After months of anticipation, a federal judge has finally ruled in the closely watched case of Joseph Van Loon, et al. v. Department of Treasury, et al. This important case addressed challenges to the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) decision to impose sanctions on Tornado Cash as a Specially Designated National and Blocked Person (SDN). The judge granted summary judgement in favor of OFAC, finding it had sufficient legal authority to designate Tornado Cash, and denied summary judgement on the plaintiffs’ claims. Shortly after that ruling, OFAC announced the SDN designation of Roman Semenov, one of three alleged co-founders of Tornado Cash, and the Department of Justice (DOJ) charged Semenov and Roman Storm, another Tornado Cash founder, with multiple alleged criminal violations related to anti-money laundering (AML) and economic sanctions laws.
Risk Assessment Offers Treasury’s Most Extensive Comments to Date on DeFi Regulation
The Department of the Treasury’s recently issued Illicit Finance Risk Assessment of Decentralized Finance is principally intended to provide insight on how illicit actors are abusing decentralized finance (DeFi) services, as well as anti-money laundering (AML) and countering the financing of terrorism (CFT) vulnerabilities unique to DeFi. However, the report also contains critical insight on
In Unprecedented Action FinCEN Identifies Virtual Currency Exchange as Primary Money Laundering Concern
On January 18, 2023, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an order identifying the virtual currency exchange Bitzlato Limited (Bitzlato) as a “primary money laundering concern” in connection with Russian illicit finance. The order, which is the first of its kind, was issued pursuant to Section 9714(a) of the
Proposed Rule Lays Out Who Will Have Access to New Corporate Beneficial Ownership Information
On December 16, FinCEN issued a notice of proposed rulemaking (NPRM) entitled “Beneficial Ownership Information Access and Safeguards, and Use of FinCEN Identifiers for Entities.” The NPRM is intended to implement the Corporate Transparency Act (CTA) and, in particular, to govern which entities may access corporate beneficial ownership information (BOI) that certain entities will soon
OFAC and FinCEN Announce Enforcement Actions Against Bittrex
On October 11, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) announced enforcement actions against Bittrex, Inc. (Bittrex), a privately-owned digital asset trading platform based in Bellevue, Washington, for apparent violations of anti-money laundering (AML) laws and of multiple sanctions programs. A settlement of over $24 million was announced by OFAC and a $29 million fine was announced by FinCEN. FinCEN will credit payment of the OFAC settlement amount toward Bittrex’s potential liability with FinCEN, meaning Bittrex will pay just over $29 million in total. Joint enforcement action between OFAC and FinCEN is uncommon—the settlements mark the first instance of parallel enforcement actions by OFAC and FinCEN in the digital asset sector.
The parallel settlements provide insight into certain sanctions and AML risks in the digital asset sector and illustrate how OFAC and FinCEN rules intersect and overlap in part: for example, that OFAC violations can trigger suspicious activity report filing obligations.
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DFS’s First Enforcement Action Against a Blockchain Company: Lessons Learned
On August 1, Robinhood Crypto, LLC (RHC) entered a consent order with the New York State Department of Financial Services (DFS) requiring RHC to pay a $30 million fine for violating (1) New York’s virtual currency regulatory regime known as the BitLicense, (2) a Supervisory Agreement entered with DFS as a condition of its BitLicense, (3) anti-money laundering (AML) requirements applicable to money transmitters, and (4) other requirements related to transaction monitoring, filtering, and cybersecurity. The consent order, which is DFS’s first enforcement action under the BitLicense regime or against a digital currency business, offers several important takeaways for blockchain companies operating or seeking to operate in the state, including (1) the importance of scaling up compliance processes commensurate with business growth, (2) the risks of relying on compliance programs of affiliated entities, (3) the importance of well-developed reporting lines in compliance programs, and (4) the consequences of filing “improper” certifications under DFS’s transaction monitoring and cybersecurity rules.
