Criminal Defense Lawyers

Detecting Transactions With Sanctioned Crypto Addresses

Cryptocurrencies like Bitcoin and Ethereum have exploded in popularity in recent years. However, the pseudo-anonymous nature of crypto transactions also makes them attractive for criminal activity like money laundering and sanctions evasion. This article will examine how law enforcement and financial institutions can detect potentially illegal transactions involving cryptocurrency addresses that have been sanctioned by governments.

What Are Sanctioned Crypto Addresses?

Governments and international organizations like the United Nations maintain lists of sanctioned individuals and entities. These lists include cryptocurrency addresses tied to terrorists, cybercriminals, and other bad actors. For example, the US Office of Foreign Assets Control (OFAC) maintains a Specially Designated Nationals (SDN) list that contains thousands of crypto addresses linked to sanctioned persons.

If a crypto user sends or receives funds from one of these blocked addresses, they could be violating economic sanctions laws without even realizing it. That’s why proactively screening transactions against sanctioned address lists is so important.

How Transactions Get Flagged

Unlike cash transactions, all cryptocurrency transactions are recorded permanently on a public ledger known as the blockchain. This transparency makes tracing funds easier for law enforcement and compliance teams.

There are a few ways a crypto transaction might get flagged as potentially involving a sanctioned address:

• Real-time screening – Exchanges and wallet providers can screen deposits and withdrawals in real-time against sanctions lists like OFAC’s SDN list using blockchain analytics tools.
• Transaction monitoring – Ongoing monitoring can retroactively detect if funds from a sanctioned address entered the platform at any point.
• External tip-offs – Law enforcement or other external parties may reach out after tracing illicit funds to a platform’s wallets.

In all cases, the compliance team will need to investigate flagged transactions to determine if sanctions violations occurred and if legal reporting is required.

Investigating Potential Violations

When a crypto transaction involving a sanctioned address gets flagged, the first step is verifying that the address actually appears on the sanctions list. Compliance teams can check OFAC’s SDN list and other government watchlists to confirm.

If the address is indeed sanctioned, the next step is determining whether the transaction represents a true sanctions violation. Context matters – the transaction could be a false positive if, for example, the funds are merely transiting through the platform to be frozen.

To make this determination, investigators will trace the flow of funds on the blockchain using transaction monitoring tools. They will attempt to identify the source and destination of the funds, learn more about the transacting parties, and build a timeline of all associated activity.

If the investigation reveals an apparent sanctions violation, the platform will be required to block or reject any related transactions. They will also likely need to submit a Suspicious Activity Report (SAR) to FinCEN or other financial authorities.

Freezing and Rejecting Transactions

If an internal investigation confirms that funds from a sanctioned address entered the platform, the platform will be required to freeze any related transactions or account balances. This ensures the illegal funds can’t be withdrawn or further transferred.

Going forward, the platform will need to configure their systems to automatically reject any transactions involving the sanctioned address if more funds attempt to enter the platform.

In extreme cases, governments may legally compel the platform to actively return or “claw back” any funds that entered the platform in violation of sanctions laws.

Reporting Suspicious Activity

In most jurisdictions, platforms are legally required to file a SAR if their investigation reveals activity indicating money laundering, terrorist financing, sanctions violations, or other financial crimes.

In the US, SARs must be filed with the Financial Crimes Enforcement Network (FinCEN). In the UK and EU, suspicious activity reports go to the National Crime Agency (NCA) and local Financial Intelligence Units (FIUs).

SAR filings allow law enforcement to open formal investigations into illegal activity involving the platform’s users. Not filing SARs can result in steep fines and penalties for non-compliance.

Avoiding Transactions with Sanctioned Addresses

The best way for crypto platforms to avoid the risks and regulatory headaches associated with sanctioned addresses is prevention:

• Screen customers and transactions in real-time against OFAC, UN, and other watchlists using blockchain analytics tools.
• Monitor transactions with tools that can trace the flow of funds on the blockchain back to sanctioned addresses.
• Configure transaction monitoring systems to automatically detect and flag activity tied to sanctioned addresses.

With the right safeguards in place, crypto platforms can identify prohibited transactions before they occur and avoid handling funds associated with sanctioned entities altogether.

The Role of Law Enforcement

Catching sanctions violations and disrupting terrorist financing are top priorities for government agencies like the FBI, FinCEN, and OFAC. These agencies rely on financial institutions filing SARs to detect and investigate illegal crypto activity.

Law enforcement also conducts its own blockchain analytics and develops intelligence on sanctioned addresses and associated criminal networks. They may request information directly from crypto platforms related to specific investigations.

By partnering proactively with law enforcement and regulatory bodies, crypto businesses can help ensure their platforms aren’t exploited for sanctions evasion or other illicit finance.

Sanctions Violations Are Serious

Handling transactions tied to sanctioned crypto addresses can have severe consequences for virtual asset platforms and employees involved. Penalties can include:

• Fines in the millions of dollars for sanctions violations.
• Criminal prosecution of compliance officers and other responsible employees.
• Loss of operating licenses and disbarment from the industry.
• Reputational damage and loss of customers.

That’s why having robust controls in place to detect, investigate, and report prohibited transactions is so vital for crypto exchanges, wallet providers, and other virtual asset businesses operating globally.

Conclusion

Blockchain analytics tools have made identifying transactions with sanctioned crypto addresses easier than ever. However, investigating potential violations and meeting reporting obligations remains complex.

By partnering with experienced compliance teams and leveraging purpose-built transaction monitoring solutions, crypto platforms can stay on the right side of regulators. And contribute to the fight against terrorism, nuclear proliferation, human rights abuses, and other criminal activity.

With great power comes great responsibility. As cryptocurrency adoption grows, virtual asset providers must exercise caution to avoid misuse by bad actors. Only by working together with law enforcement and regulators can we realize the full potential of blockchain technology to improve people’s lives.

References

How to Identify Sanctioned Cryptocurrency Wallets – Federal Criminal Lawyers. https://www.federallawyers.com/criminal-defense/how-to-identify-sanctioned-cryptocurrency-wallets/

Cryptocurrency Address Screening Tool – Chainalysis. https://www.chainalysis.com/cryptocurrency-address-screening/

Red Flag Indicators to Detect Money Laundering in Crypto Industry [Guide] – Sumsub. https://sumsub.com/blog/aml-red-flag-indicators/

How To Spot The Red Flags Of Crypto Money Laundering – ComplyCube. https://www.complycube.com/en/how-crypto-businesses-can-spot-money-laundering-red-flags/

Crypto AML Red Flags (Exchanges & Wallets) – ComplyAdvantage. https://complyadvantage.com/insights/crypto-aml-red-flags/

FBI Guidance for Cryptocurrency Scam Victims. https://www.ic3.gov/Media/Y2023/PSA230824