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Crypto Sanctions: Six Compliance Tips for Operators and Exchanges

“These six recommendations allow crypto companies to build robust compliance programs that mitigate the risk of sanctions violations”

With the ongoing invasion of Ukraine by Russia and the extensive sanctions that are imposed as a result, cryptocurrency-specific sanctions designations are on the rise. Also, crimes associated with cryptocurrencies hit a new all-time high in 2021, with illicit actions that were around 14.000 million dollars worldwide, according to the Crypto Crime Report 2021, produced by Chainalysis; Although such figures may seem significant, it is important to mention that they only represent 0,15% of the total transactions with digital assets.

Meanwhile, the European Union (EU) recently reached a provisional agreement on an innovative set of rules for the crypto ecosystem. The regulation, known as Markets in Crypto-Assets (MiCA), will come into force in 2023 and will become the world's first regulatory framework for digital assets. However, the original spirit of the development of bitcoin was to be able to count on transparent and traceable digital assets for the development of new opportunities, without depending on the regulation of different governments and the complexity of cross-border harmonization. Thus, regardless of the regulations that are under analysis and implementation in different latitudes, it is necessary to try to generate a healthy ecosystem that encourages and collaborates in its greater adoption throughout the world.

They are listed below six tips for the ones exchanges and the different operators strengthen their compliance strategies.

1. Collect customer information (KYC – know your customer) and compare it with existing sanction lists

Any cryptocurrency based business or digital assets should explore collecting KYC information from new users upon registration, recording customer names, addresses, phone numbers, emails, and related documentation. As part of the KYC process, companies must check this information against sanctions lists to refrain from doing business with any sanctioned individual, entity or country. Because each country maintains its own sanctions list, the easiest way to do an assessment is to use a service like Thomson Reuters or Refinitiv, which consolidates and updates sanctions lists daily.

Any cryptocurrency based business or digital assets should explore collecting KYC information from new users upon registration, recording customer names, addresses, phone numbers, emails, and related documentation. As part of the KYC process, companies must check this information against sanctions lists to refrain from doing business with any sanctioned individual, entity or country. Because each country maintains its own sanctions list, the easiest way to do an assessment is to use a service like Thomson Reuters or Refinitiv, which consolidates and updates sanctions lists daily.

2. Block IP addresses based on sanctioned jurisdictions

According to the guide of Office of Foreign Assets Control (OFAC, for its acronym in English) of the United States, the exchanges must use IP address detection to prevent users in sanctioned jurisdictions from accessing their products and services. For an even stronger compliance approach, exchanges they can filter IP addresses against addresses that are known to be associated with VPN services to catch users trying to mask their true location.

3. Continuously monitor transactions

The exchanges they can examine the transfers to ensure that they do not include cryptocurrency addresses identified as sanctioned parties or countries. The monitoring alerts of transactions are crucial so that compliance teams can take immediate action if one of their users attempts a transaction with a sanctioned entity or country. Transaction monitoring should be continuous, which means that old transactions are re-examined in caso that new information or sanction designations have occurred since the initial transaction.

4. Review the due diligence de partner companies

Not only individuals and jurisdictions are sanctioned, sometimes, service providers are also subject to sanctions. Suex and Chatex, two exchanges of cryptocurrencies based in Russia, fall into this category, for example. The exchanges they must identify their counterpart companies to ensure that these organizations are also not subject to sanctions.

5. Detect violations of travel rules

The exchanges they can use the information from the travel rules to further filter the transfers. The exchanges can use travel rule integrations to set parameters based on risk level that automatically restrict exchanges, incoming or outgoing, with service providers for virtual assets (VASP) that are sanctioned or do not meet the criteria for due diligence.

6. Report when interactions with designated parties are found

If a user's activity is indicative of sanction violations, that exchanges based in the United States deben assess whether they are legally bound to present a Suspicious Activity Report (SAR) to the Financial Crime Control Network (FinCEN) and necessary regulatory reports to OFAC. The exchanges based elsewhere must follow the reporting requirements defined by your jurisdiction. If sanctioned activity is identified after this period, exchanges they must assess whether voluntary self-disclosure is appropriate.

These six recommendations allow crypto companies build robust compliance programs that mitigate the risk of sanctions violations.

The overall context of crypto ecosystems in the world is changing, so the companies and companies that develop in this sector must be prepared for these changes. A robust and functional compliance strategy is essential for the satisfactory development of the companies, and for the achievement of their business objectives.

John Montaner

account manager, EMEA, Chainalysis.

Article originally published in the Blog Fide in the withfideinitial

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