U.S. government issues a wide-ranging warning to financial institutions about possible evasion attempts, singling out virtual currencies as a red flag.

The FinCEN alert, sent earlier this week by the U.S. Treasury’s enforcement arm, is aimed at all financial institutions and virtual currency providers. The U.S. government is essentially reminding both of their reporting responsibilities should they register anyone trying to evade what they term the «expansive» sanctions regime imposed on Russia after the invasion of Ukraine.

Explicit Indication

The part about convertible virtual currencies is very high up on the page and sticks out like a sore thumb. It almost seems to indicate a latent nervousness, reminding anyone who has visibility into any kind of virtual currency flow, including exchangers and administrators, to «identify and quickly report suspicious activity.»

It goes on to say that such virtual currency providers are considered money services businesses under the bank secrecy act. They will need to maintain appropriate risk-based customer due diligence or, at the very least, enhanced due diligence.

Even if they might have been aware of that in theory since last year at least, the explicitness of the current warning will take many providers aback, including the step about the necessary due diligence. If they do not yet have any necessary identifying records now, they are not going to get them from anyone connected to Russia, which will leave them very exposed.

Sanctions First, Evasion Next

After the first wave of punitive sanctions, the efforts of governments worldwide are now likely to turn to the myriad ways that they can potentially be sidestepped. Lest anyone forget, evaders can get extremely creative, as seen from an incident reported by the New York Times in 2018, when an oil tanker headed to Taiwan offloaded 600 tons of oil to a North Korean cargo ship on the high seas in clear violation of United Nations sanctions.

The U.S. government, aware of all this, has specified how it sees potential evasion attempts developing. It points out seven red flags, many of which will be very familiar to an international financial institution. The use of shell companies or third parties, efforts to conceal identities, accounts experiencing sudden, unexpected movements, any new accounts or new companies created in jurisdictions previously associated with Russia - and any kind of foreign exchange transaction that does not look routine in any way.

Getting into Detail

It then discusses virtual currencies in some detail, saying that although they may not be used for large scale evasion attempts, individuals may use them to protect their assets. Here they highlighted three red flags. IP addresses should be scrutinized, virtual currency transactions potentially connected to the OFAC’s SDN list reviewed, as well as exchangers or administrators in high-risk jurisdictions.

Those can be characterized as general, but it goes to into much more detail in the subsequent three red flags. It is essentially asking providers to report any instance where a client receives a virtual currency from an external wallet and follows it with multiple, rapid trades for no visible purpose, and then follows that with another off-platform transaction. Akin to the standard surveillance many banks conduct in connection with ATMs.

«This may be indicative of attempts to break the chain of custody on the respective blockchains or further obfuscate the transaction,» FinCEN indicated.

It also asked for clients to be scrutinized when transferring funds using a virtual currency mixing service or when they are exposed to transactions identified in blockchain software as being related to ransomware.

Prescriptive Yet General

Many virtual currency providers are going to find much of this extremely prescriptive. The question, however, is whether this will be enough, in view of the many ways sanctioned Russian individuals may attempt to avoid many of the measures.

For example, finews.ch (German only) previously reported on the increasing demand seen on crypto exchanges from Russia and the Ukraine, something which French finance minister Bruno Le Maire indicated.

China, which is not pursuing sanctions against Russia, is another outlet, and they might try to use that country’s Cross-Border Interbank Payment System (CIPS) or UnionPay bank cards instead of Visa and Mastercard. But at this point it is hard to see how they can be used for anything except transactions that are specifically between Russia and China.

The Big Picture

All this shows that general views are beginning to form about the way Russia can circumvent restrictions. This includes the gold held at their central bank, as finews.com reported earlier. Or places with no extradition treaties like the Maldives, to anchor yachts.

The truth is no-one yet knows what the big picture is. But governments, financial institutions, and virtual currency providers are going to have to be constantly on guard. As with North Korea, there will be many inventive ways, yet unknown, that Russia and sanctioned Russian individuals will likely try to use to sidestep all the restrictions.