Using blockchain to avoid global sanctions & how financial institutions can prevent it

Topics: Artificial Intelligence, Blockchain, Corporate Legal, Cybersecurity, Fraud, Government, Government Fraud, Q&A Interviews, Risk Management, Webinars

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Economic sanctions are an important tool used by governments and multinational bodies such as the United Nations and the European Union. These sanctions are often commercial and financial penalties applied by one or more countries against a targeted state or non-state actor. The U.S. government has used sanctions for several purposes throughout history, including against Cuba, Iran, North Korea, and Syria.

In a recent webinar, Sanction Screening in the Era of Blockchain, blockchain expert Doug McCalmont, a senior solutions consultant at BAE Systems Applied Intelligence, discussed the development and evolution of the current sanctions regime, the role of virtual currencies in sanctions evasion, and how blockchain-based digital identity is the future.

During the 60-minute discussion, the audience had numerous questions for McCalmont. Here are a few related to blockchain, sanctions, China and more.

Are there any documented cases of sanctioned countries using blockchain to evade those sanctions?

Doug McCalmont: Yes, see the press release by U.S. Department of Justice describing the action of the accused in educating the North Korean government in their understanding of Ethereum, which could be a tool used in sanctions evasion.

Also, a recent case involving Venezuela is unique as it concerns an entire “cryptographic” currency floated by the Venezuelan government. I placed cryptographic in quotation marks because this currency is not native to blockchain nor is it cryptographic.

Is China’s Blockchain Service Network (BSN) an attempt to circumvent sanctions and limit US influence?

Doug McCalmont: I don’t believe it is an attempt to circumvent sanctions, at least directly, as China has been implicated in multiple attempts to assist their ally North Korea in North Korea’s own circumvention attempts. It is without a doubt a move to limit US influence throughout Asia and beyond. China’s Belt and Road Initiative is one of the largest infrastructure projects ever undertaken. China has made blockchain technology one of the initiative’s centerpieces. The project will physically, economically, and socially link China to regions West of China all throughout Central Asia, undermining any US influence in that region.

In December 2019, Iran’s president reportedly proposed creation of a Muslim Cryptocurrency to decrease reliance on the US Dollar. What is the Office of Foreign Assets Control’s (OFAC’s) present stance?

Doug McCalmont: I don’t believe OFAC has registered a “formal” pronouncement as to the proposed Muslim Cryptocurrency. OFAC has worked in conjunction with the US Department of Justice in the identification of Iranian nationals who have been referenced in several indictments in addition to Iranian national crypto wallet addresses added to the OFAC Specially Designated Nationals (SDN) list. Iran is very much on OFACs radar.

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Doug McCalmont

This action on the part of Iran could continue to impact US relations with our traditional NATO allies. Turkey is working in conjunction with Iran on the Muslim Cryptocurrency, and multiple other NATO nations are working together on the alternative trade network Instex, taking an overt counter-position in Iranian relations to that of the US.

How can the private sector freeze the virtual asset of the person/company that is designated on the OFAC SDN list?

Doug McCalmont: Theoretically, the individuals linked to those named wallet addresses can continue to transact using those specific wallets, as the accused still possess the private keys required to activate those wallets. That would, however, not be a good move on the part of the bad actors as any other unnamed wallets could easily be identified (through blockchain forensics) providing regulators and law enforcement with more clues as to other entities linked to the alleged illegal activity.

There is no “one entity” in charge of the blockchain so there is no centralized authority with the capability of freezing virtual assets outside of a regulated exchange or any other regulated financial institution that provides cryptocurrency as an asset class.

Other than Know Your Customer (KYC) and counter party due diligence, how can a bank operating in Turkey ensure that their customers using cryptocurrency aren’t funding Syrian terrorists?

Doug McCalmont: If the customer of a bank regulated in Turkey is transacting in a cryptocurrency, outside of the customer bank accounts for the benefit of a Syrian terrorist, that bank is powerless when it comes to identifying the activity if that customer is using cryptocurrency channeled through an unregulated decentralized cryptocurrency exchange. From my home in the US, I could setup an account with an unregulated exchange, via the “dark web” and easily transfer assets to a terrorist organization anywhere in the world. If my bank is regulated and my purchase of the cryptocurrency used in the illegal activity took place through my bank, via credit card or bank wire, software provided by a forensic blockchain firm like CipherTrace might be able to identify the activity and shut it down.

What will Bitcoin’s relationship be to the world financial system in 10 years?

Doug McCalmont: I am very optimistic when it comes to the long-term survival of bitcoin. I believe that it will be a foundation of the growing blockchain inspired decentralized finance (DeFi) ecosystem that will operate in parallel to the legacy financial services infrastructure. Cryptocurrencies will be thriving in 10 years as they continue to grow into their role as a logical choice in day-to-day transactions, versus the majority of those who hold bitcoin today for the purpose of investment.


Access the full webinar, Sanction Screening in the Era of Blockchain, moderated by Thomson Reuters Gina Jurva.