Phoenix compliance essentials #23
Today’s focus: circumventing international sanctions through the use of crypto assets
Crypto assets raise new compliance challenges, particularly when it comes to complying with international sanctions.
➡️ Any transaction involving crypto assets requires particular vigilance from an AML/CFT/CPF perspective, notably due to:
– The speed of transfers,
– The pseudonymous nature of certain transactions,
– The ease with which funds can move across borders,
– The risk of circumventing international sanctions.
➡️ A structured approach
When a client holds crypto assets, enhanced due diligence is required:
👉 Assess the investor’s profile: transaction history, crypto assets held, and transaction volumes.
👉 Analyse the source of funds: purchase platforms, supporting evidence for bank transfers, and traceability of funds.
👉 Assess overall consistency: consistency between the client’s profile, socio-economic background and transactions carried out.
👉 Perform additional checks: links to high-risk jurisdictions, destination of funds, and blockchain analysis.
👉 Documentation & traceability: collection and analysis of relevant information, with approval from the AML/CFT/CPF officer.
➡️ Illustrative case: circumventing sanctions through a stablecoin
Stablecoins, which are pegged to a fiat currency, can be used to transfer value outside traditional banking channels.
A European company wishes to purchase goods from a sanctioned Russian supplier.
Due to the international sanctions in place, the payment cannot be made through traditional banking channels.
👉 To circumvent this restriction:
– The company converts the invoice amount into US dollar-pegged stablecoins through a crypto asset platform,
– The stablecoins are transferred to the wallet of an intermediary based in the United Arab Emirates,
– The intermediary converts the stablecoins into local currency,
– The funds are then transferred to the Russian supplier through a separate financial channel.
Result: the underlying economic transaction is completed despite the inability to make a direct payment through traditional banking channels.
💡 This type of arrangement can introduce a third party into the payment chain, add multiple layers of transfers, and make it more difficult to identify the ultimate beneficiary and the true economic purpose of the transaction.
For regulated professionals, this type of arrangement is a major red flag. The analysis should not be limited to the source of funds. It should also cover the economic purpose of the transaction, the intermediaries involved, and the identification of the ultimate beneficial owner.
