Office of Foreign Assets Control (OFAC)

We previously have blogged on actions taken by the DOJ’s “Task Force KleptoCapture,” an interagency law enforcement task force with a mandate to target sanctioned Russian and pro-Russian oligarchs. While explicitly launched in May 2022 as a direct response to Russia’s full-scale invasion of Ukraine, the task force’s mission is consistent with the U.S. government’s characterization of Russia as a kleptocratic regime (see our post here) and the Biden Administration’s promotion of anti-corruption as a “core United States national security interest” (see our posts here and here).

This week, DOJ announced (via both a press release and a filmed podium announcement by Attorney General Merrick Garland) a series of enforcement actions in five separate federal cases in districts up and down the East Coast, dealing with money laundering and evasion of sanctions, in several cases centered on quintessentially oligarchic luxury goods: high-end real estate and superyachts.  The enforcement actions also emphasize the continuing themes in these cases of the use of shell companies, proxies and lawyers to allegedly evade sanctions.

Continue Reading  The American Front in Russia’s War on Ukraine: DOJ’s “Task Force KleptoCapture” Continues Focus on Operations of Sanctioned Oligarchs

Farewell to 2023, and welcome 2024.  As we do every year, let’s look back.

We highlight 10 of our most-read blog posts from 2023, which address many of the key issues we’ve examined during the past year: criminal money laundering enforcement; compliance risks with third-party fintech relationships; the scope of authority of bank regulators; sanctions

A Huge Monetary Penalty for Sprawling Allegations – But Will Zhao Receive a Prison Sentence?

As the world now knows, Binance Holdings Limited, doing business as Binance.com (“Binance” or the “Company”), has entered into a plea agreement with the U.S. Department of Justice (“DOJ”).  

Binance is registered in the Cayman Islands and regarded as the world’s largest virtual currency exchange. It agreed to plead guilty to conspiring to willfully violating the Bank Secrecy Act (“BSA”) by failing to implement and maintain an effective anti-money laundering (“AML”) program; knowingly failing to register as a money services business (“MSB”); and willfully causing violations of U.S. economic sanctions issued pursuant to the International Emergency Economic Powers Act (“IEEPA”). Despite the plea agreement, Binance will continue to operate.

Changpeng Zhao, also known as “CZ,” also pleaded guilty to violating the BSA by failing to implement and maintain an effective AML program. Zhao is Binance’s primary founder, majority owner, and – until now – CEO. As part of his plea agreement, Zhao has stepped down as the CEO, although he apparently will keep his shares in Binance.

As part of its plea agreement, Binance has agreed to forfeit $2,510,650,588 and to pay a criminal fine of $1,805,475,575 for a total criminal penalty of $4,316,126,163. Binance also entered into related civil consent orders with the Financial Crimes Enforcement Network (“FinCEN”), the Commodity Futures Trading Commission (“CFTC”), and the Office of Foreign Assets Controls (“OFAC”). Zhao also entered into a consent order with the CFTC.

The allegations are vast and detailed, and much digital ink already has been spilled regarding this matter. Our discussion therefore will be relatively high-level. Distilled, the government alleges that Binance – under the direction of Zhao – tried to hide the fact that it operated in the U.S., purposefully avoided any meaningful AML compliance, and consequently laundered many millions of dollars’ worth of cryptocurrency involving extremely serious criminal conduct, including terrorism, child pornography, and U.S. sanctions evasion.

As for Zhao, and as we will discuss, whether he will go to prison – and if so, for how long – is an open and very interesting question. His sentencing currently is scheduled for February 23, 2024.

Continue Reading  Binance Settles Criminal and Civil AML and Sanctions Enforcement Actions for Multiple Billions – While its Founder, Owner and Former CEO Zhao Pleads Guilty to Single AML Crime

Earlier this month, John Can Unsalan, the president of a steel-making company with ties to Russian oligarchs, pled guilty to one count of conspiracy to commit money laundering, based on financial transactions committed with the alleged intent to promote U.S. sanctions violations.

Unsalan’s company, known as Metalhouse LLC, was formed in Florida in 2014. According to the plea agreement, between 2018 and 2021 Unsalan facilitated transactions through Metalhouse with companies controlled by Sergey Kurchenko, a Russian oligarch who has been on OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List since 2015 (Kurchenko was initially put on the SDN List for allegedly misappropriating state funds belonging to Ukraine). It is generally illegal for U.S. persons to directly or indirectly conduct business with individuals or entities on the SDN List – although the U.S. government is able to grant exceptions on a case-by-case basis.

