Risk #1

Cyclicality of sanctions

Crypto firms and banks alike must deal with significant fluctuations in AML and sanctions alert and KYC volumes. For example, each time a new coin offering appears, crypto firms can expect ten thousand or more new customer sign-ups that require KYC scaling. On the AML and sanctions front, a single event like the Russian invasion of Ukraine led to immediate new sanctions for over 1,300 people and entities. As Figure 2 below demonstrates the number and types of sanctions have continued to grow since then.

Figure 2. The Scope of Russia-Targeted Sanctions

Who issued new sanctions in 2022

Sanctions Targeting Russia by Type

Compounding the effects of sanctions is their varied timing.

Sanctions have been released in batches — ranging from every few days to every few weeks. As soon as organizations have learned to handle one batch of sanctions, they have needed to learn all over again on new ones.

These types of AML/KYC and sanctions demand surges strain any compliance program that lacks a highly elastic infrastructure or workforce. Yet, compliance teams are far from elastic.

The training required to gain competence in AML/KYC, sanctions alerts analysis, and due diligence lasts 2–3 months before a newly hired analyst becomes proficient enough to trust their work to regulatory scrutiny.

Figure 3: The cyclical alert reviews gap.