Compliance Blog

Are you a fan of superhero movies? Do you enjoy watching the big-budget (and lets be honest, mostly CGI) triumph of good over evil? I do. My wife and I watched Iron Man on our second date and since then have tried to keep up with all of the Marvel Cinematic Universe, although that’s gotten much harder over the years considering it now spans about 30 movies and multiple TV shows. One of the most exciting plot points in those movies is when the hero learns or masters a new skill just in time for the big showdown with the villain – Spiderman learning to use his Spider-sense at the end of Far From Home, Thor learning to channel his thunder-and-lightning powers without his hammer – the list goes on. I was reminded of those films recently when the Financial Crimes Enforcement Network (FinCEN) exercised one of its own powers for the very first time – the power to declare an institution to be a “primary money laundering concern in connection with Russian illicit finance.” If FinCEN was a superhero, I’m sure that power would have a snappier name, but I digress. Let’s look at this new power and what it means:

Think back to the end of 2020 – Congress had worked hard to pass the National Defense Authorization Act (NDAA), which would fund the military for 2021, but then President Trump had vetoed it. On January 1, 2021, Congress overrode that veto and the NDAA became law. We’ve blogged about that NDAA before – tucked within its vast pages were a number of smaller bills, some of which related to Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) topics – namely the Anti-Money Laundering Act of 2020 and the Corporate Transparency Act of 2020, which FinCEN is still working to implement to this day.

One provision of the 2021 NDAA that received less attention at the time was section 9714. That part of the bill provided the origin for this new power. It stated that the Treasury Department could now “determine that reasonable grounds exist” for labeling one or more financial institutions, class of transactions, or accounts – if operating or located within or involving a jurisdiction outside the United States – as a “primary money laundering concern in connection with Russian illicit finance.” In other words, FinCEN (a subagency of Treasury) could now declare certain institutions, types of transactions, or certain accounts to be instruments of Russian money laundering. Should FinCEN determine that the label is appropriate, then section 9714 authorizes the agency to require “domestic financial institutions” (including credit unions) to:

• Take one or more “special measures” as described 31 U.S.C. 5318A(b), which includes certain recordkeeping and reporting requirements; or
• Prohibit or impose certain conditions upon “certain transmittals of funds… by any domestic financial institution… if such transmittal of funds involves” an institution deemed to be a “primary money laundering concern in connection with Russian illicit finance.”

After having this power for more than one year, FinCEN used it for the first time a few weeks ago when they issued an order relating to Bitzlato Limited (Bitzlato), a virtual currency exchange that was originally incorporated in Hong Kong. In the order, FinCEN declares Bitzlato to be a “primary money laundering concern” connected to Russian illicit finance, due to “(1) its facilitation of deposits and funds transfers by Russian ransomware groups or affiliates… and (2) its facilitation of transactions with Russian darknet markets on behalf of both darknet customers and darknet vendors.”

For those wanting to learn more about section 9714 or what this order might mean for the industry, FinCEN also issued this handy FAQ on the topic.

The order spans about 30 pages and discusses Bitzlato’s business – Bitzlato offers P2P and exchange services through an online platform, which allows users to exchange virtual currencies such as Bitcoin, Bitcoin Cash, Ether, Dogecoin, and more. While Bitzlato is nominally based in Hong Kong, FinCEN’s analysis found that Bitzlato primarily operates in Russia, with its location of operation, employees and job openings being located in Russia, and its new job opening announcements being posted in Russian. Additionally, FinCEN notes that Bitzlato provided services to Conti, a notorious ransomware group that has ties to the Russian government and which has pledged allegiance to Russia. The connections to Russian money laundering do not end there, however. The order discusses that Bitzlato has engaged in transactions with Chatex and SUEX – both of which have been designated to the Specially Designated Nationals (SDN) list by the Office of Foreign Assets Control (OFAC) due to their connection to ransomware – as well as Hydra Market, a darknet marketplace that was also designated by OFAC as the “most prominent Russian darknet market” (for more information on those OFAC developments, see this previous post in the Compliance Blog). According to FinCEN, work with Hydra Market accounted for “a notable percentage of Bitzlato’s business,” as Bitzlato operated as a “facilitator of sales and purchases of illicit goods and services on behalf of customers and vendors operating on Hydra…” Even after Hydra was shut down, FinCEN alleges that Bitzlato continued to provide services to other darknet markets. Based on this information (and other facts discussed in the order), FinCEN found that there were “reasonable grounds” to label Bitzlato a “primary money laundering concern in connection with Russian illicit finance.”

Ultimately, FinCEN decided that “prohibiting the transmittal of funds involving Bitzlato is the only means of adequately addressing the threat Bitzlato poses.” While FinCEN considered the other “special measures” available under section 9714, or whether transmittals could mere be subject to “conditions,” FinCEN determined that Bitzlato presents such a threat that no domestic financial institution (including credit unions) should be permitted to engage in a transmittal of funds involving Bitzlato. According to the FAQ (linked above), this prohibition takes effect on February 1, 2023. The FAQ also notes that domestic institutions must “cease any and all transmittals of funds, including [convertible virtual currency, or CVC], from or to Bitzlato, or from or to any account or CVC address administered by Bitzlato,” and that institutions can choose to reject the CVC.

If you think that this sounds more like an OFAC action, you’re not alone. Typically, OFAC is the subagency within Treasury that prohibits U.S. persons (including credit unions) from engaging in transactions with foreign bad actors. However, given the connection to money laundering, FinCEN’s involvement here makes sense. From a practical standpoint, credit unions will now have to check if their transactions will not only avoid the names included on the SDN and other OFAC lists, but will also have to make sure their transactions do not involve transmittals to foreign institutions or accounts that have been designated as a primary Russian “money laundering concern” by FinCEN. Credit unions may want to check with their current transaction screening software or vendors about whether Bitzlato and any other institutions that are designated by FinCEN as Russian money laundering concerns can also be included in the screening process.

Stay tuned to the NAFCU compliance blog for future FinCEN and BSA/AML developments. Additionally, those interested in BSA may want to check out our upcoming Webinar, AML in Crypto.  

BSA School: Discover new ways to identify and stop money laundering and earn your NAFCU Certified Bank Secrecy Officer (NCBSO) credential. Save $200.00 for a limited time with the code BSASAVINGS. August 15 – 17, 2023 | Louisville, KY 

Risk Management Seminar: Earn your NAFCU Certified Risk Manager credential (NCRM) when you pass the exams. Save $200.00 for a limited time with the code RISKSAVINGS. August 15 – 17, 2023 | Louisville, KY