On March 7, the Financial Crimes Enforcement Network (FinCEN) issued a warning to banks and other financial institutions regarding potentially suspicious behavior aimed at evading economic sanctions imposed on the Russian Federation due to the Russia-Ukraine war.
The authority identified potential ways for the Russian government and wealthy Russian oligarchs to avoid the sanctions, such as dealings through some unsanctioned Russian banks with access to the global banking markets and the use of convertible virtual currencies (CVC), a term for cryptocurrencies such as Bitcoin that can be swapped for traditional money. It also cautioned financial institutions about the risks presented by Russian-linked ransomware activities.
Warning from the FinCEN
The FinCEN Alert comes in the wake of the United States government's implementation of increasing sanctions against Russian interests in relation to the invasion of Ukraine. Among the most recent measures, the Office of Foreign Assets Control (OFAC) and the US Department of State sanctioned a number of Russian aristocrats by identifying and blocking some of their properties. This initiative seeks to prohibit elites from contributing financial and other support to the Russian government. Russian intelligence-directed misinformation outlets and defense-related enterprises have also been sanctioned by the Treasury and State Departments. FinCEN advises that Russian and Belarussian players may attempt to circumvent these sanctions via a number of channels, including non-sanctioned financial institutions and a range of actors with limited access to the international financial system.
The Virtual Currency Alert
The new FinCEN release highlighted digital currencies and financial crime CVCs like Bitcoin and Ethereum. Virtual and digital currencies have garnered prominence as a result of their affiliation with criminal activities. Virtual currencies hide the identities of senders and recipients since they are unregulated and run on decentralized blockchains administered by anonymous users whose digital wallets are connected to a virtual address.
CVCs are very difficult to govern because of their worldwide scope, transaction speed, and peer-to-peer infrastructure. FinCen has long been concerned about the threats presented by darknet CVCs, peer-to-peer exchangers (P2P), foreign Money Service Businesses (MSB), and CVC workstations. Darknet markets can only be accessed with specialized software, but P2P and MSBs must follow the Bank Secrecy Act (BSA) to guarantee that transactions are neither unlawful nor entail the trade of criminal products and services.
The Importance of Suspicious Activity Reporting
The FinCEN Alert also informs financial institutions of their duties under the Bank Secrecy Act, such as Suspicious Activity Reporting. If a financial institution realizes, suspects, or has reason to believe that a transfer of funds it is engaged in uses assets derived from illegal activity, tries to conceal funds derived from illegal activities, is intended to evade Bank Secrecy Act regulations, retains a business or legal purpose, or includes the use of the organization to facilitate illegal conduct, it is required to file a report. Financial institutions are also required to do due diligence on politically exposed individuals, private banking accounts maintained for non-US citizens, and accounts involving foreign agents or foreign counterparties.