Non-US Crypto & Other Money Services Businesses: Do You Have US Clients? Beware of AML Compliance Risks and Penalties | Orrick, Herrington & Sutcliffe LLP

Two recent guilty pleas involving a cryptocurrency exchange remind all Money Services Businesses (“MSBs”) – including those ostensibly located outside of the United States but doing business there – of the importance of putting implement anti-money laundering (“AML”). ) and registering as an ESM with the Financial Crimes Enforcement Network (“FinCEN”) of the United States Department of Treasury. Last week, two founders and executives of BitMEX – a virtual currency derivatives exchange whose parent company was registered in Seychelles but operated around the world, including the United States – pleaded guilty to criminal breaches of the Securities Act. bank secrecy (“BSA”) resulting from the company. willful failure to establish, implement and maintain an AML program.[1]

BitMEX’s enforcement action also highlights the risks of sanctions non-compliance. Without a Know Your Customer (“KYC”) program, BitMEX transacted for clients based in Iran, a jurisdiction widely sanctioned by the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”). As OFAC has made clear, sanctions compliance obligations remain the same whether transactions are denominated in virtual currency or fiat. The focus on sanctions compliance may become even more critical for cryptocurrency firms in the wake of sweeping new Russia-related sanctions imposed by the United States, European Union and United Kingdom. , among other governments, in response to the Russian invasion. from Ukraine. OFAC and the New York State Department of Financial Services (“NYSDFS”) have warned that as sanctioned individuals and jurisdictions “become increasingly desperate to gain access to the U.S. financial system,” they are likely to turn to cryptocurrency to minimize the crippling effect of sanctions. .

BitMEX founders guilty pleas

The guilty pleas of the two founders of BitMEX on February 24, 2022 follow the company’s settlement with US regulators in August 2021, which was one of the largest resolutions ever with a cryptocurrency exchange. Although BitMEX was incorporated in the Seychelles, it had ties to the United States, including maintaining offices there and soliciting and accepting orders from American customers. FinCEN and the Commodity Futures Trading Commission found that BitMEX was operating as an unregistered futures commissioner under the BSA and had failed to comply with the requirements of the BSA’s AML program, including failing to not maintain an adequate customer identification program. BitMEX has resolved the allegations for $100 million, with a $20 million suspended penalty pending corrective and preventative action by the company, including ending all operations in the United States and no longer serving no more American customers.

The Department of Justice indicted four of the company’s founders and executives in October 2020. Announcing that two of them, Arthur Hayes and Benjamin Delo, had pleaded guilty to willfully violating the BSA, the Department of Justice Justice alleged that these two founders “closely” followed U.S. regulatory developments and were aware of their BSA obligations due to U.S. client transactions on BitMEX. Yet, they reportedly took positive steps that are supposed to exempt BitMEX from the application of US laws such as AML requirements and KYC requirements. For example, according to prosecutors, “the defendants pushed BitMEX to formally incorporate in Seychelles, a jurisdiction which they claimed had less stringent regulation, and from which they could still serve US customers and operate in the States. States without performing AML and KYC”. Without “even basic” AML policies in place, BitMEX has become “effectively a money laundering platform” and a “vehicle for sanctions violations”.

Take away food

This development illustrates the significant risks to which MSBs located abroad are exposed if they have American customers but do not comply with the BSA. Incorporation in a “friendlier” jurisdiction, such as the Seychelles in the BitMEX case, does not protect an MSB from BSA liability if it operates in the United States. The BSA applies to MSBs »wherever he is“if they conduct their business “wholly or substantially in the United States.” Thus, all MSBs, including those transmitting cryptocurrency – with any connection to the United States – should take note of the requirements of BSA These include registering with FinCEN; implementing a written AML program with policies, procedures and internal controls, including relating to customer identification and verification; and controls to detect and report suspicious activity Anti-money laundering programs should be proportionate to the risks posed by the location, size, nature and volume of the services provided by the MSB and be effective in preventing the MSB from is not used to facilitate money laundering and the financing of terrorist activities.

An effective AML/KYC program will also help ensure compliance with sanctions regulations. As noted, cryptocurrency exchanges are likely to face heightened sanctions risks due to the sweeping sanctions recently imposed on Russian banks, entities and individuals by the United States, European Union, United Kingdom and other countries. other governments, and additional measures that may be imposed in the coming days or weeks. As such, cryptocurrency exchanges may face “unique risks” and must manage them.

By implementing a KYC program, which includes sanctions screening, cryptocurrency companies can help ensure that they do not engage, directly or indirectly, in transactions prohibited by sanctions, such as transactions with blocked persons or property, or engage in prohibited trading or investment activities. transactions. To ensure compliance, cryptocurrency exchanges must also use geolocation and IP address blocking to bar access to parts of sanctioned jurisdictions, conduct transaction monitoring to detect suspicious activity, and file required reports with the FinCEN and OFAC. Exchanges operating outside of the United States that do not yet have but wish to attract US users should also consider implementing such measures.


[1]Also last week, on February 25, 2022, BitConnect founder Satish Kumbhani was indicted in a cryptocurrency Ponzi scheme, which the government says has deprived investors around the world, including in the United States. , more than $2 billion. According to the indictment, to avoid regulatory scrutiny and conceal BitConnect’s fraudulent scheme, Kumbhani evaded and circumvented US regulations, including those enforced by FinCEN. Among other things, BitConnect never registered with FinCEN, as required by the BSA.

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