FinCEN has issued an advisory for Iran that specifically is targeted for digital currency exchanges, banks and foreign banks so that the latter can understand their obligations under the correspondent banking system. The advisory is interesting because it is one of first instances of an attempt to provide guidance to foreign banks in respect of the reach of US financial crime law arising from the correspondent banking system. Often foreign banks, and in particular, digital currency exchanges, are not aware of the correspondent banking system and how US AML / CTF / sanctions law is applicable to them.
The practice in Iran is to move money out to Dubai and from there, banks and money services businesses sanctions-strip the money and move it to the US, Germany, UK or Canada. Sanctions-stripping is a method of providing originating information for banks that strips the origin of the money from being associated with Iran.
The Advisory directs US correspondents to go back to foreign banks they provide services to (most Canadian banks) and seek additional information to ascertain that they are not being used for sanctions avoidance from Iran. In other words, to determine if sanctions-stripping of data occurred.
Here is a common example in Canada – an Iranian foreign national, almost always an undisclosed politically exposed person (“PEP“) immigrating to Canada opens a bank account in Dubai and wires money to that bank. The bank then wires it to a Quebec bank as part of a paid investor immigration program and strips out the originating information that the funds originated from Iran. The Dubai bank and the Quebec bank know the funds involve an Iranian foreign national (the latter because they administer investor immigration funds) but that information is not disclosed. The money moves through a US correspondent bank in New York as originating from Dubai. The US correspondent bank is unaware that it handled Iranian funds from a PEP that may be subject to US sanctions. The US correspondent bank is then exposed to potential criminal liability in the US for unknowingly dealing in funds from Iran.
According to the Advisory, officials tied to the Central Bank of Iran, in particular, are being deployed to move money internationally to finance terrorism through Dubai and other cities in the United Arab Emirates. The Advisory provides examples including of an Iranian airline that moved money to Canada through Germany to finance terrorism. All Iranian foreign nationals use third parties and third party countries to move money – they have to because it is near impossible to export money in any form from Iran directly to another foreign financial institution.
Except it is possible with Bitcoin and other digital currencies because they are decentralized and are outside of the formal financial system. The Advisory estimates that at least $3.8 million is exiting Iran through Bitcoin annually from Iranian and foreign digital currency exchanges and OTC trades (referred to sometimes as peer-to-peer).
And that brings us to so-called sovereign initial coin offerings (“SOV“) that are ICOs issued by a government. A SOV is a new digital currency issued off an existing or a new Blockchain by a government agency. Venezuela is an example of a country that issued a SOV called the Petro coin for sanctions avoidance on the NEM Blockchain, that can be bought with NEM coins. Here, you can read about how millions of dollars of stolen NEM coin were apparently OTC traded at a Vancouver digital currency exchange which means that the Petro coin from Venezuela issued for US sanctions avoidance, can be bought with NEM at a Vancouver digital currency exchange without visibility since that exchange trades NEM. If you can buy the Petro coin in Vancouver with NEM for sanctions avoidance, you will be able to buy an Iranian SOV.
Last month, Iran issued a notice that it was working on a SOV and the concern is that it will be used, like Venezuela, for sanctions avoidance.
The Advisory suggests that banks and foreign digital currency exchanges monitor IP addresses and engage in Blockchain tracing to ascertain the original of digital currency trades from Iran, although the latter is harder to do than the Advisory suggests. No Blockchain identifies the origination of a transaction – only IP tracing can do that and with Iran’s heavy use of VPNs country-wide, such tracing is difficult. You can, however, trace to Iranian wallets and that is where the focus should be on, in addition to utilizing solid AML, CTF and sanctions compliance methods. And in addition, banks and digital currency exchanges should know the typologies in respect of Iran — for example, the trades of digital currencies involving Iran in Canada typically take place involving former Iranians in Canada with a Canadian passport. That is because the movement of money to and from Iran is closely transacted among persons of Iranian origin and specifically those with a Canadian passport.