March 2, 2022

What Notabene customers can do today to block transactions to sanctioned individuals

In light of the conflict between Russia and Ukraine, new sanction requirements have been imposed on Russian entities and individuals. Late last week, leaders of the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States issued a joint statement pledging to remove selected Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system. 

These actions intend to block transactions to and from a list of sanctioned names or corresponding financial entities, limiting the country’s access to worldwide financial markets while simultaneously barring millions of people from using international payment systems.

In the absence of a SWIFT network for crypto, exchanges can take a more targeted approach to prevent transactions with sanctioned individuals. By leveraging sanctions screening providers and Travel Rule solutions, crypto exchanges can implement more effective hyper-targeted individual sanctions and avoid a possible blanket ban on a broader group of citizens.

This article highlights actions that companies–regardless of Travel Rule compliance status–can take today to block transactions to sanctioned individuals.

The growing scope of sanctions

According to proprietary data from ComplyAdvantage, as of Monday, February 28th, 2,770 individual entities have been sanctioned by 13 major jurisdictions since the Russian invasion of Ukraine. 

Source: ComplyAdvantage

If the conflict persists, the sanctions list is likely to grow expansively, and the potential for evasion via crypto becomes a more significant threat. While the extent to which sanctioned parties may turn to crypto is unknown, virtual asset exchanges globally are preparing to comply with the sanctions requirements. 

1. How FATF’s Crypto Travel Rule helps to prevent transactions with sanctioned parties

A Bank Secrecy Act (BSA) rule [31 CFR 103.33(g)] mandated in 1997 by FinCEN required all financial institutions to pass on certain information to the next financial institution in certain funds transmissions involving multiple financial institutions. This legislation is recognized as the original “Travel rule.” 

Banks have a multitude of tools to manage counterparty risk, robust KYC and transaction monitoring platforms in place to identify transactions involving sanctioned individuals, and SWIFT to manage counterparty risk and send and receive Travel rule messages. 

More than two decades later, in 2019, the Financial Action Task Force (FATF) recommended that companies that custody, transmit, or exchange cryptocurrency also comply with the Travel Rule for transactions exceeding $1,000.

Today, many exchanges have AML/CFT processes that allow them to perform customer identification and sanctions screening of their customers as part of onboarding and ongoing customer due diligence. This helps them block sanctioned individuals from directly using their products to initiate transactions. 

However, unlike financial institutions, the crypto industry does not have a SWIFT network to connect to counterparties and perform Travel Rule readily. Thus, crypto exchanges today require a robust Travel Rule solution to perform proper counterparty risk mitigation and be able to identify or block a transaction with a sanctioned individual or entity. 

2. What does the Travel Rule require crypto companies to do?

The sanctions currently being levied against specific individuals present a prime example of what the Financial Action Task Force’s crypto Travel Rule requirements are looking to solve. 

As Travel Rule requirements are relatively new for the crypto industry, companies are in different stages of compliance, as detailed in our recent State of Crypto Travel Rule Compliance Report. This leaves many companies vulnerable to exposure to sanctioned individuals. 

Below we outline what companies who are already Travel Rule compliant can do today. We also share steps not-yet compliant companies can take to block transactions with sanctioned parties. 

3. What can Notabene customers do today to block transactions with sanctioned parties?

Travel Rule compliant crypto exchanges can use tools like Notabene to perform counterparty risk management and implement the sanction requirements pertaining to counterparties. 

Notabene customers can identify sanctioned counterparties and block ensuing transactions effectively by using the following features:

To turn this operational and at scale, Notabene customers set risk-based rules in our rules engine to restrict incoming or outgoing Travel Rule data transfers with VASPs that do not meet their diligence criteria or with sanctioned parties. Crypto Compliance Officers can effectively perform AML-related counterparty risk mitigation by tying this mechanism into the transaction flow.

Notabene's Rule Engine allows you to set comprehensive controls to effectively perform AML-related counterparty risk mitigation

4. How can companies get started if they are not yet Travel Rule compliant?

Companies that are not yet Travel Rule compliant can take the following actions:

  1. Start collecting counterparty names for crypto transactions, as the Travel Rule requires. 
  2. Implement a tool like Notabene that provides alerts for every transaction to a sanctioned individual or high-risk address. [You will need to connect your sanctions screening and blockchain, analytics providers.]
  3. Add a list of VASPs that you will not transact with to Notabene’s rules engine to flag them for manual review or automatic rejection. At this point, you can choose not to perform any data transfers with the counterparty exchange and merely to use the Notabene product for counterparty risk assessment.
  4. Tie Notabene to your custodian/transaction flow to restrict or block a transaction accordingly. 
  5. Once ready to comply with all Travel Rule requirements, begin performing data transfers with counterparty VASPs. 

5. How to get started today for free?

Our free ‘Sunrise plan’ allows crypto companies who are only getting started with the above terms and need to ease into travel rule compliance. Via our sunrise plan, you can receive unlimited Travel Rule data transfers and send up to $10K in transaction volume monthly.

6. Is Notabene creating a SWIFT system for the crypto industry?

No. At Notabene, we do not believe that a centralized system like SWIFT should exist for the crypto industry or control the future financial rails. This is why we’ve spent the last two years creating a Travel Rule compliance software that routes Travel Rule data transfers to multiple networks. 

When power is in the hands of a few, it can be easily misused–prudence and caution must be exercised at all times. We are proponents of a more open system, where neither we nor any other firm nor association has the capacity to impose a blanket set of restrictions on the broader financial sector. 

In the crypto industry, national and international regulators are, of course, able to set such restrictions, but it is up to individual licensed institutions to apply them. Decision points are pushed out to the compliance teams, and they implement compliance measures and policies based on their respective risk-based approach.

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