OFAC Penalizes Another Crypto Asset Company for Violating Sanctions | Wilson Sonsini Goodrich & Rosati

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In line with recent focus on the crypto asset industry, the US Treasury Department’s Office of Foreign Assets Control (OFAC) last week announced an agreement with crypto asset trading platform Poloniex, LLC ( Poloniex). Poloniex has agreed to pay more than $7.5 million to settle its potential liability for 65,942 individual sanctions violations that occurred between January 2014 and November 2019. Such violations appear unlikely to recur anytime soon: as noted in the announces, “Poloniex currently has no business operations and no employees.

For crypto-asset companies, this enforcement action highlights the importance of “incorporating[ing] sanctions compliance in business functions from the outset” and the retroactive application of any new sanctions compliance checks to existing customers. According to the announcement, Poloniex opened its crypto asset trading platform (Poloniex Trading Platform) in January 2014 but did not establish its sanctions compliance program until May 2015. At that time, Poloniex began to monitor IP address data and review personal information of new users. who have identified themselves as being located in certain globally sanctioned jurisdictions. However, Poloniex reportedly did not filter or retroactively block users who signed up before May 2015. While Poloniex performed additional due diligence and closed certain accounts based on its screening and the additional due diligence of its new users, Poloniex has not begun to implement a block on sanctioned intellectual property. addresses until June 2017, and only started implementing sanction checks on customers in the Crimea region of Ukraine in August 2017.

OFAC concluded that Poloniex’s initial attempts to comply with the sanctions “made efforts to identify and restrict accounts with ties to Iran, Cuba, Sudan, Crimea and Syria”; however, “certain customers apparently located in these jurisdictions have continued to use Poloniex’s platform to conduct online transactions related to digital assets.” Poloniex’s sanctions program reportedly became much more effective in 2018, but even its new controls failed to adequately curb sanctions violations. OFAC said a relatively small number of breaches occurred in 2018 and 2019 before the Poloniex trading platform was sold to a third party in November 2019.

OFAC acknowledged that Poloniex was a “small start-up” when most violations occurred and that its compliance policies improved significantly from January 2014 to November 2019. These improvements were a “mitigating factor” in the regulation and were probably part of the reason. Poloniex was able to settle for around $7.5 million instead of $99 million, which was the base civil penalty amount for Poloniex’s violations.

The key takeaways from this settlement agreement are:

When establishing or improving a sanctions compliance program, be sure to review all active customers using the new processes. The mere existence of a sanctions compliance program is not sufficient to protect a company from civil liability.

As this rule shows, OFAC will (i) review the effectiveness of a company’s sanctions compliance program throughout the five-year look-back period, (ii) penalize a company for violations authorized by deficiencies in the program, and iii) hold companies accountable for violations that occurred before a sufficient compliance program was in place.

As we discussed in recent alerts, other agencies have also signaled that they intend to step up their sanctions enforcement efforts. In remarks on March 2, 2023, Deputy Attorney General Lisa Monaco said the National Security Division of the US Department of Justice (DOJ) will “turn its attention to corporate crime through an infusion of personnel and of expertise”. This will include hiring more than 25 new prosecutors to investigate and prosecute the sanctions evasion, one of whom will be the National Security Division’s first corporate law enforcement attorney. Additionally, state regulators can penalize companies for violating sanctions according to state law, as evidenced by a recent settlement between crypto asset exchange Coinbase and the State Department of Financial Services. New York.

When a US sanctions violation is detected, it is often in a company’s best interest to file a Voluntary Disclosure (VSD) with the appropriate authorities. In its National Security Division (NSD) Enforcement Policy for Commercial Organizations, the DOJ states that when companies voluntarily disclose a violation, cooperate fully, and remedy the violation in a timely manner, “the NSD will generally not seek not have to plead guilty, and there is a presumption that the company will receive a non-prosecution agreement and will not pay a fine. OFAC’s Economic Sanctions Enforcement Guidelines state that the base monetary penalty for voluntarily disclosed violations is generally 50% of the fine a company would have incurred had it not submitted a disclosure.

Maintaining an effective sanctions compliance program is a crucial part of avoiding missteps that could expose businesses to legal crises. Compliance programs must be tailored to the size and scope of a company’s operations to ensure that all transactions are conducted legally, and they must be able to adapt quickly to new and changing regulations.

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