DOJ and Treasury Take Crypto Enforcement to the Next Level | Latham & Watkins LLP

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DOJ’s National Cryptocurrency Enforcement Team and Treasury’s OFAC focus on the use of cryptocurrency in cybercrimes.

The US Department of Justice (DOJ) is focusing more on combating the use of cryptocurrency in criminal activity. On October 6, 2021, the DOJ announced the creation of a National Cryptocurrency Enforcement Team (NCET) – a unit intended to be the centerpiece of a “nationwide enforcement effort to fight against the use of cryptocurrency as an illicit tool “. The DOJ identifies cryptocurrency as the “primary demand mechanism for ransomware payments” and the “preferred medium of value exchange” to facilitate crimes on the dark web. The stated goal of NCET is to conduct complex investigations and prosecutions of cryptocurrency misuse by individuals and entities operating in the digital asset space.

Underlying the NCET is the first published report of the DOJ Cyber ​​Digital Task Force, which highlighted the need to address the threats posed by the use of cryptocurrency in cybercrime, as well as its framework for October 2020 cryptocurrency application (the framework), which highlighted emerging threats and their application. challenges posed by the use of cryptocurrency and the abuse of infrastructure. As part, the DOJ asserted broad and diverse jurisdiction over crimes involving cryptoassets to prosecute violations of U.S. law even if those violations were committed by individuals or entities based outside of the United States, both that these entities maintained an activity link involving American people (see this post by Latham for more information).

Multi-agency application and collaboration

NCET represents the latest development in government efforts to identify and prosecute illegal behavior in the cryptocurrency industry. It brings together people from various divisions and units of DOJ, tapping into expertise in local criminal law enforcement, money laundering, cybercrime and blockchain technology. The DOJ has previously made it clear in the framework that it intends to work with many US regulators and agencies to control the cryptocurrency space. NCET will expand on this goal, seeking to collaborate with US lawyers across the country; with federal, state, local, tribal, territorial and international law enforcement agencies; and even with private sector players with expertise in cryptocurrency. Presumably, NCET’s collaboration will extend to the Enforcement Division of the Commodity Futures Trading Commission (with a dedicated digital assets and bank secrecy law team), as well as to the Enforcement Division. application of the Securities and Exchange Commission (with a cyber unit Innovation and Financial Technology Hub).

Ransomware prevention and the effectiveness of sanctions as a top priority

Tackling ransomware through the strategic use of sanctions has been a critical part of the US Department of the Treasury’s enforcement program in recent years. Those efforts came to a head on September 21, 2021, when the Treasury’s Office of Foreign Asset Control (OFAC) announced that, for the first time, it had added a virtual bureau de change to its list of Specially Designated Nationals ( SDN) for its role in facilitating financial transactions for ransomware players. The Treasury also issued an updated Notice on Potential Sanction Risks for Facilitating Ransomware Payments, which outlines the potential sanction risks associated with executing and facilitating ransomware payments, and recommended individuals and businesses to focus on “defense and resiliency measures to prevent and protect against ransomware attacks.” “

OFAC also reiterated previous guidelines encouraging victims to report ransomware attacks to law enforcement. The updated notice adds that OFAC will consider a company’s full and self-initiated report that is made to OFAC or a number of other government agencies as “voluntary self-disclosure” warranting a mitigation credit under OFAC enforcement guidelines. OFAC further clarified that it would be “more likely” to resolve apparent sanctions violations involving ransomware attacks with a non-public response (i.e. a letter of no action or a letter of no-action. warning) when the affected party has disclosed to law enforcement and provided continued cooperation.

It may not be a coincidence, on the same day that the DOJ announced the creation of the NCET, OFAC released the Sanctions Compliance Guide for the Virtual Currency Industry (the Guide). According to the Treasury press release, the Guide is part of a “whole-of-government” effort to address the risks associated with the illicit use of cryptocurrency and ransomware. The Guide aims to help the virtual currency industry to effectively implement compliant sanction programs to prevent exploitation of the financial system by sanctioned persons and other illicit actors. The guide provides companies in the digital asset industry with key information to:

Assess the risks associated with sanctions in their industries Build a risk-based sanctions compliance program Protect their business against sanctions violations and the intentional misuse of virtual currencies by malicious actors Understand the processes for maintaining OFAC registers, report, license and enforcement

The guide includes new expectations from OFAC for appropriate sanction compliance measures in the digital asset space, including IP geoblocking, blockchain analytics, treating VPN use as a flag potential red and performing retroactive reviews of transactions with designated wallet addresses that occurred prior to them. addresses being sanctioned.

Along with the Guide’s release, the Treasury released a Sanctions Review Report, which expresses the agency’s view that digital currencies and alternative payment platforms may reduce the effectiveness of U.S. sanctions programs. According to the agency, the innovative technologies “provide opportunities for malicious actors to hold and transfer funds outside the traditional dollar-based financial system.” As a countermeasure, the Treasury commits to “deepen its knowledge and institutional capacities in the evolving space of digital assets and services” to ensure that sanctions remain an effective national security and policy tool. foreign.

Compliance in a Changing World

The creation of the NCET, related Treasury initiatives and the United States House of Representatives reports serving as a senior investigative adviser to the legal affairs team of a leading blockchain analytics firm all demonstrate that disrupting the illicit use of cryptocurrency is a central priority for U.S. lawmakers and enforcement agencies. This concentration will only increase as cryptocurrencies become more widespread. As law enforcement agencies view cryptocurrency as the primary medium for exchanging cybercriminal activity and ransom demands, it is likely that strategic priorities and prosecutions will be set to counter this trend. .

To avoid the consequences of non-compliance, virtual asset service providers and traditional financial companies with crypto touchpoints (including non-U.S. Entities with a business connection involving U.S. people) should review new guidelines for potential applicability and ensuring that all relevant aspects of financial crime compliance programs are up to date. Components of the program that may require review include KYC implementation, counterparty selection, transaction monitoring, policies and procedures, testing, reporting, and training. Such programs should take into account the increased focus by the US government on the illicit use of cryptocurrencies, the prevention of ransomware, and the use of sanctions as an effective policy tool.

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