You’ve heard the legend of Wyatt Earp, right? How he helped bring law and order to Tombstone? How he defeated all the bad guys at the O.K. Corral? Well, in today’s global economy, most people would agree that cryptocurrency is the Wild, Wild West – an untamed place of high risk, fierce competition and some shady characters. Like the gold-rush towns of yesteryear, cryptocurrency seems to be the latest place where the masses flock to strike it rich … or lose it all. But the landscape may be changing.
As more institutional investors dip their toes into the “crypto-waters,” we can expect to see “the regulators” not far behind. Recently, none other than the U.S. Treasury Secretary, Janet Yellen, called Bitcoin “highly speculative” and “extremely inefficient.” Earlier, Yellen also expressed concerns about cryptocurrencies being used to launder money and finance terrorism. This at a time when BTC trades near all-time highs.
Many anticipate that the SEC or FinCEN will place more regulations around cryptocurrency in the near future. Part of the problem with regulating it is even defining it. (Is it a commodity? Investment? Currency? All of the above?) In the meantime, there’s another government agency that already has jurisdiction over every blockchain payment that touches the United States. Enter the Treasury Department’s Office of Foreign Assets Control (OFAC).
How does OFAC regulate cryptocurrency payments?
Created in 1950, OFAC encompasses a range of laws and regulations designed to administer U.S. sanctions programs. These programs cover not just countries, but also activities, individuals, companies and even entire industry sectors. Notably, OFAC also presides over blocked assets and financial transactions. This historically obscure government agency has, in recent years, become one of the most-feared by leveling mammoth fines against small and large companies alike. In 2019 alone, OFAC was responsible for an eye-watering $1.2 billion in civil penalties.
Specifically when it comes to payments, OFAC is involved in all manner of property interests against sanctioned targets. These include:
- Money, checks, drafts, bank deposits, savings accounts
- Debts, indebtness and obligations
- Stocks, bonds, etc.
- Letters of credits, Power of Attorney
- Real estate or any real property
In addition, OFAC has broad reach to enforce U.S. sanctions. If you are on the following list, then you should be paying attention to OFAC rules:
- U.S. citizens, lawful permanent residents and others protested under U.S. immigration (asylees, refugees, etc.)
- Foreign persons physically located in the United States
- U.S. companies and their foreign branches / offices
- Foreign companies organized under the laws of the United States
- U.S.-controlled foreign subsidiaries
- Any U.S. person, wherever they are located in the world
It’s important to understand the large scope of those subject to these rules. For example, OFAC recently penalized a French bank for violations because of transactions that were indirectly processed through the U.S. financial system and denominated in U.S. dollars.
Are crypto firms and coins at risk for OFAC violations?
The short answer is: Yes. On this blog, we’ve already written about how BitPay settled with OFAC for alleged violations earlier this year. More recently, Coinbase – the largest U.S.-based cryptocurrency exchange – disclosed in its IPO filing that it has “submitted voluntary disclosures to OFAC, or responded to administrative subpoenas from OFAC.” Some of these disclosures are still being reviewed and could result in penalties.
OFAC has also levied penalties against BitGo (a digital currency services firm) and PayPal in recent years. The penalty amounts can reach bank-busting levels very fast. For example, OFAC found that the maximum monetary penalty for BitGo could have been more than $53 million. This penalty amount was for an alleged 183 currency violations totaling about $9,000. The company eventually settled for a fine of $98,830 – more than 10 times the value of the transactions in question.
What should cryptocurrency firms do to avoid OFAC penalties?
Due diligence and planning are key. Developing and implementing a comprehensive Sanctions Compliance Program is a “must” for these firms. However, simply writing a policy isn’t enough. In some of the cases mentioned here, the firms already had existing sanctions compliance programs and those systems failed to identify the potential violations. So, it’s more than just screening parties and writing policies.
Elements of a good Sanctions Compliance Program include:
- Strong management commitment and support
- Risk Assessment and Mitigation Controls
- Internal Controls to catch violations before they occur
- Testing and Auditing functions to ensure the program works
- Comprehensive restricted parties screening
- Adequate training for all personnel
Again, this is so much more than just “restricted parties screening software.” Many of the firms who found themselves in trouble already had screening software in place. It takes knowledgeable and trained professionals to ensure your company’s sanctions compliance approach is adequately protecting you from violations.
Cryptocurrency firms are placed at, perhaps, even a higher level of risk because of the speed of digital transactions and the layer of anonymity offered by some blockchain technologies.
One last thing about Wyatt Earp. In addition to being a famous lawman, he was also a notorious gambler – experiencing several booms and busts during his lifetime. Today’s crypto-boomers would do well to learn from recent OFAC enforcements and mitigate the risk of losing it all because of sloppy compliance practices.
Tom Reynolds is the Vice President of Operations for Export Solutions, a consultancy firm which specializes in helping companies with import/export compliance.