In what is referred to as a “record-high” penalty, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) and Financial Crimes Enforcement Network (FinCEN) imposed a combined settlement of $53 million on Bittrex Inc., a U.S. virtual currency exchange that is based in Washington.

Collaboration packs a powerful punch

As the largest virtual currency enforcement action from OFAC to date, the $24 million penalty resulted from deficiencies in sanctions compliance procedures and failing to prevent individuals from the Crimea region of Ukraine, Cuba, Iran, Sudan, and Syria from using the firm’s platform to engage in approximately $263,451,600.13 worth of virtual currency-related transactions between March 2014 and December 2017.

According to a recent press release, issued by the U.S. Department of the Treasury, the applicable sanctions programme generally restricts U.S. individuals from engaging in transactions with the mentioned jurisdictions and Bittrex should have been aware of these transactions based on internet protocol (IP) address information and physical address information that had to be obtained from clients during the onboarding stage. However, the press release indicated that during the mentioned period, Bittrex was not screening clients for terms associated with sanctioned jurisdictions.

The $29 million fine which was imposed by FinCEN on Bittrex, related to the firm’s violation of the Bank Secrecy Act’s (BSA’s) anti-money laundering (AML) program and Suspicious Activity Report (SAR) requirements. According to the press release, Bittrex failed to maintain an effective AML programme from February 2014 to December 2018 due to inadequate transaction monitoring on the firm’s platform and not addressing the risks that were linked to the products and services on offer, including anonymity-enhanced cryptocurrencies. This resulted in significant exposure to illicit transactions.  Furthermore, Bittrex did not file any SARs between February 2014 and May 2017, not even for a large number of transactions involving sanctioned jurisdictions.

A stern warning

The press release emphasised the fact that the combined actions from OFAC and FinCEN represented the first parallel enforcement in the crypto asset space and should serve as a stern warning to the crypto asset industry to ensure that appropriate risk-based sanctions compliance controls are embedded effectively in firms’ financial crime frameworks.

Failure to comply with this will result in violations of multiple sanctions programmes and can lead to hefty fines and long-term reputational damage. This is echoed in the comments made by OFAC director, Andrea Gacki, in her statement that “Virtual currency exchanges operating worldwide should understand both who—and where—their customers are. OFAC will continue to hold accountable firms, in the virtual currency industry and elsewhere, whose failure to implement appropriate controls leads to sanctions violations”.

Intensified scrutiny from regulators  

Once a crypto asset firm has obtained full registration to operate in a country, is when it faces the real challenges i.e., to develop, maintain and operate a robust financial crime framework and demonstrate that effective controls are in place. This can be a very costly and challenging process that is often overlooked and underestimated. Additionally, it is likely that the regulators will intensify scrutiny to ensure that all newly registered crypto asset firms are aligned with AML regulations and operate with appropriate controls to fully protect their bottom line and their clients.

To navigate through the various regulatory requirements from different countries, to register a crypto asset firm, seems to be an impossible task, especially when a firm has global reach.

Having vast experience, the Lysis Group believes that a successful registration requires careful planning and preparation so that the documentation submitted for review is fit for purpose and responds correctly to the test questions. In addition, the application must be prepared to provide the regulator with clarity on the business purpose and activities and demonstrate a good understanding of the risks and effectiveness of controls.

To date, we have assisted several crypto asset firms with the required registration processes in various countries including assisting one of the first crypto asset firms to be registered in the UK. As crypto registration experts, we can assist your firm in achieving full registration in a cost-effective manner within various jurisdictions, if needed, and give you the peace of mind in knowing that your firm can remain compliant and safely operate in a regulated market.

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