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DOJ Alleges Use of Cryptocurrency in Circumventing Financial Sanctions by Russian Nationals




Five Russian nationals and two Venezuelans were charged by US prosecutors for being part of a complex global sanctions evasion and money laundering scheme that also involved cryptocurrency transactions, according to a release published on Wednesday, October 19, by the US Department of Justice (DoJ).

U.S. DOJ Alleges Cryptocurrency Used to Circumvent Sanctions

Federal prosecutors in New York alleged that the defendants had obtained military technologies from US manufacturers and shipped them to Russia, including advanced semiconductors and microprocessors used in fighter aircraft, missile systems, smart munitions, radar, satellites, and other space-based military applications.

On top of that, they had allegedly smuggled millions of barrels of Venezuelan oil, shipping it to buyers in Russia and China. The oil originated from the Venezuelan state oil company PDVSA, which had been put under US sanctions in 2019. Defendants were also charged with laundering tens of millions of US dollars for Russian oligarchs and other sanctioned entities.

Breon Peace, US Attorney for the Eastern District of New York, stated:

“As alleged, the defendants were criminal enablers for oligarchs, orchestrating a complex scheme to unlawfully obtain U.S. military technology and Venezuelan sanctioned oil through a myriad of transactions involving shell companies and cryptocurrency.  Their efforts undermined security, economic stability and rule of law around the world. We will continue to investigate, disrupt and prosecute those who fuel Russia’s brutal war in Ukraine, evade sanctions and perpetuate the shadowy economy of transnational money laundering.”

Prosecutors said that some of the semiconductors and other electronics obtained through the scheme had been discovered in Russian weapons platforms seized in Ukraine, with the two countries being currently involved in a military conflict that was launched by Russia in February.

The defendants allegedly used a German company to ship the US military technologies and Venezuelan oil to Russia. One of the defendants was arrested in Germany earlier this week, and another one in Italy, with the US currently seeking their extradition.

Payments for the German company’s illicit activities were conducted in US dollars and routed via US financial institutions and correspondent bank accounts. Prosecutors allege that, in order to bypass US sanctions imposed on Russian entities, defendants used fictitious shells and falsified KYC documentation and bank accounts in high-risk jurisdictions, prompting US banks to process tens of millions of USD. The scheme also involved cryptocurrency transfers worth millions of USD and bulk cash drops with couriers in Russia and Latin America.

What Are Financial Sanctions and How Effective Are They?

Financial sanctions, which can be part of wider economic sanctions, are a form of penalties imposed by a country against another country, its officials, or private citizens that may or may not have ties to the sanctioned government. This form of punishment is regarded as a last-resort alternative to using military force and is meant to discourage the targeted country from taking certain objectionable actions. Financial sanctions may include asset seizures and the banning of financial transactions.

Sanctions usually prohibit local companies and individuals from engaging in transactions and deals with sanctioned governments and individuals. In 2019, the US government issued a record $1.28 billion in sanctions fines against local businesses across 30 enforcement actions.

The US is imposing economic sanctions worldwide in line with its foreign policy and national security objectives. For example, it currently implements major sanctions programs against Russia, Venezuela, Iran, North Korea, and Syria, among others. These measures are meant to punish alleged violations of international law around the globe and achieve diplomatic objectives.

However, not everyone agrees that financial sanctions are effective. In the case of the US and the European Union, which also imposes a wide range of sanctions against multiple countries and individuals, some argue that too often sanctions end up hurting local economic interests without influencing the target’s behavior that much. When it comes to Russia, the world’s largest oil and gas exporter, Western sanctions may act like a boomerang, leading to an energy crisis that ultimately affects the EU as well.

Another major controversy has to do with sanctions that affect civilians of the targeted country, who may not necessarily support their government’s violation of international law.

Major Crypto Platforms Refused to Impose Sanctions Only to Be Forced

Following the Russian invasion of Ukraine on February 24, several major crypto exchanges, including Kraken, Binance, and Bitfinex, rejected calls from Kyiv to impose sanctions on Russian users and shut down their hot addresses.

Former Kraken CEO Jesse Powell said at the time:

“When you got to freeze someone’s financial account, they’re no longer able to pay their rent, pay their debts, buy food, you know, support their family.”

Binance, Bitfinex, and other exchanges with offices in the European Union initially refused to freeze crypto accounts of Russian users, citing the rights of ordinary citizens.

However, some of them, including Binance and Kraken, were eventually forced to reverse course following the EU’s restrictive measures against Russia.

After the EU’s fifth package of sanctions against Russia, Binance said in an announcement that it had been required to limit services for Russian individuals and entities that hold crypto assets exceeding the value of 10,000 EUR.

“Accounts that classify under this restriction will be put into withdrawal-only mode. No deposits or trading will be permitted on these accounts. The limit also covers all spot, futures, custody wallets, and staked and earned deposits,” the statement says.

In its eighth package of sanctions on Russia, adopted on October 6, the EU bans cross-border crypto transactions with Russian citizens altogether (previously up to 10,000 EUR was allowed) in an effort to address potential loopholes that could allow Russians to move money abroad.

On October 19, Kraken, which is based in the US but supports EUR operations on its platform, halted services to Russian users. The decision comes shortly after the adoption of the EU’s latest package and the departure of Jesse Powell as CEO.

Anatol is an experienced crypto/blockchain/DeFi journalist and analyst. Prior to joining the crypto space in 2017, he covered major forex pairs and US stocks, working for asset managers and brokerage firms, among others. He likes to dive deeper into each subject while maintaining professional conduct.