Crypto Company Comes Under OFAC Scrutiny
- The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) on Oct. 11, 2022, announced a more than $24.28 million settlement with cryptocurrency exchange Bittrex Inc. for violations of multiple U.S. sanctions programs.
- This enforcement action marks OFAC's largest virtual currency enforcement action to date and sends a clear message to companies in the virtual currency industry that OFAC expects U.S. companies and non-U.S. companies that engage in U.S. nexus transactions to have robust sanctions screening in place.
- Companies that utilize third-party software for sanctions screening should periodically review and test their systems to ensure that they are flagging customers or transactions in sanctioned jurisdictions.
The U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) on Oct. 11, 2022, announced a more than $24.28 million settlement with Bittrex Inc. (Bittrex), a Bellevue, Washington-based company that offers cryptocurrency exchange. The settlement resolves 116,421 transactions with persons with an internet protocol (IP) address or physical address in the Crimea region of Ukraine, Cuba, Iran, Sudan and Syria that resulted in violations of multiple U.S. sanctions programs.1
Bittrex also agreed to pay $29 million to the Treasury Department's Financial Crimes Enforcement Network (FinCEN) for violations of the Bank Secrecy Act, though FinCEN will credit the $24 million Bittrex is paying to OFAC. The Bittrex settlement marks the largest civil penalty imposed by OFAC in the virtual currency industry as well as the first parallel enforcement by OFAC and FinCEN in this realm.2
Facts Surrounding Violations
According to OFAC, Bittrex operated with no sanctions compliance program for nearly two years (from March 2014 to February 2016) after it began offering its service to global customers. In February 2016, while Bittrex stepped up its sanctions compliance and retained a third-party vendor for sanctions screening purposes, the vendor merely screened transactions for hits against OFAC's list of Specially Designated Nationals and Blocked Persons (the SDN List) and did not scrutinize customers or transactions for a nexus to sanctioned jurisdictions.
Because of the nonexistence of – and then shortcomings in – its sanctions screening procedures, Bittrex processed approximately $263 million worth of transactions associated with sanctioned jurisdictions between March 2014 and December 2017.
Factors Affecting OFAC's Penalty Determination
OFAC found that Bittrex's violations were not voluntarily self-disclosed, but were nonegregious. In reaching the more than $24 million penalty, OFAC noted as an aggravating factor that Bittrex operated with no sanctions compliance program for nearly two years and the screening tool that it ultimately adopted failed to scrutinize customers or transactions associated with sanctioned jurisdictions. OFAC also faulted Bittrex for having reason to know that some of its users were in sanctioned jurisdictions based on those users' IP addresses and physical address data.
For mitigating factors, OFAC noted that Bittrex was a small and new company at the time of most violations and most of transactions at issue were relatively small. OFAC also credited Bittrex for its substantial cooperation and swift implementation of remedial measures, including blocking all IP addresses associated with sanctioned jurisdictions, restricting accounts of the account holders identified as being located in jurisdictions subject to OFAC sanctions, using a new software program for sanction screening and conducting additional sanctions trainings for its employees.
This record fine should send a clear message to virtual currency companies that like all financial service providers, virtual currency companies should develop and implement robust sanctions screening procedures that will identify all potentially problematic transactions.
In particular, companies serving global customers should incorporate geolocation tools and IP address blocking controls so that they can identify and prevent users in sanctioned jurisdictions from accessing its platform in the first place. OFAC also expects the companies to review other available information, such as the address provided by a customer or counterparty, address indicated in email addresses or data contained in invoices for sanctions screening purposes.3
With the growing popularity of virtual currency as a payment method, OFAC has placed a heightened focus on cryptocurrency and other forms of digital assets. Holland & Knight will continue to closely monitor enforcement actions by OFAC in this area. For questions about this alert or more broadly, advice on sanctions compliance programs, please reach out to the authors or another member of Holland & Knight's International Trade Group.
1 See Enforcement Release, OFAC, OFAC Settles with Bittrex, Inc. for $24,280,829.20 Related to Apparent Violations of Multiple Sanctions Programs, Oct. 11, 2022.
2 Press Release, U.S. Department of the Treasury, Treasury Announces Two Enforcement Actions for over $24M and $29M Against Virtual Currency Exchange Bittrex, Inc., Oct. 11, 2022.
3 In an effort to increase awareness of sanctions compliance obligations, OFAC issued an industry specific brochure last year, Sanctions Compliance Guidance for the Virtual Currency Industry, Oct. 15, 2021.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.