On October 11, 2018, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) released an advisory (the Advisory) intended to help money services businesses (MSBs) and foreign financial institutions better understand how U.S. sanctions on Iran affect their compliance obligations under the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) rules and under the U.S.-Iran sanctions enforced by the U.S. Department of the Treasury’s Office of Foreign Asset Controls (OFAC).[1]

While Iran has historically relied upon, among other things, precious metals, such as gold, to evade sanctions and to market Iranian goods abroad, FinCEN views virtual currency as another commodity that Iranians may rely on to avoid sanctions.  Since 2013, Iranians have participated in more than $3.8 million in bitcoin-denominated transactions annually.  As a result, companies subject to U.S. regulation that participate in the virtual currency markets should pay careful attention to the Advisory.

To confirm the importance of the Advisory, OFAC separately issued the Advisory to all persons who subscribe to OFAC updates and listed the Advisory on its website.  This, together with the discussion of OFAC obligations within the Advisory, demonstrates that FinCEN and OFAC may cooperate on enforcement of these obligations.  As a reminder, U.S. sanctions prohibit U.S. persons and U.S.-owned or -controlled foreign entities from entering into transactions involving Iran, the Government of Iran, or Iranian financial institutions.[2]

Use of Virtual Currency and Other Means to Evade Sanctions

Iranians can access virtual currency through three types of platforms: (1) Iran-based virtual currency exchanges; (2) non-Iran-based virtual currency exchanges; and (3) peer-to-peer exchanges (e.g., decentralized exchanges and “meetup” platforms).  Iran has previously used third-country fiat currency exchange houses and trading companies as money transmitters to process fund transfers through the United States to third-country beneficiaries in evasion of sanctions.  Similarly, Iranians may move funds out of the country by converting fiat currency to virtual currency using virtual currency exchange platforms and peer-to-peer exchange platforms.

The Advisory includes a list of “red flags” to assist MSBs and foreign financial institutions in identifying suspicious activity.  These include:

  • Use of forged documents;
  • Customer transactions that move through multiple exchanges;
  • Account holders that receive deposits from multiple persons;
  • Transactions related to precious metals, such as gold, that are linked to Iran or that involve unusually high volumes;
  • Customer logins from Iranian Internet Protocol (IP) addresses or accounts with an Iranian email address;
  • Customer or correspondent payments to or from virtual currency exchanges that appear to be operating in Iran; and
  • Unexplained transfers into a customer account from multiple individual customers combined with transfers to or from virtual currency exchanges.

MSBs should consider incorporating these suspicious activities and appropriate response protocols into their risk management AML/CFT , OFAC and Know Your Customer policies and procedures.

FinCEN Compliance Recommendations

FinCEN recommends that MSBs actively monitor transaction records to detect suspicious activity.  Specifically, the Advisory encourages MSBs to use technology to monitor open blockchain ledgers for activity that originates or terminates in Iran and investigate transactions to or from peer-to-peer exchange platforms.  Such fund flows may involve wire transactions from multiple accounts or locations together with transfers to or from virtual currency exchange platforms.

MSBs and non-U.S. based virtual currency businesses doing substantial business in the United States must comply with relevant OFAC sanctions and AML/CFT obligations.  The Advisory notes that these obligations may include screening against OFAC’s List of Specially Designated Nationals and Blocked Persons and complying with other OFAC-administered sanctions programs, including import and export restrictions.

FinCEN advises that institutions engaged in virtual currency business review OFAC’s March 2018 Frequently Asked Questions on sanctions issues related to virtual currency.[3]  OFAC views virtual and real currency as equivalent for sanctions compliance purposes.  Therefore, persons subject to OFAC jurisdiction may not engage in transactions in real or virtual currency prohibited by OFAC sanctions.

Conclusion

Violation of OFAC sanctions is a strict liability offense.  Accordingly, virtual currency businesses should consider revisiting and strengthening their U.S. sanctions compliance policies and procedures in light of the Advisory to mitigate the risk of a violation.  The Advisory demonstrates that FinCEN, which regulates a broad swath of virtual currency businesses as MSBs, is cognizant of the illicit use of virtual currency by Iranian actors and may coordinate with OFAC to enforce U.S. sanctions.


Endnotes:
[1] Advisory on the Iranian Regime’s Illicit and Malign Activities and Attempts to Exploit the Financial System, FinCEN Advisory No. FIN-2018-A006 (Oct. 11, 2018), https://www.fincen.gov/sites/default/files/advisory/2018-10-11/Iran%20Advisory%20FINAL%20508.pdf.
[2] Sanctions Update: Rewind Your Iran Compliance Policy to January 2016 (May 9, 2018), https://www.perkinscoie.com/en/news-insights/sanctions-update-rewind-your-iran-compliance-policy-to-january.html.
[3] OFAC FAQs: Sanctions Compliance, U.S. Dep’t of the Treas., https://www.treasury.gov/resource-center/faqs/Sanctions/Pages/faq_compliance.aspx (last accessed Oct. 13, 2018).