UK cryptoasset firms and sanctions reporting

Do firms providing cryptoasset exchange and custodial services have to report suspected sanctions breaches?

Yes, firms providing services of cryptoasset exchanges and cryptoasset custodians must report suspected sanctions breaches, as well as comply with additional sanctions reporting requirements.

Background

Previously, all relevant firms have been subject to UK sanctions reporting obligations.  These obligations include reporting awareness of a person or entity subject to financial sanctions and reporting any breach of the sanctions regulations that occurs in the course of business.

30 August 2022 Updated Guidance

HM Treasury’s Office of Financial Sanctions Implementation’s (“OFSI”) 30 August 2022 Guidance “Reporting information to OFSI – what to do” confirms that the definition of relevant firms includes a cryptoasset exchange provider and a custodian wallet provider. 

As such, firms offering the services of cryptoasset exchange providers and custodian wallet providers must comply with UK sanctions reporting obligations.

What are the reporting requirements?

Relevant firms are required to inform OFSI as soon as possible if they know or reasonably suspect a person who may be a designated person, or who may have committed an offence under financial sanctions regulations. The reporting obligation applies where the information has been received by the relevant firm in the course of carrying out their business.

In addition, relevant firms are required to report to OFSI the nature and amount or quantity of any funds or economic resources that they hold for a customer who is a designated person.

Failure to notify OFSI is an offence and could result in a penalty.

Reporting to OFSI is done via the compliance reporting form. OFSI has published detailed guidance “Reporting information to OFSI – what to do”.

UK crypto sanctions compliance

Gherson’s criminal litigation, investigations and regulatory team have also recently written about how to address the risk of sanctions evasion via cryptoassets.

This followed an 11 March 2022 joint statement reiterating that all UK financial services firms are expected to play their part in ensuring that sanctions are complied with. That includes firms in the cryptoasset sector.

This statement additionally served as a timely reminder that financial sanctions regulations do not differentiate between cryptoassets and other forms of assets. Therefore, the use of cryptoassets to circumvent economic sanctions is a criminal offence under the Money Laundering Regulations (“MLRs”) and regulations made under the Sanctions and Anti-Money Laundering Act 2018.

Indeed, the use of technology to obfuscate transactions is one of the following red flags suggesting an increased risk of sanctions evasion according to the statement:

• Customers who are located or conducting business to or from a jurisdiction subject to sanctions, or which is on the UK’s High Risk Third Country list;
• Transactions to or from a wallet address associated with a sanctioned entity, or a high-risk wallet address;
• Transactions involving a cryptoasset exchange or custodian wallet provider known to have poor customer due diligence procedures or otherwise high risk; and
• The use of tools to obfuscate the location of the customer.  

Sanctioning of smart contract Tornado Cash

The team have also previously written a blog entitled “Can a smart contract be sanctioned” about the 8 August 2022 decision of the U.S.Department of Treasury’s Office of Foreign Asset Control to sanction virtual currency mixer Tornado Cash.

Conclusion

With the crypto sector becoming more and more integrated into the financial sector it is not surprising to find out that increased regulatory and compliance obligations are being imposed.  

Implementing systems and controls to ensure compliance with these additional obligations can often be a burdensome and technical task.

Those working in the compliance of this sector will need to keep a keen ear to any developments and ensure that all systems and controls are up-to-speed. 

Regulation and compliance

In these constantly changing times, firms that deal with cryptoassets will need to carefully consider all their systems and controls to ensure that they are able to comply with all relevant AML and sanctions regulations.

How Gherson can assist

Gherson’s white-collar crime and regulatory team are able to provide advice and assistance with AML and sanctions compliance, including in situations involving cryptoassets. 

Additionally, the team has recently started a series of blogs on the regulation of crypto, with the aim of advising those who work in the compliance of this sector. Furthermore, for those who would like advice on relevant issues, including those who have had issues with the FCA registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.

Please do not hesitate to contact us for further advice, send us an e-mail, or, alternatively, follow us on Twitter, Facebook, or LinkedIn to stay up-to-date.

The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please do not hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.

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