In a recent opinion, U.S. Magistrate Judge Zia M. Faruqui of the U.S. District Court for the District of Columbia held that there is probable cause to find that a U.S. citizen-defendant violated U.S. sanctions by funneling cryptocurrency to a payments platform that the defendant operated in a “comprehensively sanctioned country.”[1]  The opinion, which allows the Department of Justice’s (“DOJ”) criminal prosecution of the defendant to continue, adopts the U.S. Department of the Treasury, Office of Foreign Assets Control’s (“OFAC”) view that U.S. sanctions apply to cryptocurrency-related activities.  The opinion puts participants in the cryptocurrency industry – including U.S. financial institutions and U.S. and non-U.S.-based cryptocurrency exchanges – on notice of the range of civil and criminal penalties that can be levied against them for U.S. sanctions violations.

According to the opinion, the defendant operated an online payments and remittances platform in a comprehensively sanctioned country, and used financial accounts in the United States to conduct financial services for the payments platform and its customers.  (Although the country is not named in the opinion, based on the description in the opinion, we surmise that the country is likely Cuba, Iran, North Korea, or Syria.)  To operate the payments platform, the defendant used its account at a U.S.-based online financial institution to receive and send thousands of dollars to the sanctioned country for the payments platform’s customers, used its account on a U.S.-based cryptocurrency exchange (which the defendant funded using its account with a traditional U.S. financial institution) to transfer thousands of dollars to its accounts on a foreign cryptocurrency exchange (which were then accessed by IP addresses located in the sanctioned country), and used its accounts on the foreign cryptocurrency exchange to transfer over $10 million worth of bitcoin between the United States and the sanctioned country for the payments platform’s customers.  According to the opinion, the defendant was marketing the payments platform as a tool to evade U.S. sanctions.  Judge Faruqui emphasized that despite claims about the anonymity created by the use of cryptocurrencies, the defendant’s conduct was traced, including based on the “know-your-customer” information the U.S.-based cryptocurrency exchange collected from the defendant and IP address information.

Most significantly for the cryptocurrency industry moving forward, the opinion explicitly adopts OFAC’s Sanctions Compliance Guidance for Virtual Currency, which confirmed that U.S. sanctions apply to the cryptocurrency industry.[2]  The opinion references OFAC’s recent cryptocurrency-related civil enforcement actions (including those relating to BitGo and BitPay) as confirmation that OFAC is enforcing U.S. sanctions based on the guidance it has issued.  In addition, the opinion stresses that OFAC’s definitions of statutory terms in the International Emergency Economic Powers Act (“IEEPA”) (the statutory authority for most U.S. sanctions programs), such as “financial services,” carry the force of law, and that OFAC’s decisions are subject to significant deference because OFAC acts in an area that concerns national security, foreign policy, and administrative law.  The opinion further explains that OFAC’s interpretation of IEEPA is entitled to deference under administrative law principles (i.e., Chevron deference) and OFAC’s interpretation of its own regulations is entitled to even more deference.  Accordingly, the opinion provides an additional reason to take seriously OFAC’s existing guidance for the cryptocurrency industry (including its recommendations regarding effective compliance procedures and other best practices) and any newly issued guidance on the application of U.S. sanctions to cryptocurrency-related activities.

In the opinion, Judge Faruqui discussed, as background, additional points regarding the application of U.S. sanctions.  These points are generally black letter U.S. sanctions law, but bear mentioning because they may not be commonly understood.

• First, many U.S. sanctions programs prohibit the provision of services, including financial services, to certain sanctioned countries or persons. Citing OFAC’s prior civil enforcement activity, the opinion states that financial service providers include virtual currency exchanges.
• Second, U.S. sanctions can apply to the activities of non-U.S. persons (including, for example, when non-U.S. persons engage in dealings with U.S. persons or in transactions conducted in U.S. dollars), and non-U.S. persons can be liable under some U.S. sanctions programs for causing a U.S. person to violate U.S. sanctions. The opinion cites a recent case involving a sanctioned Russian oligarch alleged to have wired money to a front company through a U.S. correspondent bank, thereby causing the U.S. correspondent bank to violate U.S. sanctions.
• And third, civil liability for U.S. sanctions violations “is not the ceiling” – significant criminal penalties are available for willful violations of U.S. sanctions, including those involving virtual currency. These penalties can include very significant monetary fines and imprisonment for individuals.

In this case, the defendant’s alleged conduct was particularly egregious.  It is, therefore, not surprising that the DOJ may have decided to use this as a “test case” for a criminal prosecution of cryptocurrency-related U.S. sanctions violations or that Judge Faruqui’s opinion came out the way it did.  The DOJ’s pursuit of this case is in line with the DOJ’s strong focus on prosecuting violations of U.S. sanctions laws, including through the use of cryptocurrency.[3]  Further, the opinion highlights how businesses ranging from traditional and online U.S. financial institutions to U.S. and non-U.S.-based cryptocurrency exchanges can be implicated in U.S. sanctions violations – this case implicated several such businesses.  The case also serves as a reminder of the importance of U.S. sanctions and anti-money-laundering compliance, including “know-your-customer” processes.

 ***

*Special thanks to Margaret Carroll, a Law Clerk working in our Washington D.C. office, for her assistance on this blog post.

[1] Memorandum Opinion, In re Criminal Complaint, No. 22-mj-067 (D.D.C.), available at https://www.dcd.uscourts.gov/sites/dcd/files/22mj00067CriminalOpinion.pdf.

[2] We previously wrote about this guidance here:  Abena Mainoo, Chase D. Kaniecki, Michael G. Sanders, John Lightbourne & William S. Dawley, OFAC Issues Sanctions Guidance to Virtual Currency Industry, Cleary Gottlieb: Cleary Foreign Investment & International Trade Watch (Oct. 22, 2021), available at https://www.clearytradewatch.com/2021/10/ofac-issues-sanctions-guidance-to-virtual-currency-industry/#more-2618.

[3] We previously wrote about related developments here:  Abena Mainoo, Chase D. Kaniecki & Hani Bashour, Authorities in U.S. Take Steps to Strengthen Enforcement of U.S. Measures Against Russia, Cleary Gottlieb: Cleary Foreign Investment & International Trade Watch (Mar. 10, 2022), available at https://www.clearyenforcementwatch.com/2022/03/authorities-in-u-s-take-steps-to-strengthen-enforcement-of-u-s-measures-against-russia/.