The U.S. Department of the Treasury’s Office of Foreign Asset Control (OFAC) on Nov. 28, 2022, announced a more than $362,000 settlement with Payward Inc. d/b/a Kraken (Kraken), a Delaware-incorporated company that offers cryptocurrency exchange. The settlement resolves 826 transactions with persons with an internet protocol (IP) address in Iran.
This latest sanction is a continuing focal point for OFAC enforcement action. (See previous Holland & Knight alert, “Crypto Company Comes Under OFAC Scrutiny,” Oct. 24, 2022). Of particular note, Kraken agreed to invest an additional $100,000 in certain sanctions compliance controls, placing a value on a meaningful compliance program in OFAC’s eyes.
Facts Surrounding Violations
According to OFAC, Kraken, despite having a sanctions compliance program, processed 826 transactions, totaling approximately $1.68 million, between October 2015 and June 2019 for individuals who appeared to be located in Iran when the transactions were executed.
Although Kraken implemented controls to prevent users located in a jurisdiction subject to sanctions from opening an account on its platform, it failed to implement IP address blocking on transactional activity across its platform. Therefore, users located in sanctioned jurisdictions could access their accounts and transact on its platform so long as they opened their accounts outside of these jurisdictions.
Factors Affecting OFAC’s Penalty Determination
As for mitigating factors, the fact that this was a voluntary self-disclosure is the most significant. In addition, OFAC credited Kraken for its substantial cooperation and implementation of significant remedial measures, including adding geolocation blocking for clients in prohibited locations, implementing blockchain analysis tools to assist with sanctions monitoring, investing in additional compliance-related training and hiring additional personnel dedicated to sanctions compliance.
However, OFAC found that Kraken failed to exercise due caution or care for its sanctions compliance program. In particular, OFAC faulted Kraken for failing to follow through the geolocation controls it implemented at the time of the customer boarding in the subsequent transactional activities.
The Cost of Robust Compliance
The Kraken settlement also has provided insight into the value of a robust sanctions compliance program. Despite Kraken already having a sanctions compliance program in place, OFAC is requiring the company to invest an additional $100,000 into the program, including additional training and technical measures to assist in sanctions screening.
The U.S. government believes that economic sanctions are a powerful tool against foreign adversaries. Therefore, virtual currency exchange companies, and any company serving global customers, should take this enforcement action as a clear and unambiguous signal that OFAC expects considerable resources to be devoted to sanctions compliance programs.