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On April 14, the US Treasury’s Office of Foreign Assets Control (OFAC) took its latest action to sanction fentanyl traffickers and their support networks.
As part of that crackdown — which targeted two entities and five individuals based in China and Guatemala allegedly involved in the production of fentanyl precursor chemicals — OFAC included a Bitcoin address on its list of Specially Designated Nationals and Blocked Persons (SDN list).
The Bitcoin address in question belongs to Wang Hongfei, the individual OFAC claims provided support to Wuhan Shuokang Biological Technology Co., Ltd (WSBT). This is a Chinese company that manufactures fentanyl precursor chemicals. According to OFAC, Wang Hongfei’s Bitcoin wallet “was used to receive Bitcoin payments for illegal drug transactions on behalf of WSBT.”
The action targeting Wang Hongfei is just the latest in a series of actions by OFAC targeting the crypto addresses of fentanyl traffickers. And it certainly won’t be the last, as the agency’s efforts to sanction the fentanyl trade are likely to increase significantly.
As OFAC intensifies efforts to disrupt fentanyl trafficking networks, compliance teams at crypto exchanges and financial institutions must ensure they can detect and manage the associated risks.
Combating Fentanyl Trafficking: A Growing Policy Priority
In recent years, the US government has made combating the fentanyl trade a growing priority in light of the devastating impact of the deadly and addictive opioid.
The increasing use of synthetic opioids such as fentanyl has fueled a new addiction crisis in the US and has also resulted in a record number of drug overdoses over the past decade. Overdoses due to the use of opioids have quadrupled since 2010, and in 2021 there will be more than 71,000 fatal overdoses in the United States linked to the use of synthetic opioids.
While the death rate from fentanyl has decreased in recent months due to intensified efforts to disrupt the trade, the US government remains concerned that the trend of combining fentanyl with other potentially lethal substances – such as the sedative xylazine – could cause a resurgence overdose rates.
In addition, the US government has repeatedly pointed out that the fentanyl trade relies on suppliers of precursor chemicals operating primarily in China. Precursor chemicals are shipped from China to destinations such as Mexico, where fentanyl is manufactured before being shipped to the US.
Profits from the sale of fentanyl ultimately benefit drug cartels such as the Sinaloa cartel, which traffics the drug from Mexico into the US. The fentanyl trade therefore not only has a devastating impact on those who buy the drug, but also enriches organized crime groups and their supply networks around the world.
Some dark web markets have barred sellers from selling fentanyl due to concerns about attracting law enforcement scrutiny. Nonetheless, fentanyl is sold on certain sites on the dark web that use crypto-assets like Bitcoin – or the very anonymous Monero.
Network members involved in the sale of precursor chemicals can also settle peer-to-peer transactions in cryptoassets to avoid transactions through the banking system.
The US government has made it clear that disrupting these financial networks is critical to combating the fentanyl trade. On April 11, the Biden administration released a fact sheet outlining its strategy for cracking down on fentanyl supply chains.
A key pillar of the US strategy is to increase “efforts to disrupt the illicit financial activities that finance these criminals by increasing accountability measures, including financial sanctions, on key targets to disrupt drug traffickers’ access to the US financial system and illicit financial flows”.
OFAC Sanctions and Fentanyl Trafficking
OFAC has already targeted numerous individuals and entities involved in the fentanyl trade using cryptocurrencies.
In addition to the sanctions imposed on Wang Hongfei on April 14, OFAC also took the following actions:
- In August 2019, OFAC sanctioned three Chinese nationals – Xiaobing Yan, Fujing Zheng and Guanghua Zheng – for their involvement in fentanyl trafficking. At the time, OFAC included dozens of crypto addresses belonging to them on the SDN list. These individuals were sanctioned under the Foreign Narcotics Control Act (“The Kingpin Act”), a law passed in 1999 that was used to sanction major drug traffickers and their support networks.
- In December 2021, OFAC sanctioned Hebei Atun Trading Co. Ltd., a Chinese company engaged in the import and export of fentanyl precursors. Hebei Atun was designated by Executive Order 14059 – “Imposing Sanctions on Foreign Persons Involved in Global Illicit Drug Trafficking” – a US measure designed to crack down on the trafficking of narcotics such as fentanyl. On February 28, OFAC updated Habei Atun’s entry on the SDN list to include a Bitcoin address controlled by the company.
