In this article I want to address the application of the regulations of the Office of Foreign Assets Control (“OFAC”) to businesses dealing with virtual currencies.
This aspect of regulations is often overlooked or ignored, but the fines are very real. This spring, PayPal was fined $7,658,300 because they allowed transactions with Iranian and Cuban nationals, for example.
OFAC has authority to impose civil liability of either $250,000 or twice the amount of the underlying transaction. It is an office of the US Department of the Treasury and is tasked with enforcing economic and trade sanctions against foreign countries and certain foreign nationals.
Laws and regulations enforced and promulgated by the OFAC apply to banks and money services businesses alike. And since back in 2013 the Treasury Department designated administrators and exchangers of virtual currencies as money service businesses, most likely OFAC regulations will apply to them as well. Thus a business owner dealing with virtual currencies should be aware of all possible regulations that may affect the bottom line.
When imposing sanctions, the US Government can target either the entire country, region, organization or individual.
When the entire county, such as North Korea, is targeted by sanctions, it is the virtual currency company’s responsibility to block any account or property belonging to any citizen of that country.
Blocking or “freezing” of property means that a country or an individual is denied any kind of access, administration or control of their property without authorization from OFAC.
Banks have developed software that is designed to interdict certain illicit fund transfers to targeted regions or individuals. It is unclear whether a comparable software exists for virtual currencies.
OFAC treats failure to block illicit transfers as a strict liability. According to this guidance, OFAC has imposed millions of dollars in civil penalties to banks who failed to block illicit transfer involving a targeted individual or a country.
The PayPal announcement shows that money services businesses are just as liable under OFAC’s regulations as the banking sector. And there is no indication that virtual currency operators will be treated any different in case of non-compliance.
Every time an account has been blocked or a transaction has been rejected, the financial institution – or a virtual currency business — has an obligation to make a report within ten business days. The report must identify, among other things, the owner, the property, the property’s location, estimated value and date it was blocked.
When it comes to Bitcoin or similar virtual currency that may be problematic, because of the nature of the cryptocurrency.
In addition, every time it comes to OFAC’s attention that an illicit transaction has occurred without being blocked or rejected, OFAC sends out an administrative demand for information requesting information on how the transaction was processed. Once the financial institution has responded to the demand, a civil penalty may be imposed. The financial institution — or a virtual currency operator — then has 30 days to present an explanation why a penalty should not be imposed or lessened. OFAC will look at any mitigating circumstances.
This is just an example of another way existing regulations can apply to virtual currency based businesses.