Regulatory bodies to invoke sanction screening and transaction monitoring for crypto exchange providers in response to the Russian invasion of Ukraine
Over the past few weeks, the US and the EU announced sectorial and designated sanctions against various sectors, entities and individuals in Russia in response to the Invasion of Ukraine. Compared to the previous sanction regimes, this is one of the first times that regulators and authorities made clear statements and guidance to make sure “crypto and digital assets” are in the scope of the newly imposed sanctions against Russia.
On March 15, 2022, the European Council published its fourth package of sanctions against Russia. A summary of the new restrictions is highlighted below:
Order of asset freezes for 37 individuals and six entities known to be associated with Russian military and political parties.
The asset freeze order includes all funds or assets that are owned or controlled by the Sanctioned Persons. In other words, it is prohibited for EU persons to deal directly or indirectly with such funds or assets. It is also prohibited for EU persons to provide funds or assets available directly or indirectly, to or for the benefit of Sanctioned Persons. Under EU law, these restrictions are also applicable to entities that are owned more than 50%, or controlled by, a Sanctioned Person.
Moreover, the EU list of sanctioned persons and entities has been further extended to include more oligarchs and business elites linked to the Kremlin and companies active in military and defense areas.
Following the announcements on the new sanctions against Russia, EU issued its decision on excluding some Russian banks from the SWIFT global payment system which would have an impact on isolating the Russian financial system to remain connected with the global financial system.
On March 11, 2022, President Biden issued the Executive Order Prohibiting Certain Imports, Exports, and New Investment with Respect to Continued Russian Federation Aggression. The Executive Order prohibits:
On March 15, 2022, the US added several Russian and Belarusian nationals to the Specially Designated Nationals and Blocked Persons List (“SDN List”).
Furthermore, OFAC clarified that the prohibitions of Executive Order 14024 and the newly imposed sanctions are also applicable to virtual currencies: “US persons, including virtual currency exchanges, virtual wallet hosts, and other service providers, such as those that provide nested services for foreign exchanges, are generally prohibited from engaging in or facilitating prohibited transactions, including virtual currency transactions in which blocked persons have an interest.”
Government authorities in the US and the EU have reiterated that all financial services firms, including the crypto asset sector are expected to play their part in ensuring that they comply with sanctions regulations.
On March 7, 2022, the United States Financial Crimes Enforcement Network (FinCEN), issued a FinCEN Alert, advising all financial institutions to be vigilant against bypassing Russian sanctions using cryptocurrencies and other virtual currencies.
On March 9, 2022, EU announced the measures on SWIFT prohibitions along which it clarified that crypto assets fall under the scope of “transferable securities” and further expand the existing financial restrictions. As a result, any prohibitions with respect to Russian sanctions involving transferable securities would be applicable to crypto assets as well.
It is less likely and statistically difficult to imagine the Russian economy and the country itself at a macro level attempting to bypass sanctions by the use of virtual currencies.
However, it could be potentially feasible in practice that sanctioned entities, blacklisted individuals, and designated oligarchs use the advantage of cryptocurrencies and assets to their own benefit but at a micro-level.
Nevertheless, historically major concerns were given to financial institutions and banks which could have potentially been used as the getaways for sanctioned individuals and entities to transfer their funds and assets via traditional banking routes and fiat currencies. That led to the rise of strict regulatory requirements to come into place addressing financial institutions and banks to have proper sanction screening and AML systems in place in order to avoid any misuse of the financial system in favor of bad actors.
With the fast developments in the crypto industry and the trust of the public society to use crypto as one of the means to deal with day to day financial operations, regulatory bodies are now addressing crypto exchange providers to set up if not yet already a robust KYC, ongoing sanction screening and transaction monitoring in place, however, many of the known large crypto service providers and exchanges have already taken steps to robust their AML and sanctions controls.
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