Cryptocurrency and Sanctions

On November 28, 2018, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) added two bitcoin addresses to its list of Specially Designated Nationals (SDNs) for the first time ever. These two addresses belonged to two Iranian-based cryptocurrency brokers who laundered 6,000 BTC over 40 exchanges for SamSam ransomware actors and others.

Since 2018, OFAC has sanctioned 67 additional addresses, including Bitcoin, Ethereum, Litecoin, Bitcoin SV, Bitcoin Gold, Dash, Zcash, and Monero addresses. However, CipherTrace analysts have discovered that the addresses that end up on OFAC’s SDN list are only a small handful of the actual addresses under the sanctioned person’s control or in their “wallet.” The use of blockchain analysis is necessary to uncover the additional addresses under the sanctioned person’s control but not listed by OFAC or other consolidated lists of persons.

If a financial institution is unaware of these additional addresses, it runs the risk of unknowingly transacting with sanctioned persons.

“Treasury will aggressively pursue Iran and other rogue regimes attempting to exploit digital currencies and weaknesses in cyber and AML/CFT safeguards to further their nefarious objectives.”

– US Treasury Under Secretary for Terrorism and Financial Intelligence,  Sigal Mandelker

With the addition of cryptocurrency to the US sanctions list, the Department of Treasury has clarified that the cryptocurrency addresses listed in the SDN list aren’t exhaustive and any additional addresses associated with designated addresses should also be blocked.

Additional, IP data should be incorporated into all sanctions compliance programs that deal in web-based activity, such as cryptocurrency transactions. The anonymity that internet-based transactions provide often increases sanctions risk exposure. Many internet-based financial service companies already have IP address blocking procedures; however, these procedures are usually limited to uncovering customer IP data upon login. While this approach can be effective initially, it does not fully address a web-based financial institution’s compliance risks.

Blockchain technology allows financial institutions to gather additional IP data on counterparties that is impossible to see in traditional web-based transactions. This data can help inform compliance teams of whether a counterparty transaction is to or from a sanctioned country and prevent potential violations.

Blockchain IP Data Enhances Sanctions Compliance

CipherTrace has already collect over 72,000 unique Iranian IP addresses. Many of these addresses have already transacted with large exchanges domiciled in regions that could constitute a sanctions violation—such as in the US.

Unlike traditional financial institutions, Virtual Asset Service Providers (VASPs) have an increased risk of inadvertently transacting with sanctioned jurisdictions simply because of the pseudonymous, cross-border nature and global reach of cryptocurrency transactions. VASPs should use IP data derived though blockchain analytics to enhance their compliance programs and reduce sanctions risk exposure.

Transactions to and from addresses with an IP associated with a sanctioned country should be a red flag for any VASPWhat is a Virtual Asset Service Provider (VASP)? A Virtual A… More. While IP blockchain data alone cannot guarantee that an address belongs to actors in a given region, it is enough to demonstrate significant interest from a person in the sanctioned jurisdiction and should trigger enhanced due diligence for the account holder transacting with the potentially sanctioned address.

Financial institutions should perform additional inquiries and investigations where appropriate to ensure that their assessments are in line with their internal risk profile. IP addresses can also be used by institutions to search for additional bitcoin addressees associated with a customer or counterparty IP. These additional insights can be beneficial for an institution’s risk and threat assessments and suspicious transaction reporting requirements.

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Source: https://ciphertrace.com/sanctions-research-more-than-72000-unique-iranian-ip-addresses-linked-to-more-than-4-5-million-unique-bitcoin-addresses/