The Financial Crimes Enforcement Network (FinCEN) alerted banks and other financial institutions on March 7 about possible suspicious practices that seek to evade the economic sanctions imposed on the Russia Federation in the context of the Russia-Ukraine war.
The agency identified possible ways in which the Russian state and wealthy Russian oligarchs may seek to circumvent the sanctions, including dealings through some unsanctioned Russian banks that have access to the international financial system and the use of convertible virtual currencies (CVC), a name for cryptocurrencies such as Bitcoin that can be exchanged for conventional money. It also warned financial institutions of dangers posed by Russian-related ransomware campaigns.
FinCen's announcement comes on the heels of the U.S. Treasury's imposition of sanctions that cut off two of the largest Russian banks, Sberbank and VTB Bank, which together account for more than half of the Russian banking industry's assets, from U.S. dollar-denominated foreign exchange transactions. Several state-owned financial entities and private institutions in Russia have also been blocked from transactions via the U.S. financial system. The sanctions also extended to oligarchs and specified persons in Russia and its wartime ally, Belarus.
- FinCEN warns of possible evasion of the economic sanctions imposed on Russia due to its aggression on Ukraine.
- The agency flagged possible evasions through unsanctioned Russian banks that have access to the international financial system and the use of convertible virtual currencies.
- Using Section 314(b) to share information with other financial institutions and timely reporting is required to identify and contain suspected unlawful activities that violate the economic sanctions imposed against Russia.
The announcement called for vigilant reporting and due diligence processes to identify evasive practices in a timely way. Section 314(b) of the USA PATRIOT Act, which allows information-sharing authorities to disclose sensitive and private information to protect national security, will also provide a pathway for investigations and the containment of sanctions evasion.
Though participation under Section 314(b) is voluntary, FinCEN encourages banks and other financial institutions, such as securities broker-dealers, mutual funds, insurance companies, dealers of precious metals and jewels, and futures commission merchants, to avail themselves of the provision to support anti-money laundering activities (AML) and combating the financing of terrorism (CFT). Under its broad provisions, financial institutions may initiate an investigation and share information of suspected unlawful activities (SUA), even when specific proceeds of the SUA have not been identified.
Digital Currencies and Financial Crime
CVCs such as Bitcoin and Ethereum, were mentioned in the latest FinCEN announcement. Virtual and digital currencies have gained a certain notoriety for their association with illegal dealings. Since they are unregulated and run on decentralized blockchains operated by pseudonymous users whose digital wallets are linked to a digital address, virtual currencies conceal the identity of senders and receivers.
Due to their global nature and the speed of transactions as well as their peer-to-peer network, CVCs are very difficult to regulate. FinCen has had a longstanding position on the risks posed by CVCs that operate on the dark net, peer-to-peer exchangers (P2P), foreign Money Service Businesses (MSB) and CVC kiosks. Dark net marketplaces can only be accessed through a special software, while P2P and MSBs are required to comply with the Bank Secrecy Act (BSA) to ensure that transactions are not illegal or do not involve the exchange of illicit goods and services. Foreign-based MSBs are not required to comply with FinCEN's regulations, and this makes them a conduit for illegal transactions and tax havens for those seeking to evade the U.S. tax regime. CVC kiosks or ATMs can also be easily misused to conceal the identities of those making digital transactions.
Stringent regulations under the anti-money laundering/combating the financing of terrorism actions by FinCEN ensure timely reporting and record keeping for those who comply with them. However, the nature of CVCs and their fungibility with fiat currencies and other CVCs open up risks to financial crimes that FinCEN has always been alert to. In the context of the Russia-Ukraine war, financial institutions may need to be on high alert, as CVCs present ways to evade the severe and potentially ruinous economic sanctions imposed against Russia.