March 7, 2022

5 Key Takeaways on Russia Sanctions: Unpacking TRM's exclusive interview with senior U.S. government officials

In the midst of a steady drumbeat of escalating and unprecedented economic measures taken against Russia this week in response to its invasion of Ukraine, on Friday, senior U.S. government officials Carole House and Todd Conklin joined TRM Talks to discuss Russia sanctions and the role, if any, of cryptocurrency. It was a unique opportunity to hear directly from policy makers.

Here are some key takeaways:

Cryptocurrency compliance is “at the front lines” of stopping sanctions evasion.
Crypto is not a useful tool for sanctions evasion by the Kremlin as, “You can’t flip the switch overnight and run a G20 economy on cryptocurrency.”
But, sanctioned oligarchs and other Russian actors could turn to non-compliant crypto businesses in an attempt to evade sanctions.
Sanctioned oligarchs have, for years, attempted to evade sanctions, and crypto has not been a primary part of that playbook.
The U.S. is anticipating an escalating cyber war.

Cryptocurrency compliance is “at the front lines” of stopping sanctions evasion

Carole House, Director for Cybersecurity and Secure Digital Innovation for the White House National Security Council (NSC), was laser-focused on the need for cryptocurrency businesses — virtual asset service providers (VASPs) — to implement anti-money laundering standards globally.

House explained that, "The greatest vulnerability in the cryptocurrency ecosystem right now is the absence of sufficient implementation of AML controls internationally, usually due to the absence of sufficient AML regulatory and enforcement regimes." House’s comments echo the sentiments of the Financial Action Task Force (FATF) which has been focused on global implementation of anti-money laundering controls to avoid jurisdictional arbitrage and other compliance gaps. House, who focused on the important of dedicated international cooperation on Russia sanctions explained, “We will continue to work with international partners to take swift action to try to implement the AML regimes and make sure that we have the partnerships in place to be able to detect and interdict any illicit finance.”

House, speaking directly to the crypto industry, explained the importance of hardening cyber defenses and AML controls. "You guys are on the front lines of this activity . . . these actors are looking for places that are easy to exploit in order to facilitate movement, and you are the people that are best positioned to detect and then report this activity.”

“You can’t flip the switch overnight and run a G20 economy on cryptocurrency.”

Conklin, counselor to the deputy secretary of the U.S. Treasury Department, when asked if the Kremlin could use cryptocurrency to evade U.S. sanctions, did not believe that Putin could make such a move successfully. "Russia is a G20, fiat-based economy, and now the ruble is at a record low," Conklin explained. "Russia has not focused on building the rails needed to support crypto or DeFi [decentralized finance] innovation. In fact, they've shown signs of being reticent to move in that direction over the last two years, while they've built up their own internal reserves. So, point being, you can't flip a switch overnight and run a G20 economy on cryptocurrency."

He added: "For the Central Bank of Russia to use crypto assets in this way, it would've had to develop a large stock of crypto assets or the ability to use its reserves to buy crypto assets. And we did not see an uptick that one would expect in the crypto market in the lead-up to the sanctions actions last week . . . so if the Central Bank of Russia was able to use its reserves to buy crypto assets, it's an access problem, it's a rails problem, and it's just a basic liquidity problem.”

Conklin said the department tracked an uptick in the markets this week, although it was timed with the Russian government banning foreign currency conversion. Russian citizens were also likely looking for an alternative to the ruble, he said.

But, sanctioned oligarchs and other Russian actors could turn to crypto.

While it is unlikely a G20 country can evade crippling sanctions through the use of cryptocurrency, according to Conklin, the use of crypto for sanctions evasion “is concerning from a much more micro perspective,” as sanctions oligarchs may turn to crypto on a smaller scale. Since many larger exchanges have robust sanctions and anti-money laundering controls in place, sanctioned Russian actors will likely turn to non-compliant exchanges.

That said, Conklin reminds us that Treasury has targeted non-compliant VASPs that facilitate money laundering before pointing to the September 2021 designation of SUEX — a non-compliant Russia-based parasite VASP which was sanctioned for facilitating ransom payments.

“Did our sanctions work [on SUEX]? Look at the liquidity for SUEX in the year and a half leading up to the sanctions designation action. They moved in total, 1.6 billion . . .In the month that they were designated by OFAC, they moved $13,000, and now they don't move anything.”

Are there more SUEX-types out there?

In a recent post, TRM identified 340 Russia-related VASPs, the overwhelming majority of which are currently rated as high risk based on a lack of compliance controls such as Know-Your-Customer and exposure to illicit activity. According to Conklin, Treasury will go after such entities. “Treasury is going to use the tools that it currently has at its disposal, which are sufficient to tackle this problem. And we're going to stay on top of it, and we're going to continue to have more actions in this space to make sure we are completely squeezing their ability to move assets.”

Sanctioned oligarchs have, for years, attempted to evade sanctions, and crypto has not been a primary part of that playbook

Conklin explained that sanctioned Russian oligarchs will likely look to options other than crypto, relying on “a long and extensive playbook to launder money. And at the center of their playbook is their web of international corporate registrations and use of front companies and front persons.” He continues, “The Russian cronies are really adept at creating complex layers of international front companies, leveraging family members and front persons. They're also really adept at conversion to other assets, including gold and foreign currencies.”

Is crypto potentially part of their playbook? According to Mr. Conklin, certainly, it will play a role, but “it frankly isn't at the top of their list.”

The U.S. is anticipating an escalating cyber war

Both officials discussed concerns that a wounded but aggressive Putin could use hackers and cybercriminals to lash out against the West. "From SolarWinds in late 2020 and Log4j over the holidays, the [cybersecurity] sector has really been in a state of heightened demand for some time now, and I do worry about burnout, not only for Treasury's own security operations center staffing, but the whole sector," said Conklin. "We've just gone through a lot of significant vulnerabilities over the last year and a half, and now we're facing this particular challenge." House, speaking again to the crypto industry, added, "For the [crypto] sector, which I know has faced challenges with cybersecurity over many years, there's a lot of resources out there pointing to recent OFAC guidance as well as President’s Biden’s executive order on cybersecurity.

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