In recent years, the cryptocurrency market has been going through a new stage of development: regulators, together with law enforcement agencies, conduct thorough inspections of companies and owners of cryptocurrencies in general, limiting their activities with sanctions. On September 21, 2021, it became known that this fate befell SUEX, a crypto exchanger registered in the Czech Republic and having offices in Moscow and St. Petersburg.

According to the US Treasury, the company “facilitated financial transactions for the operators of ransomware programs,” which was the reason for its inclusion in the sanctions list. Financial expert Maxim Kurbangaleev describes how the sanctions mechanics work now, and what to do for business not to get into such situations.

How do companies get sanctioned? – Maxim Kurbangaleev

Until recently, the cryptocurrency market was considered one of the most loyal in terms of regulation and control. Blockchain technology, in which all actions with a specific unit of cryptocurrency are recorded in blocks, implied the transparency of such a means of payment. To ensure security, data on previous transactions is stored in encrypted form, so an ordinary user cannot see the entire transaction history without using special tools.

Such scanning technologies have appeared only recently, but their use is often limited: certain versions work with only one type of cryptocurrency; other programs are simply not freely available. Nevertheless, regulators and law enforcement agencies have started using these tools for mass verification of cryptocurrency transactions.

«The paradox is that an ordinary wallet owner cannot know what money came to his account. Even if the user is absolutely sure about the sender of the transfer, he cannot know where a particular cryptocurrency was 100 or even 10 blocks ago. But in the current conditions, the user will be responsible for this, and his wallet will receive a special label, as well as all the currency in it,” says Maxim Kurbangaleev. — It’s like getting a bill at an ordinary ATM, paying it in a supermarket, and then getting punished, because it turns out that this bill was involved in money laundering or drug trafficking. We understand that in the fiat world this scenario looks absurd, but in the cryptocurrency world it is happening here and now.” 

A similar situation is happening with companies. “It is enough for a crypto-exchange to receive and put into circulation funds that will later be recognized as illegal. And after the sanctions are imposed on the exchanger, all customers who have ever used its services will suffer, as recently happened with SUEX,” the expert shares.

As Maxim Kurbangaleev noted, the difficulty is not only in tracking down a “suspicious” transaction, but also in the fact that even if discovered, it cannot be canceled: “There have been cases when people were deliberately framed by sending them a marked cryptocurrency to their wallet. The user cannot cancel the incoming transfer, and now both his wallet and all his funds fall under sanctions. Of course, it is wrong. This approach destroys the market, because sooner or later all cryptocurrency will be sanctioned. Now is exactly the time when the relevant authorities need to develop new regulatory rules.”

Maxim Kurbangaleev: How can business avoid sanctions?

According to Maxim Kurbangaleev, companies operating in the cryptocurrency market, first of all, need to conduct a thorough AML check of counterparties (“Anti-Money Laundering” – “countering money laundering” – Ed.). The expert explains: “In the current conditions, it’s not just about standard crypto checks using, for example, the same Chainalysis or Sum&Substance. I believe that classical instruments from the fiat world should also be involved. Unfortunately, this will increase the cost of transfers due to the need to hire a whole staff of AML-officers, and after all, the task of cryptocurrency was to reduce costs. But, alas, without these measures, there is a great risk of falling under sanctions.”

Development of an AML policy – a set of measures to combat money laundering — is the most important point that needs to be completed in the early days of the company. At the same time, it is important to take into account the requirements of the regulator not only of the country where the company is registered, but also of those jurisdictions where counterparties are registered.

Maxim Kurbangaleev recommends choosing countries where cryptocurrency is fully legalized for company registration: “A number of countries not only allow, but even license work with cryptocurrencies, for example, Great Britain, Lithuania, Estonia, Poland, Czech Republic, Malta. Obtaining a license will already mean that the requirements of the regulator are met. Thus, the criteria for obtaining and maintaining this license must necessarily be present in the AML policy. For the same reason, I would recommend cooperating only with licensed exchanges — this minimizes the risk of inclusion in local sanctions lists of individual countries.”  

A thorough AML check of the company must be carried out on an ongoing basis: checking incoming funds using blockchain analysis tools (Chainalysis, Reactor, Coinpath, Elliptic and others), identifying customers and check their presence in sanctions databases and lists.

“This is the part that will require significant funding from the company, because you either need to hire a separate staff of inspection specialists, or pay for the services of third-party companies offering outsourced AML services. But this is the part that cannot be sacrificed in favor of short-term benefits. Illegal activity, in principle, does not add capitalization and does not bring either the company itself or the entire industry to a new evolutionary level. The banking sector has already gone through this stage, but with the introduction of uniform standards, its participants no longer had any problems. Therefore, I emphasize: I am all for developing clear and fair rules for regulating the crypto market, which users, exchanges, and exchangers can focus on,” Maxim Kurbangaleev sums up.