According to the factual basis supporting the plea agreement, Unsalan knowingly participated in a scheme with Kurchenko to evade sanctions through Metalhouse transactions, which totaled around $157 million over the relevant three-year period. The scheme involved two shell companies – one formed in Hong Kong and one in Cyprus – controlled by Kurchenko. Unsalan and his associate at Metalhouse met with Kurchenko in person and subsequently contracted with Kurchenko’s companies to order steel and other raw materials and to pay for the materials using offshore bank accounts. Ultimately, Unsalan and Metalhouse received a total of over $160 million from reselling those materials to third parties – and although most of that money went to Kurchenko to pay for additional raw materials, the factual basis supporting the plea agreement alleged that Unsalan kept millions in profits for his own personal use.

Continue Reading  Steel Company President with Ties to Russian Oligarch Pleads Guilty to Money Laundering Conspiracy Involving Alleged Sanctions Violations

Following Russia’s invasion of Ukraine, the Financial Crimes Enforcement Network (“FinCEN”) and the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) issued a joint alert and a supplemental alert (the “Joint Alerts”) urging U.S. financial institutions (“FIs”) to be attentive to attempts by Russia to evade U.S. sanctions and export controls. The Joint Alerts also reminded FIs of their obligations to file suspicious activity reports (“SAR”s) detailing suspected export control evasion.  We blogged on the Joint Alerts here and here.

FIs complied, and on September 8, 2023, FinCEN published a Financial Trend Analysis (“FTA”) describing insight it gained from those SARs into Russian procurement activities potentially in violation of the Export Administration Regulations. FinCEN issued the FTA right before the Office of Foreign Asset Control (“OFAC”) announced on September 14, 2023 another wave of related sanctions by adding to the list of Specially Designated Nationals more than 150 foreign companies and individuals accused of aiding Russia, including by shipping American or other Western technology.

The FTA is based on 333 SARs filed between June 28, 2022 and July 12, 2023. The SARs—96% of which were filed by U.S.-based depository institutions—detailed nearly 1 billion dollars in suspicious activity

Continue Reading  FinCEN Analysis Reveals Patterns and Trends in Suspected Evasion of Russia-Related Export Controls

Complex Civil and Criminal Cases Converge

On August 17, 2023, Judge Robert Pitman of the federal district court for the Western District of Texas issued an Order granting summary judgment for the U.S. Treasury Department (“Treasury”) in a lawsuit brought by six individuals, and denying the cross-motion for summary judgment filed by the individuals. The lawsuit alleged that Treasury overstepped its authority by imposing sanctions on the coin mixing service Tornado Cash.  Deciding for the government, Judge Pitman determined that Tornado Cash is a “person” that may be designated by OFAC sanctions.  Specifically, the regulatory definition of “person” includes an “association,” and Tornado Cash is an “association” within its ordinary meaning.

Shortly thereafter, on August 23, 2023, the U.S. Department of Justice (“DOJ”) unsealed an indictment returned in the Southern District of New York against the alleged developers of Tornado Cash, Roman Storm (“Storm”), a naturalized citizen residing in the U.S., and Roman Semenov (“Semenov”), a Russian citizen.  The indictment charges them with conspiring to commit money laundering, operate an unlicensed money transmitting business, and commit sanctions violations involving the International Emergency Economic Powers Act, or IEEPA.  When the indictment was unsealed, Storm was arrested and then released pending trial.  Treasury simultaneously sanctioned Semenov, who remains outside of the U.S., adding him to OFAC’s Specially Designated Nationals and Blocked Persons (“SDN”) List.

These are very complicated cases raising complicated issues.  They are separate but obviously related.  As we will discuss, the factual and legal issues tend to blend together, and how a party characterizes an issue says a lot about their desired outcome:  has the government taken incoherent action against a technology, or has it pursued a group of people attempting to hide behind tech?

