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Money service firms penalized for not adopting robust anti-money laundering practices

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Two recent federal enforcement actions announced the same day underscore the need for cryptocurrency companies to carefully consider their anti-money laundering (AML) obligations.

First, on August 8, 2022, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) added Tornado Cash (Tornado) to its Specially Designated Nationals (SDN) list. Therefore, Tornado generally cannot do business with US persons.

According to OFAC, Tornado is a cryptocurrency mixer that has been used to launder more than $7 billion since its creation in 2019. Currency mixers aggregate digital assets into pools, often obscuring their destination and origin. While this may be a legitimate way to protect the privacy of crypto users, it can also be used to obfuscate illegal activity. In announcing the sanctions against Tornado, OFAC said mixers should generally be considered “high risk” until “appropriate controls are put in place” to mitigate money laundering concerns. rice field.

Tornado is not the first OFAC-sanctioned cryptocurrency mixer for a weak or non-existent AML program. The first OFAC-sanctioned mixer was, which, according to OFAC, was widely used by hacking groups sponsored by the Democratic People’s Republic of Korea.and In a press release addressing the incident, OFAC indicated that it would continue to “investigate the use of mixers for illegal purposes and review the scope of its mandate.” [it] We need to address the risk of illicit funding in the cryptocurrency ecosystem. For more information on the risks associated with anonymity-enhancing technologies, please visit 2022 National Money Laundering Risk Assessment.

The second enforcement action involved another money services company that was found to have weaknesses in its AML program. The US Attorney for the Southern District of New York has announced that Gregory Dwyer, former head of business development at BitMEX, has pleaded guilty to violating the Bank Secrecy Act (BSA). prosecutor revealed BitMEX’s failure to implement Know Your Customer (KYC) requirements has made it “substantial a money laundering platform” and Dwyer has deliberately attempted to “establish, implement, or maintain an anti-money laundering program.” Negligence constituted a violation of the BSA.

BSA requires covered entities to maintain effective AML policies, including a customer identification program (commonly referred to as KYC requirements). Specifically, financial institutions must collect certain identifying information from clients who use their services, verify that information to form a reasonable belief about the client’s identity, and maintain related records. I have. MSB and other financial institutions are liable for their failure to implement and maintain effective AML programs and for violating the BSA.

Other regulatory agencies, such as the US Department of Justice and the Financial Crimes Enforcement Network (FinCEN), have the power to investigate and punish violations of the BSA. responsible for such violations. In addition to KYC, an AML program should also typically include a designated compliance officer to oversee the AML program, suspicious activity reporting, employee training, and an independent review or audit of the AML program.

The Tornado designation and BitMEX conviction serve as a reminder that financial institutions must maintain and follow robust AML programs tailored to their operations, scale, and risks. the size and scope of the financial institution;

The “financial institutions” covered include traditional types such as banks and broker-dealers, and non-traditional types such as money service businesses, a category that includes “money transfer providers”. A crypto company that offers digital financial or banking products should consider its role in the flow of funds to determine whether it is considered a money services business. If you’re not sure whether your business is a money transfer provider or some other type of money services business, see our previous publication MSB or Not MSB? That’s the Question.

For more information on money laundering laws and regulations, please contact a Wilson Sonsini attorney. Stephen Heifetz Troy Jenkins Jonathan Davey, or international security training.