A court in the United States for the first time accused the crypto exchange of circumventing sanctions

The American authorities are tightening control over trading platforms. Experts told how this could affect the digital asset industry.

Justice of the Peace Zia Farooqi of the US District Court in Washington, DC, has begun considering a case on the transfer of more than $ 10 million through a crypto exchange bypassing US sanctions, the Washington Post reports. The names and names of the platform have not yet been disclosed, but the judge's conclusion has been published, from which it follows that not only the attacker, but also the exchange is responsible. At the same time, it is confirmed that she had no information about the circumvention of sanctions by the user. The transactions were conducted through a dummy platform designed specifically to circumvent financial prohibitions.

The Ministry of Justice has opened such a criminal case for the first time. This signals to crypto exchanges that they are responsible for users who evade sanctions on their platforms, regardless of whether the exchange deliberately colludes or not. Also, Judge Farooqi's memorandum equated digital assets with traditional assets in matters of circumvention of sanctions.

The responsibility for compliance with KYC/AML policies falls entirely on the exchange, explains Viktor Pershikov, a leading analyst at 8848 Invest. In his opinion, in this case, there is an insufficiently high-quality due diligence procedure, since when registering on the platform of legal entities, the exchange must identify all beneficiaries and directors of the company and make sure that they do not fall under the sanctions lists.
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"At the same time, even enhanced verification may not reveal cases when the owner of the funds is a person who does not have a direct relationship to the corporate account on the crypto exchange. If the exchange did not reveal the fact of a fake company at the KYC/KYB verification stage, then we are talking about "negligence" in relation to AML procedures, which will entail, at least, a fine. If the court succeeds in proving that the exchange deliberately "turned a blind eye" to the beneficiary of assets included in the sanctions lists, then in the current situation with sanctions, the consequences for the crypto exchange may be much more serious," Pershikov warned.

He noted that even large crypto exchanges do not always pay sufficient attention to KYC/KYB procedures, and as for medium-sized and small crypto exchanges, KYC procedures mainly exist for them as purely formal conditions for registration that do not require significant evidence of beneficiaries and the origin of their assets.

"Crypto exchanges should be directly responsible if it turns out that the owner of the assets is not installed or installed incorrectly, and the user or legal entity falsified the documentation. In pursuit of maximizing the customer base, exchanges turn a blind eye to many things, and as long as it does not concern the interests of the state, it can work. But not when the state (represented by the United States) takes enhanced measures to minimize the chances of circumventing sanctions," the expert stressed.

Such judicial practice in the countries of the Anglo-Saxon system of law will lead to an increase in the responsibility of operators of digital trading platforms (crypto exchanges) to regulators and the law, explained Oleg Ogienko, CEO of BitRiver.

"In other jurisdictions, this will also force crypto exchanges to be more attentive to their customers and the operations they carry out. In fact, stricter KYC/AML requirements will be applied, or already established norms will be more strictly observed. For bona fide participants in the digital currency market, including miners, eventually there may be more formal procedures that need to be followed to conduct activities on custodial platforms," the expert says.

He assumes that the terms for carrying out operations will increase, and for illegal subjects of the crypto industry, the possibilities of free anonymous activity will be further narrowed.

"Nevertheless, with this approach, it is important to maintain a transparent and non-discriminatory dialogue between the client, the crypto exchange and regulators. We hope that in Russia, when mining and circulation of cryptocurrencies permitted by law will soon begin, all interested parties will be able to positively take into account the experience of foreign colleagues," Ogienko concluded.

Sanctions are one of the most common tools of US foreign policy, but the development of cryptocurrencies has opened up a new opportunity to circumvent them. The regulatory authorities of the United States have begun to pay more and more attention to compliance with sanctions in this area, strengthening monitoring and introducing increasingly stringent requirements for participants in cryptocurrency transactions.

First of all, US citizens must comply with the sanctions, regardless of which country they are located in, as well as American companies, their foreign representative offices and representative offices of foreign companies in the country. Non-compliance with sanctions entails liability, including criminal liability.

To date, court proceedings have repeatedly taken place regarding the circumvention of sanctions with the help of cryptocurrencies, as a result of which the court imposed large fines. The Office of Foreign Assets Control (OFAC), which deals with financial intelligence, planning and the application of sanctions, published statistics on fines for circumvention of restrictions on its website: the largest amount of fines was issued in 2019: 26 fines for 22 persons for $ 1.3 billion. Often the amount of the fine exceeds the amount of illegal transactions at times: so, the BitPay crypto company was fined more than $ 500 thousand for conducting cryptocurrency transactions worth about $ 129 thousand.

There have also been cases of sentencing to prison. For example, in April of this year, cryptocurrency expert Virgil Griffith received more than 5 years in prison for helping North Korea circumvent US sanctions, and in September 2021, a US court sentenced Russian Oleg Nikitin to 28 months in prison for violating the sanctions regime.

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