Crypto exchange Kraken may have violated US sanctions

abdelaziz Fathi

Cryptocurrency exchange Kraken is reportedly under investigation by US authorities for a possible breach of sanctions, the New York Times reported, citing people with knowledge of the matter.

The San Francisco-based firm declined to comment but said it is cooperating with the Justice Department and the Treasury Department’s Office of Foreign Assets Control, which enforces US economic sanctions.

The Treasury is investigating whether Kraken allowed users in sanctions-hit countries to buy and sell cryptocurrencies.

The authorities have been investigating Kraken since 2019 and is expected to impose a fine, said the sources. In addition, the company failed to inform OFAC about these transactions and did not voluntarily disclose the violations of US sanctions.

The firm’s systems failed to analyze all data required for compliance with OFAC sanctions and therefore did not implement control measures to prevent such users of countries comprehensively sanctioned by the US government from accessing its service.

Nevertheless, the news sends an important message to crypto businesses. OFAC itself reiterated that digital asset institutions should take a risk-based approach to sanctions compliance to detect flaws in internal controls.

In 2021, crypto payment provider BitPay paid $507,375 to settle violations of sanctions rules administered by the US Treasury’s Office of Foreign Assets Control. OFAC said the violations occurred because BitPay, in 2,102 instances, allowed people located in sanctioned regions to conduct transactions with merchants in the United States and elsewhere using cryptocurrencies on its platform. The company was aware that based on the IP address data it collects, users from Ukraine, Cuba, Iran, Sudan and Syria logged into BitPay platform.

While BitPay screened its direct customers and conducted due diligence to ensure they were not located in sanctioned jurisdictions, the company failed to screen location data that it obtained about its merchants’ buyers.

Kraken was also in the news recently after it received the Financial Services Permission (FSP) from the Abu Dhabi Global Market’s (ADGM) regulator, which allows it to operate as a multilateral trading facility (MTF) and custodian for virtual assets.

The San Francisco-based company made headlines last month after had quietly gone live with integration of the Bitcoin Lightning Network (LN), nearly two years after it initially announced it will do so.

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