The FCA has stressed recently that it expects the cryptoasset sector to play its part in ensuring that Russian sanctions are complied with, and highlighted that the financial sanctions regulations do not differentiate between cryptoassets and other forms of assets.
The use of cryptoassets to breach or circumvent economic sanctions is a criminal offence under the Money Laundering Regulations 2017 and regulations made under the Sanctions and Anti-Money Laundering Act 2018; most notably the Russia (Sanctions) (EU Exit) Regulations 2019, as amended.
In addition to steps taken to identify customers and monitor transactions under the Money Laundering Regulations 2017, the financial sector, including the cryptoasset sector, will also need to implement additional sanctions specific controls as appropriate.
The FCA identified a number of steps to consider, including:
- updating business-wide and customer risk assessments to account for changes in the nature and type of sanctions measures;
- ensuring that customer onboarding and due diligence processes identify customers who make use of corporate vehicles to obscure ownership or source of funds;
- ensuring that customers and their transactions are screened against relevant updated sanctions lists and that effective re-screening is in place to identify activity that may indicate sanctions breaches;
- identifying activity that is not in line with the customer profile or is otherwise suspicious and ensuring that these are reported quickly to the nominated officer for timely consideration;
- where blockchain analytics solutions are deployed, ensuring that compliance teams understand how these capabilities can be best used to identify transactions linked to higher risk wallet addresses; and
- engage with public-private partnerships and private-private partnerships to gather insights on the latest typologies and additional controls that might be relevant and share their own best practice examples.
In addition to taking these steps, the FCA reiterated that firms should also monitor red flags, which can include (but and certainly not limited to):
- a customer who is resident in or conducting transactions to or from a jurisdiction which is subject to sanctions, or which is on the UK’s High Risk Third Countries list for anti-money laundering and counter-terrorist financing purposes, or any jurisdiction you have identified as posing an increased risk of illicit financial activity;
- transactions to or from a wallet address associated with a sanctioned entity, or a wallet address otherwise deemed to be high-risk, based on its transaction history or that of associated addresses, or other factors;
- transactions involving a cryptoasset exchange or custodian wallet provider known to have poor customer due diligence procedures or which is otherwise deemed high-risk; and
- the use of tools designed to obfuscate the location of the customer (such as an IP address associated with a virtual private network or proxy) or the source of cryptoassets (such as mixers and tumblers).
Compliance with the fast-developing sanctions regime is particularly challenging for cryptoasset firms.