- In November 2022, OFAC sanctioned a network of individuals and entities in the UK and the Netherlands involved in the dark web trafficking of fentanyl. OFAC included dozens of Bitcoin, Ethereum and Bitcoin Cash addresses belonging to Matthew Grimm and Alex Peijenburg, two individuals who ran the network from the United Kingdom and the Netherlands, respectively. These individuals and their associates were penalized under Executive Order 14059. In addition, the three websites that OFAC cited as a network used to facilitate fentanyl trafficking—Real Arc, Smokey’s Chem Site, and Research Group Nederland—used different crypto addresses to conduct of their activities.
Elliptic’s research shows that these addresses have received more than $14 million in cryptoasset transfers to date.
As a result of these actions, crypto exchanges and financial institutions may not engage in any transactions involving crypto addresses controlled by sanctioned fentanyl traders. Since OFAC’s SDN list is not exhaustive, this means that compliance teams must be able to identify potential interactions not only with those crypto addresses that appear on the SDN list, but also with any other addresses that sanctioned parties may also control.
As OFAC ramps up its activity targeting human traffickers in light of the Biden administration’s focus on disrupting the fentanyl trade, compliance teams will need to ensure they can comprehensively detect activities belonging to these actors.
Using blockchain analytics to identify sanctioned traffickers
In order to achieve compliance with sanctions targeting fentanyl traffickers and their supply networks, it is critical to use block analysis solutions that provide robust visibility into the crypto addresses and transactions associated with sanctioned parties.
Elliptic Lens – our wallet verification solution – enables compliance teams to pre-verify customer transactions to ensure that all transactions involving wallets belonging to a sanctioned party have been blocked. In addition, our Elliptic Navigator transaction screening solution enables the successful detection of sanctions avoidance activity by identifying funds that have been moved through numerous intermediary addresses – or hops – before arriving at a crypto exchange or financial institution.
Our Investigator software can also enable compliance teams to visualize the flow of funds associated with sanctioned fentanyl traffickers, as shown in the image below.
The image above from Elliptic Investigator illustrates the flow of funds related to a crypto wallet belonging to Wang Hongfei, an OFAC-cleared individual involved in the procurement of fentanyl precursor chemicals. Hongfei’s transaction history includes interactions with dark web markets such as Abacus Market, as well as various cryptocurrency exchange services, as shown here.
Moreover, our solutions feature unique holistic screening capabilities that enable compliance teams to identify exposures to penalized parties even when funds have moved through different vehicles and blocks.
As we noted in our “Report on the state of inter-chain crime”criminal actors are increasingly relying on services in the decentralized finance (DeFi) space to launder funds. This includes the use of services such as decentralized exchanges (DEX) and cross-bridges to exchange cryptoassets in a money laundering typology known as “chain-hopping”, which aims to disguise the ultimate origin of funds.
Elliptic’s holistic screening capabilities ensure that compliance teams can still detect potential exposure in cases where sanctioned fentanyl traffickers attempt to hide their activity using these “chain hopping” techniques. To understand this concept, consider an example.
Suppose a buyer of a cryptoasset exchange receives a deposit of Tether stablecoin. If an exchange reviews only the Tether address used for the payment, it may determine that there are no sanctions risks because the Tether address does not appear on the OFAC SDN list.
However, applying holistic screening, the compliance team may arrive at a different result.
Using Elliptic’s holistic screening capabilities, the compliance team is able to identify that the Tether received was actually received on the DEX, where it was received in exchange for Ether. And the compliance team can see that the Ethereum address where those funds originated belongs to an OFAC-approved fentanyl trader. This ensures that the compliance team can block the relevant funds in accordance with their OFAC requirements.
Achieving successful compliance with sanctions
As the US tightens sanctions against fentanyl trafficking networks, compliance teams at cryptoasset exchanges and financial institutions must ensure they can detect and manage risks.
Contact us to learn more about how Elliptic’s solutions, including our holistic screening capabilities, can enable your organization to achieve successful sanctions compliance.
