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U.S. Government to Include Digital Currency Addresses on List of Sanctioned Parties

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What’s changed

The U.S. Government is considering adding digital currency addresses affiliated with individuals and entities identified to the List of Specially Designated Nationals and Blocked Persons (“SDN List”). This would put U.S. persons on notice that doing business with those digital addresses may be prohibited, increasing compliance considerations for businesses delving into the world of virtual currency.

What it means for you

On March 19, 2018, the U.S. Office of Foreign Assets Control (“OFAC”) updated its FAQs to include a section on virtual currency. In the new section, OFAC provides guidance about the various money laundering and terrorist financing risks associated with virtual currency. In particular, OFAC states that it will use sanctions to “fight against criminal and other malicious actors abusing digital currencies and emerging payment systems.” One of the strategies under consideration is the inclusion of digital currency addresses associated with blocked persons to OFAC’s SDN List.

OFAC implements and enforces U.S. sanctions against parties on the SDN List and sanctioned countries (e.g., Cuba, Iran, North Korea, Russia, Syria, Venezuela). All U.S. persons must comply with OFAC regulations, including prohibitions on dealing with parties on the SDN List. U.S. persons must also block the property (including goods, contracts, and funds of any form) of sanctioned persons and make timely reports to OFAC. Failure to do so may result in significant civil and criminal penalties. The maximum civil penalty per violation of OFAC’s regulations amounts to the greater of USD 295,141 or twice the amount of the underlying transaction.

Once OFAC starts adding digital currency addresses to the SDN List, parties will be on notice that those addresses are affiliated with sanctioned persons, and payments through such means may result in a violation of OFAC regulations. OFAC’s plans represent another step in the march towards fully regulating virtual currency operations. Little by little, virtual currencies are being brought under existing regulatory schemes, or new schemes (like the New York BitLicense) are being created to cover perceived gaps. OFAC’s plans to add digital currency addresses to the SDN List will mean greater risk for companies and a matching increase in compliance cost.

Actions to take

Companies dealing in virtual currency may already be regulated under U.S. federal and state anti-money laundering (“AML”) regulations. If your company is already AML compliant, then it may be an easy lift to adjust to this new development. Such companies should:

  • Check whether their AML compliance program covers OFAC issues.
  • Ensure that their customer identification/verification and due diligence processes consider digital profiles and virtual currency issues.
  • Ensure that your transaction monitoring systems consider the unique issues presented by dealing in virtual currency.

Confirm whether relevant employees are trained on OFAC regulations. For companies dealing in virtual currency, but are unaware as to their AML or OFAC regulatory obligations, we suggest conducting a risk assessment at your next opportunity.

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Author

Matthew Kluchenek heads the Firm's Global Derivatives and Hedge Fund practice. He regularly advises clients on a broad array of regulatory, transactional and enforcement matters involving the financial markets and financial products, drawing on deep business knowledge to deliver practical advice and explain complex concepts. Mr. Kluchenek serves as a subject matter expert in printed media and industry events, has published numerous articles and has spoken at many industry events. He is an adjunct professor at a local law school, where he teaches a course on derivatives law. Prior to joining Baker McKenzie, Mr. Kluchenek served as the general counsel of a large proprietary trading firm and as an associate general counsel of a major futures exchange, as well as other positions. In addition to his law practice, Mr. Kluchenek is the founder and owner of Mind’s Eye Winery, LLC, a producer of premium Napa Valley wines.

Author

Samuel G. Kramer’s practice focuses on multi-jurisdictional outsourcing, complex technology licensing, commercial contracting, and supply chain agreements and integration. He is frequently involved in outsourcing transactions and large scale IT services projects. Mr. Kramer also focuses on emerging technology services, including mobile virtual network operator (MVNO) transactions. He is the North American coordinator of the Firm’s MVNO practice.

Author

Nicholas Coward is a partner in Baker McKenzie´s Washington office and serves as chair the Firm’s Global Trade and Commerce Practice Group. He has also chaired the North American International Commercial Practice Group. He has over 30 years experience practicing in the areas of US export controls, trade sanctions and the Foreign Corrupt Practices Act. Mr. Coward served on the Washington Office management committee from 1990 to 2002 including two terms as managing partner and served on the Firm’s Executive Committee from 2002 to 2007.

Author

Ryan Fayhee is a partner in Baker McKenzie´s Washington, DC. Mr. Fayhee previously was with the United States Department of Justice for 11 years, where he was a leading national security prosecutor in the areas of economic espionage, export controls, sanctions enforcement and cybercrime. Through a number of investigations and prosecutions, Mr. Fayhee received special recognition from the Attorney General for devising a model approach to the identification and disruption of foreign military supply and proliferation networks. He also led an investigation and prosecution of a multinational company that resulted in the largest criminal fine to date for sanctions violations. Mr. Fayhee later served a term as the National Export Control Coordinator, the principal Department of Justice attorney overseeing export control and embargo investigations and prosecutions nationally. He was also a Trial Attorney with the Civil Frauds Section and an Assistant United States Attorney in the Northern District of Illinois, assigned most recently to the National Security and Cybercrime Section.

Author

Alexandre Lamy joined Baker McKenzie in 2009 and currently works in the Firm's International Trade Practice Group. He assists clients with sanctions and export controls (Export Administration Regulations (EAR); International Traffic in Arms Regulations (ITAR)) and he advises clients on corporate compliance matters. Since August 2011, Alex has served on the steering group for the ABA Section of International Law’s Export Controls & Economic Sanctions Committee and is currently a Vice Chair of the Committee. He has organized several events regarding recent developments in US trade sanctions and export controls for the Committee.

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