On November 28, 2022, the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced a settlement of more than $362,000 with Payward Inc. . The settlement resolves 826 transactions involving persons with an Internet Protocol (IP) address in Iran.
This latest sanction is an ongoing focus for OFAC enforcement action. (See previous Holland & Knight alert, “Crypto Company Comes Under OFAC Scrutiny,” Oct. 24, 2022). Of particular note, Kraken has agreed to invest an additional $100,000 in certain sanctions compliance checks, which adds value to a meaningful compliance program in OFAC’s eyes.
Facts surrounding violations
According to OFAC, despite a sanctions compliance program, between October 2015 and June 2019, Kraken processed 826 transactions totaling approximately $1.68 million for individuals who appeared to be located in Iran when the transactions were executed.
Although Kraken has implemented controls to prevent users in a jurisdiction subject to sanctions from opening an account on its platform, it has failed to implement IP address blocking on transactional activity across its platform. Therefore, users located in approved jurisdictions can access their accounts and transact on its platform as long as they open their accounts outside these jurisdictions.
Factors Affecting OFAC’s Penalty Determination
In terms of mitigating factors, the fact that it was a voluntary self-disclosure is the most important. In addition, OFAC credited Kraken for its significant cooperation and implementation of significant corrective measures, including adding geolocation blocking for customers in prohibited locations, implementing blockchain analytics 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 diligence or to maintain its sanctions compliance program. OFAC specifically faulted Kraken for failing to follow the geolocation controls it had implemented at the time of customer onboarding in subsequent transactional activities.
The cost of robust compliance
The Kraken settlement also 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 in the program, including additional training and technical measures to assist with sanctions screening.
The US government believes that economic sanctions are a powerful tool against foreign adversaries. Therefore, virtual currency exchange companies, and any company serving global clients, should take this enforcement action as a clear and unequivocal signal that OFAC expects significant resources to be devoted to sanctions compliance programs.