US Department Of Justice Can Pursue Criminal Charges For Sanctions Evasion By Cryptocurrency, Court Rules

My partner at Akrivis, Sam Amir Toossi, who heads the firm’s White Collar Defense and Commercial Litigation practice wrote this piece, which features on our firm’s website as well. Those of us in the sanctions regulatory and compliance field may have less appreciation for this as for those familiar with the regulations, the sanctions are very clear and self-evident on this issue – sanctions evasion and circumvention are prohibited whether by cryptocurrency or any other method. However, those in the enforcement space, including litigators such as Sam, a former federal prosecutor in the Eastern District of New York (EDNY), find the opinion of the District Court for the District of Columbia (DDC) very poignant and significant as it clearly ascertains the Department of Justice’s position on this issue. Expect to see a lot more on this in the coming months and years.

Following Russia’s invasion of Ukraine, the United States quickly imposed sweeping sanctions on Russian entities and individuals, which the Biden Administration immediately began to take steps to aggressively enforce.  The Department of Justice (DOJ) announced the formation of the KleptoCapture Task Force, an interagency law enforcement effort to enforce the sanctions and restrictions designed to punish Russia’s actions in Ukraine.

As news reports abounded of Russian efforts to evade the sanctions using cryptocurrency, the DOJ stated that part of the KleptoCapture’s mission would be to “target[] efforts to use cryptocurrency to evade US sanctions, launder proceeds of foreign corruption, or evade US responses to Russian military aggression.”  OFAC also issued guidance in an FAQ released on March 11, 2022, confirming that compliance with the Russian sanctions would be required “regardless of whether a transaction is denominated in traditional fiat currency or virtual currency,” pointing to its own October 2021 guidance on the use of cryptocurrency.  Now, a court sitting in the District of Columbia has weighed in and confirmed that the DOJ can pursue criminal charges against individuals that use cryptocurrency to evade U.S. sanctions.  This ruling not only confirms that the DOJ is pursuing sanctions violators criminally, but it also represents the first time that the federal courts have approved of such enforcement.

On May 13, U.S. Magistrate Judge Zia Faruqui, sitting in the United States District Court for the District Columbia (DDC), ruled that the DOJ could pursue a criminal action based on the use of cryptocurrency to evade U.S. sanctions.  In an opinion rich with pop-culture references (including Friday the 13^th, Silicon Valley, and Saturday Night Live), the Court stated that “[t]he question is no longer whether virtual currency is here to stay (i.e., FUD) but instead whether fiat currency regulations will keep pace with frictionless and transparent payments on the blockchain.”  The Court ultimately relied heavily on OFAC’s recent guidance from October 2021, which determined that “sanctions compliance obligations apply equally to transactions involving virtual currencies and those involving traditional fiat currencies.” (quoting OFAC, Sanctions Compliance Guidance for Virtual Currency (“OFAC Guidance”), at 1 (Oct. 2021),

https://home.treasury.gov/system/files/126/virtual_currency_guidance_brochure.pdf  see also U.S. Dep’t of the Treasury, Questions on Virtual Currency (Mar. 19, 2018),

https://home.treasury.gov/policy-issues/financial-sanctions/faqs/560.

Notably, the Court also cited with approval recent enforcement actions involving cryptocurrency.  Prominent payment platforms such as BitGo and BitPay had to settle sanctions violations with OFAC earlier this year due to deficiencies in internal controls and screening procedures aimed at detecting prohibited transactions on their platforms. BitGo was found to have violated OFAC regulations because it allowed transactions between buyers in a sanctioned country and businesses in the United States and elsewhere exchanging digital currency on its platform, even though the platform provider had Internet Protocol (IP) addresses and other location data about the buyers prior to processing the transactions.

There are several key takeaways from Judge Faruqui’s opinion.  First, while it is unknown which sanctioned country was involved in the transactions at issue, the DOJ has been clear that it intends to pursue sanctions violators criminally.  As Deputy Attorney General Lisa Monaco recently said, “sanctions are the new FCPA.”  And the opinion reveals that the DOJ is now pursuing sanctions violations using cryptocurrency criminally.  Second, it is unusual that the opinion is even available to the public.  The case remains under seal, and the Court redacted the name of the defendant and the sanctioned country at issue.  And yet the Court nonetheless published the opinion on its website, seemingly as a warning that not only does the executive branch (e.g., DOJ and OFAC) view cryptocurrency as subject to sanctions regulations, but the judiciary does now as well.  Indeed, there is now clear judicial precedent for the proposition that the use of cryptocurrency is subject to U.S. sanctions.  As Judge Faruqui stated in his opinion, “The [DOJ] can and will criminally prosecute individuals and entities for failure to comply with [sanctions] regulations, including as to virtual currency.”