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On October 15, 2021, the US Department of the Treasury's Office of Foreign Assets Control (OFAC) published a compliance guide for the virtual currency industry and updated the answers to frequently asked questions (FAQs) 559 and 646. OFAC acknowledged that it released the guidance because virtual currencies are playing an increasingly prominent role in the global economy and in payments.
The publication consolidates guidance that OFAC previously provided in answers to FAQs, enforcement actions, and other statements. Most of the guide is dedicated to the general regulatory framework for sanctions, which applies to all US financial institutions. Accordingly, in this alert, we outline the framework and provide more detail regarding the material specific to virtual currency.
OFAC implements and administers economic sanctions under applicable US laws.
US economic sanctions cover all “US persons,” which includes any US citizen, permanent resident alien, entity organized under the laws of the United States, or any person in the United States. In the case of some OFAC sanctions programs, the prohibitions also apply to non-US entities that are owned or controlled by US persons. OFAC also maintains secondary sanctions to deter non-US persons from engaging in a range of activities, even if the activities do not involve any US elements.
US economic sanctions generally fall into four categories:
Generally, OFAC imposes civil penalties for sanctions violations using a “strict liability” legal standard (i.e., without regard for whether a person has knowledge or reason to know of the violation).
OFAC’s virtual currency guidance reinforces its long-held position that all US persons have the same sanctions compliance obligations, regardless of whether they engage in transactions or services that involve traditional fiat currency or virtual/digital currency. This view, however, is problematic for the virtual currency industry because the almost instantaneous transfer does not permit the parties involved to reject (refuse to process) transactions. Most members of the industry only can block the virtual currency following the transfer into its possession.
Definitions. To fully understand their compliance obligations, members of the virtual currency industry should be aware of how OFAC defines applicable terms in the guidance:
In its updated answer to FAQ 559, OFAC provides the definitions for the terms digital currency, virtual currency, digital currency wallet, and digital currency address.
Blocking virtual currency. OFAC’s guidance and its answer to FAQ 646 explain the key steps in blocking virtual currency:
Best practices in developing and implementing a sanctions compliance program. In the guidance, OFAC provides an overview of the five major parts of a sanctions compliance program: management commitment, risk assessment, internal controls, testing and auditing, and training. The best practices specific to virtual currency, detailed below, fall primarily into the area of internal controls.
Know your customer procedures
Sanctions screening
Technology tools
Use a geolocation tool to:
Use transaction monitoring and investigation software to:
Guidehouse can help members of the virtual currency industry and more traditional financial institutions assess their compliance programs to navigate regulatory risks, including developing and implementing updates to operations, policies, procedures, controls, and technology systems.
Our areas of relevant expertise include the following:
Contact Guidehouse’s experts today for an assessment of your sanctions and AML compliance programs or training on cryptocurrency-related compliance tools, including blockchain tracing and analytics. We are well-equipped to make an individualized assessment of your organization’s unique circumstances and offer innovative advice and solutions for responding to the heightened regulatory requirements applicable to the virtual currency industry.
Guidehouse is a global consultancy providing advisory, digital, and managed services to the commercial and public sectors. Purpose-built to serve the national security, financial services, healthcare, energy, and infrastructure industries, the firm collaborates with leaders to outwit complexity and achieve transformational changes that meaningfully shape the future.