Syed Rahman considers the shortcomings that led to ShapeShift being involved in thousands of sanctions breaches.
The defunct crypto exchange ShapeShift is to pay $750,000 to settle sanctions violations in the United States.
The settlement was announced by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC). It said that the exchange, which had been founded by crypto entrepreneur Erik Voorhees, had taken money from users based in the sanctioned countries Cuba, Iran, Sudan and Syria on 17,183 occasions.
ShapeShift was accused of having "no sanctions compliance program in place to screen users or transactions for a nexus to sanctioned jurisdictions" and of processing more than $12.5 million in crypto transactions by users from sanctioned countries between December 2016 and October 2018.
ShapeShift only adopted a compliance programme after it had received an administrative subpoena from OFAC. The Treasury Department stated that "ShapeShift had reason to know that such users were located in sanctioned jurisdictions, including on the basis of IP address data," and that the exchange "conveyed economic benefit to persons in several jurisdictions subject to OFAC sanctions and thereby harmed the integrity of multiple OFAC sanctions programs."
The fine imposed was, according to OFAC, small because ShapeShift had closed in 2021 and had limited assets.
Checks
ShapeShift had been founded in 2014, was incorporated in Switzerland and operated from Denver, Colorado before it shut down. It had allowed users to swap digital coins and tokens without having to be subject to any know-your-customer checks that should have been in place. As a result, clients could trade cryptocurrencies with a degree of anonymity.
It had been investigated by the US Securities and Exchange Commission (SEC) for not registering as a broker or exchange. This led to it agreeing to a cease and desist order (stopping it from functioning) and paying a $275,000 fine to settle SEC allegations.
The link between sanctions and cryptocurrency investment can be a difficult area for exchange platforms. While they may view themselves as a separate and innocent third party, they can inadvertently become involved in sanctioned business activities.
The main risk posed by cryptocurrencies is the anonymity that such assets can offer, which means that verifying identities and determining the true source of transactions can be difficult. But exchange platforms have to understand that this does not provide them with a defence to sanctions violations if they are not complying with their own obligations to carry out necessary checks.
An exchange platform that does not carry out sufficient customer checks can also find itself liable for claims brought by individual investors who used the platform, lost money to less scrupulous users of it and are now left with little chance of their funds being recovered.
Platforms, therefore, need to be seeking advice from relevant experts to ensure their systems are compliant, in order to reduce their risk of being penalised for their shortcomings or sued for lost funds.
