to Danilo Potekhin. Using our transaction screening solution, the exchange was able to identify this person as the ultimate source of the funds, allowing them to automatically block the transfer, place the money in a quarantine wallet, and immediately report the information to OFAC.
Investigations
In the event that your compliance team identifies red flags that may suggest you are exposed to sanctioned entities, you will need to dig deeper to uncover the activity. To effectively conduct this investigation, you will need a solution that allows you to instantly investigate and visualize crypto activity in blocks and assets simultaneously. This will ensure that bad actors cannot simply move assets to alternative chains to avoid investigative scrutiny.
Investigations in action
The screenshot below shows $100 million worth of cryptoassets stolen from Horizon Bridge and laundered through the now defunct Tornado Cash mixer. Using our investigation solution, we were able to trace these stolen assets through the blockchain and mixer until they reached the cryptocurrency exchange service.
In the image above, the arrows show where the funds were moved through other wallets (indicated by white circles) before being sent via Tornado Cash.
VASP due diligence
For crypto exchanges and financial institutions, the need to understand the risks posed by virtual asset service providers (VASPs) is critical.
For example, clients of a financial institution may attempt to purchase cryptoassets on exchanges located in Russia or located outside of Russia but serving the Russian market by offering to exchange bitcoins for rubles. After the Russian invasion of Ukraine, we identified more than 400 VASPs with a Russian nexus, many of which allow users to create accounts anonymously.
To tackle this challenge, organizations need a VASP analytics solution to help identify potentially risky VASPs. By providing information on known VASP countries of registration, regulatory status, fiat currencies offered by VASP, and its history with privacy coins, our VASP directory solution can help organizations take a risk-based approach.
The need for cross-capacity in compliance with sanctions
Given that regulatory control puts additional pressure on sanctioned entities and individuals, many are using alternative approaches to launder their money flows. In recent years, this has culminated in the proliferation of cross-typologies of money laundering between chains and assets.
Criminals are increasingly using the ability to move their illicit funds across assets and blockchain to disguise their activity. This makes it difficult for organizations to identify and detect these flows. As such, the need for cross-chain and cross-asset blockchain analytics is clear.
With cross-chain and cross-asset verification capabilities, you can gain accurate insight into customer risk across multiple blockchains and assets, helping you instantly identify and respond to potential sanctioned entity exposure in real-time.
As these threats become more commonplace, OFAC and other regulatory bodies will expect organizations to make greater efforts to address the challenges or reap the consequences. With this in mind, you need to ensure that your blockchain analytics solution can offer full cross-chain and cross-asset capabilities to truly protect your organization from sanctions exposure.
Learn more about the threat of cross-chain typologies and how holistic blockchain analytics can future-proof your sanctions compliance strategy on our blog.
Alternatively, download our latest “Cryptocurrency Sanctions Compliance” Report to see how your organization can build a risk management framework to navigate the challenges of sanctions compliance.
