With concerns over a crypto market crash and steep sell-off of digital currency this month, the volatile and under-regulated nature of the crypto industry is seeing renewed scrutiny. As digital currencies have gained in popularity, so too have the risks associated with them. While the industry as a whole offers certain positive opportunities for social impact and combating financial crime, it also presents considerable financial and financial crime risks. Criminals have increasingly abused digital currencies for personal gain and recent events in the Russian invasion of Ukraine highlight key risk areas, including fraud schemes and the potential use of crypto to evade sanctions.
The ongoing Russian invasion of Ukraine demonstrates an emerging juxtaposition within the crypto sector – with crypto offering both opportunities for social good throughout the crisis while also presenting criminal opportunities. On the positive side, there has been praise for the global crypto relief campaign used to support Ukraine, which has raised over $50 million so far. Crypto allows for quick fundraising across borders with the ability to trace funds to ensure accountability. However, there have been reports of crypto scammers setting up fake charity websites and utilising email spam to take advantage of the ongoing crisis. One report uncovered over 100,000 emails per day attempting to trick targets into donating to Bitcoin or Ethereum wallets set up by scammers.
There has also been concern expressed over the potential use of digital currencies by sanctioned individuals to evade sanctions through the laundering and hiding of assets. Russia is a crypto-savvy country, with an official government estimating local holdings of digital currency at $200 billion and over 17 million Russians owning digital currencies. This, coupled with the fact that digital currencies have been used to evade financial sanctions in other countries such as Venezuela, Iran, and North Korea, has led to experts highlighting the risk of digital currencies being abused in the Russian context. Crypto trading platforms often have less stringent “know your customer” systems in place, leaving them more exposed to abuse by illicit actors.
This week, a federal judge in the US disclosed that the Justice Department has launched its first criminal prosecution involving the alleged use of cryptocurrency to evade US economic sanctions. The criminal complaint alleges an American citizen helped set up a payment platform system where $10 million in bitcoin payments were transferred from the US to a country sanctioned by the US. The judge said that US sanctions regulations apply equally to transactions involving virtual currencies as those involving traditional fiat currencies.
Experts have also highlighted the likelihood of the Putin regime using digital currencies to lessen the impact of sanctions on the government. For example, the Russian government is developing its own central bank digital currency that it hopes to use to trade directly with other countries. This would remove the need to first convert trading currency into dollars. There is also the risk of the Putin regime utilising cyber techniques such as ransomware to steal cryptocurrency, which is a mechanism North Korea has employed in the past.
There is further concern over the role of the crypto private sector in propping up Russian war efforts, either on purpose or inadvertently. In April, the US added Russia-based cryptocurrency miner BitRiver and its subsidiaries to its sanctions list. Marking the first time the US has sanctioned a crypto mining company, the US cited the risk of its vast server farms helping the Russian government continue to monetise its natural resources even after sanction tariffs.
The UAE: A Case Study of Crypto Evasion
There is concern over links between Russians seeking to evade sanctions and the use of the UAE’s propsering crypto market. According to a Reuters investigation, crypto firms in the UAE are being deluged with requests to liquidate billions of dollars in digital currency as Russians seek a safe haven for their fortunes. There have also been reports of digital currencies being used to invest in real estate in the UAE and UAE-based firms helping clients convert digital money into hard currency.
The UAE has sought to position itself as a leading digital currency market – with recent developments including the largest crypto exchange company in the world Binance being granted a digital asset licence in the UAE, and cryptocurrency exchange Bybit announcing it would move its headquarters from Singapore to Dubai. As countries such as the UAE continue to prioritise innovative technology to help solidify their profile in global markets, it is important for these countries to implement effective regulations and oversight. The UAE has already experienced issues with crypto related crimes, such as an alleged member of the OneCoin Ponzi scheme owning property and operating out of Dubai at the time of taking part in the scheme. The UAE government has adopted some effective measures to combat crypto related risks, such as the UAE’s National Committee for AML/CFT announcing in September 2021 the adoption of a regulatory framework for virtual assets in the UAE in concordant with approved AML/CFT standards, and further such progress should be encouraged.
Central African Republic: A Case Study on Geopolitics
In April, the Central African Republic (CAR) approved Bitcoin as legal tender, making it just the second country ever to do so (with El Salvador being the first in 2021). This move has received widespread criticism from experts, who highlight the potential for it to lead to regional monetary instability. According to the BBC, some experts see the decision as an attempt to undermine the French-based CFA franc, amid a contest for influence over the resource-rich country between Russia and western actors such as France. The CAR has had close dealing with Russian actors for years, including the highly controversial and newly sanctioned mercenary Wagner Group.
Russian sanctions add an additional spin to these dynamics, with concerns over Russian actors attempting to use corruption and other tactics in the CAR to evade sanctions and prop up the Putin regime. Crypto currency could play a role in this, as could other commodities such as gold, which is also of growing concern when it comes to Russian sanctions evasion techniques.
Conclusion
The crypto sector must remain vigilant and ensure that adequate due diligence is in place to help prevent digital currencies from being abused by the Russian government or sanctioned actors seeking to evade sanctions and benefit financially. The sector must also remain aware of other risks related to the ongoing invasion, such as fraud scams and the use of crypto for geopolitical purposes. Technology companies, exchangers, users of digital currencies, and others should develop tailored, risk-based compliance programmes, which should include sanctions list screening, adverse media checks and other appropriate measures.
Themis Search can help tackle your wide-ranging enhanced due diligence needs. The platform is updated every six hours to include the latest sanctions from across the world so your business can screen at national and international levels. We also provide ongoing sanctions news alerts, which contain information on any new sanctions that are released and guidance on how these new developments may impact your business.
Stay on top of the ever-changing financial crime landscape by accessing the latest information on emerging criminal techniques and the risks associated with carrying out business with particular industries or in particular jurisdictions.
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