Seven Years of Crypto Enforcement Actions Preceded Designation of Russian Crypto Mine | Kharon The Kharon Brief

Seven Years of Crypto Enforcement Actions Preceded Designation of Russian Crypto Mine

By Robert Kim

May 26, 2022

The U.S. Treasury Department’s designation of the Russian crypto mining company Bitriver in April, the first U.S. sanctions action targeting a crypto mining operation, is part of a broader U.S. campaign against illicit actors in the crypto space that is now contributing to the Russia sanctions regime. U.S. regulatory and law enforcement agencies have been addressing the exploitation of cryptocurrencies for years, with regulatory enforcement actions and criminal cases going back to 2015. The same federal agencies are acting to strengthen and enforce sanctions against Russia in 2022. 

Cryptocurrencies and Russia Sanctions Enforcement in 2022

After Russia’s invasion of Ukraine on February 24, the Department of Justice, and the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC) took steps to address the risk that cryptocurrencies could be used in alternative payment systems to evade U.S. and international sanctions, or as sources of revenue.

  • The Department of Justice announced on March 2 that its Task Force KleptoCapture, an interagency law enforcement task force dedicated to enforcing the sanctions and export controls imposed on Russia, will specifically include "targeting efforts to use cryptocurrency to evade U.S. sanctions, launder proceeds of foreign corruption, or evade U.S. responses to Russian military aggression."

  • A FinCEN Alert on potential Russian sanctions evasion, issued on March 7, provided red flags indicating suspected sanctions evasion that included three specific to virtual currencies. The alert warned that "sanctioned persons, illicit actors, and their related networks or facilitators may attempt to use [virtual currencies] and anonymizing tools to evade U.S. sanctions and protect their assets," and reminded financial institutions of their obligation to file suspicious activity reports (SARs) on transactions involving persons designated by OFAC.

  • OFAC FAQ 1021, issued on March 11, confirmed that compliance with sanctions on Russia is required "regardless of whether a transaction is denominated in traditional fiat currency or virtual currency." Regarding OFAC’s enforcement authority, the FAQ warned, “OFAC is closely monitoring any efforts to circumvent or violate Russia-related sanctions, including through the use of virtual currency, and is committed to using its broad enforcement authorities to act against violations and to promote compliance.”  

OFAC designated Bitriver and its Russia-based subsidiaries on April 20. OFAC declared, “By operating vast server farms that sell virtual currency mining capacity internationally, these companies help Russia monetize its natural resources. Russia has a comparative advantage in crypto mining due to energy resources and a cold climate. However, mining companies rely on imported computer equipment and fiat payments, which makes them vulnerable to sanctions.” The designation is intended to ensure that “no asset, no matter how complex, becomes a mechanism for the Putin regime to offset the impact of sanctions.” 

Criminal investigations or regulatory enforcement actions relating to use of cryptocurrencies to evade sanctions on Russia have not been announced as of May 26. On May 13, a magistrate judge’s opinion revealed that the Department of Justice had filed a sealed criminal complaint alleging that a U.S. citizen had conspired to operate an online payments and remittances platform based in a “comprehensively sanctioned country,” designed to evade U.S. sanctions using “purportedly untraceable virtual currency transactions.”  The country in question was redacted in the released opinion. There are five jurisdictions currently sanctioned comprehensively by the U.S. government: Cuba, Iran, North Korea, Russia, and Syria.

Seven Years of U.S. Crypto Enforcement Actions, 2015 - 2021 

U.S. regulatory initiatives on cryptocurrencies began in 2013, when the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidance on the application of the Bank Secrecy Act (BSA) and its regulations to transactions in “virtual currency.” Subsequently, the first enforcement action with a civil monetary penalty followed in 2015 when FinCEN and the U.S. Department of Justice penalized Ripple Labs Inc. a total of $700,000 for AML compliance failures.

A Russia-based unlicensed cryptocurrency exchange named BTC-e was the target of the next major crypto enforcement action in 2017. DOJ indicted BTC-e and its proprietor Alexander Vinnik for criminal money laundering violations, and FinCEN imposed civil penalties of $110 million on BTC-e and $12 million on Vinnik for failures to comply with the BSA. Even though BTC-e and Vinnik were based in Russia and had no physical presence in the United States, they came under the jurisdiction of the criminal money laundering statutes and the regulatory requirements of the BSA because they conducted transactions for U.S. customers. 

Multiple countries had indicted Vinnik on money laundering charges, and international legal disputes involving Vinnik went on for years before his eventual prosecution in France: arrested in Greece in 2017, extradited to France in 2020, and convicted and sentenced to five years in prison in 2021.   

By 2019, federal law enforcement demonstrated sophisticated capabilities to trace cryptocurrency transactions using the data embedded in cryptocurrency blockchains. For example, the 2019 indictment of a South Korean national for operating a darknet child pornography website was the result of Internal Revenue Service Criminal Investigation (IRS-CI) agents tracing Bitcoin transactions to determine the location of the darknet server, identify the administrator of the website, and track down the website server’s physical location in South Korea. Such investigative capabilities belied the reputation of cryptocurrencies as anonymous and untraceable.

In 2021, several international crypto businesses were hit by U.S. federal regulatory and law enforcement actions.

  • BitMEX, a cryptocurrency exchange registered in the Seychelles, received $100 million in penalties, and its founders lost control of the company and received millions of dollars in penalties individually. In August 2021, BitMEX consented to pay a total of $100 million in penalties to the Commodity Futures Trading Commission (CFTC) and FinCEN, with $20 million suspended pending satisfactory completion of remedial actions on BSA compliance. In May 2022, the CFTC required BitMEX’s three co-founders to pay $10 million in penalties each.  

  • The issuers of Tether, a leading stablecoin, received $41 million in penalties from the CFTC for fraudulent statements violating the Commodity Exchange Act (CEA) in October 2021. Bitfinex, whose cryptocurrency trading platform sold Tether, was required to pay $1.5 million in penalties for violating the CEA by operating as a futures commission merchant without registering with the CFTC.    

  • Treasury’s Office of Foreign Assets Control (OFAC) designated Suex OTC, S.R.O., a cryptocurrency exchange based in Russia and the Czech Republic, in September 2021 for its role in facilitating financial transactions for ransomware actors. 

These actions in 2015-2021 demonstrated the ability of U.S. law enforcement and regulatory authorities to assert jurisdiction over international cryptocurrency businesses and successfully conclude criminal and civil enforcement actions against them, under a variety of U.S. laws and regulations. An essential requirement is the presence of U.S. customers or transactions with a U.S. nexus, or cooperation from foreign authorities in taking enforcement action against parties outside of U.S. jurisdiction.

What it Means

The impact of international efforts to address sanctions evasion and other illicit activities by targeting crypto providers is largely contingent upon establishing jurisdiction and the cooperation of third countries. The International Monetary Fund’s April 2022 Global Financial Stability Report found that the implementation of global standards and robust oversight over crypto transactions in emerging markets will be important to combatting sanctions evasion and other illicit financial activities via cryptocurrencies.

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