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OFAC Designates Tornado Cash in First Action Against a Decentralized Platform
On August 8, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced the imposition of sanctions on the decentralized digital asset mixer Tornado Cash. The action marks the first time OFAC has targeted an on-chain decentralized protocol. To date, OFAC has not issued any guidance specific to decentralized finance (DeFi) as part of its broader sanctions guidance for the “virtual currency” industry, but the Tornado Cash action lays down an important marker and makes clear that OFAC will target projects or protocols engaged in illicit activity regardless of their centralized or decentralized status. (Our prior blog post on OFAC’s general virtual currency guidance is available here).
According to OFAC, Tornado Cash was “used to launder more than $7 billion worth of virtual currency since its creation in 2019,” including over $455 million stolen by the Lazarus Group, a North Korean-backed hacking group that was previously targeted by OFAC sanctions. In announcing the action, Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian Nelson explained, “Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks.”
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What US Financial Institutions Need to Know about FinCEN’s Russian Sanctions Evasion and Ransomware Guidance
On March 7, 2022, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury published guidance (Guidance) for US financial institutions warning about: (1) efforts of foreign actors to evade expanding US economic sanctions and trade restrictions related to the Russian Federation and Belarus and (2) increased risk of malicious cyber-attacks and related ransomware campaigns, following the invasion of and continued military action in Ukraine. The Guidance provides instructive red flags and related advice for all US financial institutions to evaluate, and provides information of particular relevance for Money Services Businesses (MSBs) and other FinCEN-regulated institutions undertaking transactions in what the agency calls “convertible virtual currency” (CVC).
Most notably, FinCEN strongly encourages US financial institutions that have information about CVC flows, including exchangers or administrators of CVC to: (1) be mindful of efforts to evade expanded US sanctions and export controls related to Russia and Belarus, summarized by Steptoe here; (2) submit Suspicious Activity Reports (SARs) as soon as possible regarding such conduct; (3) undertake appropriate risk-based due diligence of customers, and where required, enhanced due diligence; (4) voluntarily share information with other financial institutions consistent with Section 314(b) of the USA PATRIOT Act; and (5) consider using tools to identify assets that must be blocked or frozen under applicable sanctions.
FDIC and OCC Join President’s Working Group on Financial Markets in Calling for New Stablecoin Legislation, Oversight
On November 1, 2021, the President’s Working Group on Financial Markets (PWG), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) issued a joint report that, among other things, calls on Congress to adopt legislation to enable federal oversight of stablecoin issuers, custodial wallet providers that hold stablecoins,
OFAC Issues Compliance Guidance for the Virtual Currency Industry
On October 15, 2021, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued anticipated Sanctions Compliance Guidance for the Virtual Currency Industry and updated two related Frequently Asked Questions (FAQs 559 and 646). OFAC has published industry-specific guidance for only a handful of other industries in the past two decades; the new guidance demonstrates the agency’s increasing focus on the virtual currency (VC) sector. It also clarifies US sanctions compliance practices in ways that could lay a foundation for future OFAC enforcement actions.
OFAC’s guidance was announced as part of broader US government enforcement priorities to combat ransomware, money laundering, and other financial crimes in the virtual currency sector, as noted in the Department of Justice’s recent announcement of a National Cryptocurrency Enforcement Team. The OFAC guidance was published in tandem with a Financial Crimes Enforcement Network (FinCEN) analysis of ransomware trends in suspicious activity reporting, but the guidance is directed at the VC industry in general and is not specific to ransomware. A ransomware actor who demands VC may or may not be a target of OFAC sanctions, and sanctioned actors may engage in a wide variety of VC transactions that do not involve ransomware. The recommended compliance practices in OFAC’s new guidance are focused on the full range of sanctions risks that arise from virtual currencies.
The guidance maintains OFAC’s longstanding recommendation for risk-based compliance programs, and builds on the May 2019 Framework for OFAC Compliance Commitments. The guidance also provides notable examples of compliance controls that are tailored to the unique risk and control environments of the VC sector.
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