Continue Reading  All Roads Lead to Roman: Alleged Tornado Cash Co-Founders Roman Storm Arrested and Roman Semenov Sanctioned, Days After Treasury Defeats Lawsuit Challenging OFAC

On July 31, 2023, the United States Securities and Exchange Commission (“SEC”) published an alert outlining deficiencies the Division of Examinations has observed in broker-dealers’ (“BD”) compliance with anti-money laundering (“AML”) and countering terrorism financing (“CTF”) requirements.  While the alert addresses overarching compliance requirements for BDs, it focuses on deficiencies the Division of Examinations has observed with regard to independent testing of BDs’ AML programs, personnel training and identification and verification of customers and their beneficial owners.

The alert makes two over-arching observations.  First, BDs “did not appear to devote sufficient resources, including staffing, to AML compliance given the volume and risks of their business.”  Second, the “effectiveness of policies, procedures, and internal controls was reduced when firms did not implement those measures consistently.”  Emphasizing the key elements of an adequate AML program BDs must implement, the Alert then shifts its focus to independent testing and training and customer identification and customer due diligence.

Continue Reading  SEC Issues Alert Outlining Deficiencies in Broker-Dealers’ AML Compliance

Notice Also Stresses New BSA Whistleblower Provisions

On July 26, the Department of Commerce, the Department of the Treasury, and the Department of Justice released a joint compliance notice (the “Compliance Notice”) updating and summarizing each agency’s position regarding the voluntary self-disclosure by businesses of potential violations of sanctions, export controls, and other national security laws.

Asserting that voluntary self-disclosure can provide many benefits to a reporting business – potentially providing for a non-prosecution agreement or a 50 percent decrease in “base penalties” – the Compliance Notice provides each entity’s current position as to voluntary self-disclosure.  The Compliance Notice also references the still-evolving whistleblower program under the Bank Secrecy Act (“BSA”), which now pertains to not only potential BSA violations, but also potential violations of sanctions law.

Continue Reading  “Tri-Seal” Compliance Notice: U.S. Authorities Release Joint Guidance on Voluntary Self-Disclosure of Potential Sanctions and Export Control Violations

Yesterday, the Department of the Treasury announced that Andrea Gacki, who had been serving as the Director of the Office of Foreign Assets Control (OFAC), has been appointed as the Director of the Financial Crimes Enforcement Network (FinCEN).

FinCEN, which faces a daunting agenda and associated timelines courtesy of the Anti-Money Laundering Act and

The Office of Foreign Asset Control (“OFAC”) announced on June 20 that Swedbank Latvia AS (“Swedbank Latvia”), a subsidiary of Swedbank AB (“Swedbank AB”) headquartered in Riga, Latvia, agreed to pay $3,430,900 to settle its potential civil liability for 386 “apparent” violations of OFAC sanctions involving Crimea.  Specifically, Swedbank Latvia allegedly allowed a client to initiate payments from Crimea through an e-banking platform that ultimately were processed by a U.S. correspondent bank. The settlement amount reflects OFAC’s determination that Swedbank Latvia’s conduct was “non-egregious” – but not voluntarily self-disclosed.

Although unrelated to this OFAC action, Swedbank Latvia was the topic of a 2019 internal investigation report commissioned by Swedbank AB revealing that from before 2007 through 2016, Swedbank Latvia (and Swedbank Estonia) actively pursued certain high-risk customers as a business strategy.  This conduct, related to the Danske Bank scandal and its now-notorious Estonian Branch, resulted in Swedish and Estonian authorities ordering Swedbank AB in 2020 to pay a record 4 billion Swedish Krona (then, approximately $38 million) in anti-money laundering related penalties.

This OFAC enforcement action involves alleged conduct which occurred even before Russia’s 2022 unprovoked invasion of Ukraine, the ensuing host of expanded U.S. sanctions, and the recent drive by U.S. regulators and prosecutors to combat the attempted evasion of Russia sanctions and export controls.  The enforcement action reflects how OFAC can learn of potential sanctions violations through other financial institutions.  It also emphasizes, once again, some of the risks inherent in providing correspondent bank services to foreign banks, and the need for good communication between U.S. and foreign banks.  It further reflects the need for a financial institution (or any company) to integrate customer data into a sanctions compliance program, keep up to date on evolving sanctions, and pursue potential red flags of non-compliance – including in the face of customer representations of compliance.

Continue Reading  Swedbank Latvia Settles with OFAC for Apparent Crimea Sanctions Violations