December 5, 2022

Restraining the Kraken: Another Crypto Company Under OFAC Scrutiny

Holland & Knight Alert
Ronald A. Oleynik | Sulan He


  • The U.S. Department of the Treasury's Office of Foreign Asset Control (OFAC) on Nov. 28, 2022, announced a more than $362,000 settlement with cryptocurrency exchange Kraken for violations of the Iranian Transactions and Sanctions Regulations. Additionally, Kraken will invest $100,000 in compliance programs.
  • This is another in a series of recent OFAC enforcement actions in the virtual currency industry, and highlights the importance of using geolocation tools, including internet protocol blocking and other location verification tools, to identify and block sanctioned users.
  • This enforcement action also highlights the fact that OFAC sanctions compliance obligations do not end with initial sanctions vetting. Companies that serve global customers should have robust sanctions monitoring and screening of customers' transactional activities on an ongoing basis.

The U.S. Department of the Treasury's Office of Foreign Asset Control (OFAC) on Nov. 28, 2022, announced a more than $362,000 settlement with Payward Inc. d/b/a Kraken (Kraken), a Delaware-incorporated company that offers cryptocurrency exchange. The settlement resolves 826 transactions with persons with an internet protocol (IP) address in Iran.

This latest sanction is a continuing focal point for OFAC enforcement action. (See previous Holland & Knight alert, "Crypto Company Comes Under OFAC Scrutiny," Oct. 24, 2022). Of particular note, Kraken agreed to invest an additional $100,000 in certain sanctions compliance controls, placing a value on a meaningful compliance program in OFAC's eyes.

Facts Surrounding Violations

According to OFAC, Kraken, despite having a sanctions compliance program, processed 826 transactions, totaling approximately $1.68 million, between October 2015 and June 2019 for individuals who appeared to be located in Iran when the transactions were executed.

Although Kraken implemented controls to prevent users located in a jurisdiction subject to sanctions from opening an account on its platform, it failed to implement IP address blocking on transactional activity across its platform. Therefore, users located in sanctioned jurisdictions could access their accounts and transact on its platform so long as they opened their accounts outside of these jurisdictions.

Factors Affecting OFAC's Penalty Determination

As for mitigating factors, the fact that this was a voluntary self-disclosure is the most significant. In addition, OFAC credited Kraken for its substantial cooperation and implementation of significant remedial measures, including adding geolocation blocking for clients in prohibited locations, implementing blockchain analysis tools to assist with sanctions monitoring, investing in additional compliance-related training and hiring additional personnel dedicated to sanctions compliance.

However, OFAC found that Kraken failed to exercise due caution or care for its sanctions compliance program. In particular, OFAC faulted Kraken for failing to follow through the geolocation controls it implemented at the time of the customer boarding in the subsequent transactional activities.

The Cost of Robust Compliance

The Kraken settlement also has provided insight into the value of a robust sanctions compliance program. Despite Kraken already having a sanctions compliance program in place, OFAC is requiring the company to invest an additional $100,000 into the program, including additional training and technical measures to assist in sanctions screening.

The U.S. government believes that economic sanctions are a powerful tool against foreign adversaries. Therefore, virtual currency exchange companies, and any company serving global customers, should take this enforcement action as a clear and unambiguous signal that OFAC expects considerable resources to be devoted to sanctions compliance programs.

For additional information or questions regarding the enforcement action, review or assistance on assessing sanction compliance risks, or any other trade-related matters, please contact the authors or another member of Holland & Knight's International Trade Group.

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.

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