Russian Use of Crypto for Sanctions Evasion on the Rise

So, how is Russia using virtual assets to evade sanctions?

• In recent testimony, Treasury Deputy Secretary Wally Adeyemo highlighted that Russia is increasingly turning to alternative payment mechanisms, including the stablecoin Tether that is pegged to the U.S. dollar, in an effort to circumvent western sanctions and finance its military campaigns. 
• A self-described Russian smuggler in China used Tether to pay a Hong Kong electronics distributor for an order for electrical parts for drones Russia uses in Ukraine placed by U.S.-designated Kalashnikov Concern, according to the Wall Street Journal. Andrey Zverev reportedly placed the order at a Hong Kong electronics distributor in late 2022 and used Tether to transfer millions of dollars from Kalashnikov to the supplier. 
• The United States and UK are reviewing more than $20 billion in cryptocurrency transactions that passed through U.S.-designated virtual exchange Garantex, according to recent media reporting. The payments under investigation used Tether and were routed through the Moscow-based exchange after it was sanctioned. 
• OFAC in November 2023 sanctioned Russian national Ekaterina Zhdanova for laundering and moving funds using virtual currencies on behalf of Russian elites. OFAC alleged that Zhdanova uses virtual currency to facilitate large cross-border transactions for Russian elite clients. According to Treasury, Zhdanova uses entities that lack Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) controls, such as Garantex to move money.  

Blockchain analytics firm TRM Labs assesses that in March 2022 Task Force Rusich, a U.S.-designated Russian neo-Nazi militia fighting in Ukraine, raised more than $100,000 in crypto. Media reports in late 2022 also highlighted that pro-Russian groups, such as the Novorossia Aid Coordinating Center (NACC), are also raising funds in cryptocurrencies to help Russia evade sanctions. The NACC was set up in 2014 to support Moscow’s operations in Ukraine and raised more than $20,000 in mainly bitcoin to buy drones for Russia. 

Russian media in September reported that Russia’s Finance Ministry is exploring the possibility of legalizing Decentralized Financial Organizations (DeFi DAOs) to increase liquidity in the market. DeFi DAOs are organizations that use blockchain technology and smart contracts to manage financial transactions without relying on financial intermediaries to move money, which theoretically could enable Russia to evade sanctions.  

Russia in 2023 paved the way for its digital ruble, which Russian officials claimed would help it evade sanctions and deal a blow to the global financial system for which the U.S. dollar is the reserve currency. Russian lawmaker Anatoly Aksakov, who coauthored the digital ruble legislation, claims that the central bank digital currency (CDBC) would help Russia protect itself from sanctions and “carry out settlements with foreign countries and foreign companies.” However, experts say that the digital ruble would not help Russia access the dollar and the euro, from which many of its businesses, government officials, and elites are blocked. Russia claims its CBDC, if used for international transactions, will enable payments without the involvement of foreign commercial banks or western financial infrastructure, like the SWIFT financial messaging system from which numerous Russian banks are blocked. 

Risk Mitigation 

U.S. regulators will likely increase their focus on cryptocurrency mixers, exchanges, mining operations, and associated individuals facilitating Russia’s sanctions evasion.  

• In his remarks to the Senate Committee on Banking, Housing, and Urban Affairs, Deputy Treasury Secretary Wally Adeyemo noted that in November, he recommended introducing a secondary sanctions tool targeted at foreign virtual asset providers that facilitate illicit finance. 
• Recent regulator actions indicate that virtual currency mixers are in regulators’ crosshairs. The United States in 2022 sanctioned virtual currency mixers Tornado Cash and Blender.io, and a year later charged Tornado Cash founders, Roman Storm and Roman Semenov, with laundering more than $1 billion in illicit proceeds. In 2023, the Financial Crimes Enforcement Network (FinCEN) proposed listing virtual currency mixing as a class of transactions of primary money laundering concern under Section 311 of the USA PATRIOT Act. 
• OFAC in 2022 sanctioned companies in Russia’s virtual currency mining industry that operate vast server farms that sell virtual currency mining capacity internationally, helping Russia monetize its natural resources. However, Treasury assessed that mining companies, like many critical sectors of Russia’s economy, rely on imported computer equipment and fiat payments, making them vulnerable to sanctions. 

The Yermak-McFaul International Working Group on Russian Sanctions in January 2024 published a paper, “Exposing and Exploiting the Kremlin’s Software Networks and Dependencies.” The report highlights that despite the Kremlin’s efforts to reduce Russia’s reliance on western software for critical systems, the transition is progressing slowly, and Russia still relies on a network of IT companies and software providers to enable its critical sectors, including finance and military.

Virtual asset service providers and miners almost certainly rely on Western equipment, components, and software to conduct business.

The report makes several recommendations to limit Russia’s access to critical software, including imposing sanctions on Russian software developers; prohibiting western vendors from providing updates and support to institutions in the Russian military-industrial complex; and alerting financial institutions to the importance of preventing financial transactions between Russian companies and software service providers. If implemented, these actions could also limit the use of virtual currency mining to circumvent sanctions. 

FinCEN in 2022, shortly after Russia’s full-scale invasion of Ukraine began, released an alert advising financial institutions and virtual currency exchangers and administrators—generally considered money services businesses pursuant to the Bank Secrecy Act—to identify and report suspicious activity associated with potential Russian sanctions evasion. The agency flagged the importance of checking the OFAC SDN list to ensure that the digital wallet addresses are not sanctioned and paying special attention to exchanges located in high-risk jurisdictions. The alert also identifies funds transfers involving mixing services as risky and warranting extra attention.  

Financial institutions that transact with virtual asset service providers (VASPs) should—in addition to standard checks on sanctions status and high-risk jurisdictions—examine the exchange’s high-risk activities that could indicate money laundering or sanctions evasion activity.

⚠️  High volumes of gambling proceeds processed could indicate efforts to move assets by designated individuals.

⚠️  Transacting in privacy coins, such as Monero or Zcash could help sanctioned individuals obscure the origins of their funds.

⚠️  Receiving high volumes of Tether or other cryptocurrencies from risky jurisdictions can suggest efforts to evade sanctions or strategic trade controls.

⚠️  Examining the VASP’s existing Know-Your-Customer (KYC) controls could help inform financial institutions’ risk appetite. If a VASP has little to no KYC controls in place for small transactions, the policy could facilitate structuring, allowing sanctioned actors to move small amounts of money without triggering alerting bank systems.