What can law enforcement and government agencies do to uncover the identities of individuals circumventing sanctions with crypto?
Sanctions are a key tool for governments to protect their interests and enforce international norms of behavior. Sanctions are often financial in nature, including capital restraints, asset freezes and trade restrictions, but can also include travel bans and arms embargoes. Geopolitical conflicts have led to a growing list of sanctioned entities and individuals.
As governments aim to enforce financial sanctions through traditional financial institutions, bad actors are finding new ways to bypass regulations with cryptocurrencies. This primer describes how crypto can be used to evade sanctions – and what your organization can do to stop it.
Sanctions have been used for decades by governments to prevent threats and protect their political interests. As cryptocurrencies became a new toolkit for sanctions evaders, authorities began to crack down on illicit crypto wallet addresses and services. In line with these efforts, the US Treasury’s Office of Foreign Assets Control (OFAC) issued a guide for sanctions compliance for the virtual currency industry to enable legitimate services to enforce sanctions, similarly to banks, with Know Your Customer (KYC) Procedures and other measures. Sanctions on crypto addresses and crypto related entities are growing. OFAC currently has sanctions against terrorist organizations, individuals, crypto services, and sovereign states.
Source: Chainalysis 2023 Crypto Crime Report
In 2022, OFAC sanctioned Tornado Cash, a decentralized virtual currency mixer that was responsible for laundering more than $7 billion in crypto since 2019, including stolen gains from sanctioned organizations like North Korea’s state-sponsored hacking group, Lazarus Group.
Other services are used to evade sanctions and launder money related to sanctions evasion. The Russian-linked Hydra, the world’s largest darknet market, was sanctioned before being seized and shut down by the US Department of Justice (DOJ) in April 2022. The DOJ also sanctioned Garantex, a virtual currency exchange with the majority of its operations in Russia, however Garantex continues to operate.
Indeed, some of the most notorious international sanctions-related headlines are those connected to Russia. As the IMF has cited, ‘not since the 1930s has an economy the size of Russia’s been placed under such a wide array of commercial restrictions as those imposed in response to its invasion of Ukraine.’
In February 2022, in a joint statement, France, Germany, Italy, the UK, Canada, and the US condemned Russian aggression and committed to financial restrictions against the Russian financial system, as well as specific people and entities.
Following the invasion of Ukraine, sanctions were immediate and comprehensive: the European Union announced packages of sanctions against Russia, including restricting access to the EU’s capital, financial markets and services, as well as banning transactions with the Russian Central Bank and banning Russian banks from the SWIFT system, a key component of the global payments system. The restrictive measures included an asset freeze and funding restrictions against Russian individuals.
More than a year after sanctions were announced, crypto remains under scrutiny as a measure to bypass sanctions. Binance, the world’s largest cryptocurrency exchanges, is under investigation by the US Department of Justice for potentially enabling Russians to bypass US sanctions on its decentralized peer to peer (P2P) platform. As of August 2023, the exchange has been considering a full exit from its Russian business.
The crypto alternative to bypass sanctions
In this climate of growing sanctions, it’s no wonder why targeted individuals may wish to move their wealth into cryptocurrencies. This unregulated alternative can easily and promptly enable global commerce – exactly what the sanctions aim to block – as it bypasses the control points on which governments rely, mainly transfers of money by banks, without detection. Moreover, they are not likely to be easily seized.
As a result, cryptocurrencies pose an increasing challenge to law enforcement.
EU officials admit that cryptocurrencies could be used by criminal actors to circumvent the sanctions.
What can law enforcement and government agencies do to stop individuals circumventing sanctions with crypto?
To address the growing concern of sanction evaders leveraging cryptocurrency, law enforcement agencies and government task forces should equip themselves with cutting-edge blockchain analytics solutions.
While all cryptocurrency transactions are recorded on the blockchain, their makers’ identities are considered anonymous or pseudo-anonymous. To add another layer of complexity, services like mixers and decentralized exchanges aid criminals in obscuring money trails and masking the origin of such transactions. An advanced solution is needed to overcome these challenges and identify sanctions evaders and related criminal misconduct.
Cognyte’s blockchain analytics platform is a world-class cryptocurrency analytics and de-anonymization solution. This groundbreaking, patent pending technology delivers crypto-centric intelligence driven by collecting and fusing siloed data sources. The solution uses multiple approaches, including open-source analytics for tagging services and malicious addresses, blockchain analytics to track blockchain transactions, and additional sources and techniques.
Cognyte’s solution enables de-anonymization of illicit transaction makers, such as sanction evaders, with zero dependence on third parties, such as collaborative exchanges, wallet vendors or financial institutions, and with no dependency on their willingness to comply with new regulations.
To find out how you can uncover sanction evaders, book your demo now.