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OFAC-GUIDANCE-IS-YOUR-CRYPTOCURRENCY-EXCHANGE-COMPLIANT? BY A&D FORENSICS

OFAC Guidance On Having a Compliant Cryptocurrency Exchange

IS YOUR CRYPTOCURRENCY EXCHANGE COMPLIANT?

The Office of Foreign Assets Control (OFAC) had on October 15, 2021, provided guidance on how cryptocurrency exchanges should comply in the industry. It’s no news that many federal regulations scrutinized the cryptocurrency industry after OFAC placed a ban on SEUX OTC in relations with ransomware.

 Hence, the OFAC guidance is established to protect the cryptocurrency companies including cryptocurrency exchanges, wallet providers, virtual assets service providers (VASPs), OTC traders and miners.

The  OFAC guidance provides the following:

1) A difference between Virtual and Digital CurrenciesA Digital currency is a larger category of assets  while a virtual currency is a subset of Digital currencies. In any case, both terms could be used interchangeably.

2) A breakdown on how to ‘block” digital currencies: Whenever a digital asset that  ought  to be blocked eventually gets blocked, no party is allowed to access the asset again. In the case where a fiat currency gets blocked, it should be placed in an interest bearing account. In addition, companies do not have the right to convert already blocked digital assets to fiat currencies before placing them in an interest bearing account.

3) An explanation of OFAC’s stringent liability rule: This means that exchanges who violate the rules are to be charged.  For instance, if you unknowingly engage in a forbidden transaction, you have gone against the rules and you will be penalized.

The recent OFAC guidance also expanded on the essential components that every  Sanctions Compliance Program (SCP) should have. They include:

a) Management Dedication: Just like the non digital  financial services, the Head of Management should ensure that the compliance team have adequate tools and are thoroughly incorporated into the daily activities of the organization.

b) Assessing Risk: Digital asset companies are required to thoroughly review their  potential exposure to illicit transactions, screen their clients to prevent risks and also protect their high risk customers. For this to be possible, the risk assessment methodology should  be personalized to suite each company’s business.

c) Internal Controls: In as much as this aspect needs to be personalized to suite the companies business, it’s mandated to have some features such as:

i. Screen the company’s data and incorporate them into their SCP.

ii. Include the use of Geolocation tools, appropriate blocking of IP address and screening against sanctions.

iii. Use of appropriate blockchain analytics tools like Chainalysis KYT to identify transactions involving digital asset addresses associated with prohibited  individuals or businesses identified on the OFAC Sanctions list or even situated in prohibited  areas.

iv. Participants in the digital asset industry should regularly audit and test their schedules in their SCPs to access how effective they are in practice. 

v. Employees should be trained at least annually on compliance so as to show the employee’s activities, the business structure of the company and their risk profile, and also to incorporate new technologies in the digital currency space.

Despite the fact that the OFAC guidance expects the digital asset industries to adopt an SCP, there are some issues that has remained unaddressed. For instance,

1) Rejection of  incoming funds from sanctioned persons, and ensuring that  outgoing funds from exchanges are  not directed to sanctioned persons is yet to be practically feasible.

2) By charging a person(s) indirectly exposed to a prohibited wallet, one would wonder how to guarantee that the next transfer of a digital asset after the initial transfer has been made wouldn’t land in a prohibited  wallet.

3) The digital asset industry is faced with a challenge of deanonymizing counterparties. However, exchanges are advised to leverage on existing blockchain tools that can assist them to identify risk wallets.

4) More clarity is needed on how SFCs can be built around Decentralized Autonomous Organizations (DAOs). For instance, A DAO may lack unidentifiable top management to implement OFAC related policies and also, it’s yet to be ascertained on the team that should be trained in order not to break the rules.

Conclusion

In conclusion, OFAC through the OFAC guidance wants all companies, exchanges involved in the digital asset industry to adopt an SCP and also document their efforts adequately when creating and implementing SCPs leading to a need for an experienced guide.

If you have any questions about this advice or you need to know how you might apply these guidelines to your business, contact us with: contactus@adforensics.ng and follow our social media platforms for further guide.

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LEAD FACILITATOR – CRYPTOCURRENCY INTUITION

Chioma Onyekelu is a highly skilled and accomplished professional in the field of cryptocurrency and blockchain technology. She is a Certified Cryptocurrency Investigator and Crypto Compliance Specialist, as well as a Blockchain Forensic Specialist and a teacher. She is also a public speaker and her teachings include consultations and practical solutions for African Start-ups on the best and most cost-effective way to build with compliance in mind. With a wealth of knowledge and experience in these cutting-edge technologies, she is well-equipped to navigate the complex landscape of cryptocurrency-related crimes.

In her current role as a Blockchain Forensic Specialist at A&D Forensics, Chioma is responsible for tracing and investigating cryptocurrency-related crimes, as well as training law enforcement agents and compliance officers on the latest developments and best practices in the field. In addition, she is currently pursuing a Master's degree in Blockchain and Digital Currencies at the University of Nicosia in Cyprus, further solidifying her expertise and understanding of the technology.

Chioma's dedication and passion for the field is evident in her work, and she is committed to staying at the forefront of developments in cryptocurrency and blockchain technology to provide the best possible service to her clients. Her exceptional skills in educating and consulting make her a valuable asset to the industry and an authority in the field of Blockchain and Crypto Compliance.

LEAD FACILITATOR – CRYPTOCURRENCY INVESTIGATIONS

Adedeji is a Forensic Investigation Practitioner and CertifiedBlockchain/Cryptocurrency Forensic
Investigator (CFE, CCI, CCFI & Reactor Certified) with more than Fifteen years of experience across few banks within the Nigeria Financial Sector and educator in Corporate workplace settings, Deji is uniquely qualified and involved in forensics analysis of Financial Infractions, Cryptocurrency crimes and designing plans that works for Government, Regulators, Law enforcement.

He was appointed by SEC Nigeria as Member Virtual Asset and Fintech Regulatory framework drafting Committee, He is a member of Global Digital Finance’s KYC/AML working group in France and a member of the Industry led Thinktank that worked on and came out with FATF cryptocurrency Travel rule InterMessaging Standard for Virtual Assets (IVMS101) to help combat money laundering and terrorism financing using cryptocurrencies around the globe.

His law enforcement training efforts on new money and cybercrime have seen him train many law enforcement agents in various countries i.e Nigeria Police, Nigeria Army CyberWarfare command, Zambia Financial Intelligence Unit, Zambia Central Bank and more.
He is Chainalysis Sole Africa Investigative Partner helping law enforcement investigate criminal organizations using cryptocurrency to conceal illiccit activities across Africa, he is also a training Partner for Blockchain Intelligence Group based out of Canada.

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