In-Depth Analysis How Tether is Used to Evade US Sanctions?

Uncovering the Role of Tether in Bypassing US Sanctions An Extensive Analysis

Author: JP Koning, monetary economist; Translation: 0xxz@LianGuai

Tether is a stablecoin that has become a news focus because it provides a means for sanctioned entities like Hamas to participate in the global payment ecosystem. This article aims to explore how Tether is used to evade sanctions in more detail. I will avoid using the example of Hamas, as it is a controversial example, and instead analyze the recent indictment by the U.S. Department of Justice against a group of businessmen who purchased oil from the sanctioned Venezuelan state oil company, PDVSA. Let’s get started. In this particular case, the buyers indirectly represented a sanctioned Russian aluminum company and appeared to use two methods of settling with Venezuela: bank wire transfers and cash (Tether comes into play with the latter). Before discussing Tether, we need to understand how bank wire transfers work. Russian buyers operate through shell companies or fronts established in places like Dubai. “We are using ‘covers’ due to [sanctions],” the Russians admitted. The Russian shell company in Dubai holds an account at an Egyptian bank, which has a branch in Dubai. One Russian, Orekhov, described this bank as the “worst bank in the UAE… they have no problems as long as you pay all the fees.”

The reputable Dubai bank may not want to risk allowing the Russian shell companies to engage in potentially sanctionable transactions, but it’s a bank without any qualms.

The Russian fronts cannot wire dollars directly to PDVSA, as they are sanctioned. Instead, the funds are sent through the Egyptian bank to foreign shell companies affiliated with PDVSA in Australia, Hong Kong, the UK, and other locations. Once payment is made, Russian vessels are then able to load Venezuelan oil.

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The second method of payment is U.S. cash. In fact, PDVSA seems to prefer cash. In the excerpt below, a Venezuelan contact, Serrano, says that Russian middleman Orekhov suffered heavy losses in a previous oil shipment because a competing buyer offered to pay with 100% U.S. cash. “The key is cash,” Serrano said. Much of Venezuela’s economic activity is dollarized, and with PDVSA’s link to U.S. banks severed, you can understand why U.S. cash is highly valued by PDVSA.

In response, the Russians propose two options for cash payments. Firstly, they would wire funds to a Panamanian bank, which would then pay PDVSA in cash in Venezuela. “This is just a service they provide,” Orekhov said. The second option suggested is to bring cash to Evrofinance in Moscow. Evrofinance is a bank controlled by PDVSA and subject to U.S. sanctions.

The indictment does not specify whether either of these two solutions was chosen, but instead focuses on the third cash-based solution involving the use of Tether or USDT for conversion.

The indictment provides a detailed account of the transaction. In November 2021, a Russian vessel was about to dock in Venezuela for loading. Venezuelan contact Serrano informed the Russian, Orekhov, that he needed to prepare payment for 500,000 barrels of PDVSA oil. In response, Orekhov sent 17 million USDT to a Venezuelan broker who would convert the USDT into cash. “Don’t worry, no pressure,” the Russian told his Venezuelan contact. “The speed of USDT operation is as fast as a text message.”

Once the broker received the 17 million USDT, the cash would be deposited into a bank, and PDVSA officials could collect it. Now the ship could be loaded.

Therefore, in this case, Tether was used as a third-party channel to pay cash in Venezuela. It served as an alternative to a set of bank wire transfers conducted through shell companies, with noticeably faster speed. “It’s faster than a wire transfer,” Orekhov said. “That’s why everyone is doing it now. It’s convenient and quick.”

Another benefit of using Tether for payment is that there is no need for a KYC check. Orekhov could buy 17 million USDT and send it to the Venezuelan broker, and neither of them would have to show their ID or fill out any forms to the platform owner, Tether. It’s like using “the worst bank in the UAE,” but with less hassle.

Further delving into the indictment, we learn another major advantage of Tether is that it provides a certain level of protection from the legal risks associated with traditional bank wire transfers. If you scroll down to the section where the indictment presents the charges, particularly the second count, you’ll find that the root of Orekhov and Serrano’s legal trouble is the bank wire transfers, not the Tether transactions.

In addition to many other charges, Orekhov and his Venezuelan counterpart Serrano are also accused of evading sanctions, specifically conspiring to violate the International Emergency Economic Powers Act (IEELianGuai). The IEELianGuai is legislation that includes US sanction laws.

What specific actions led to their indictment? That’s a great question because at first glance, the defendants appear to be beyond the reach of US jurisdiction. Both individuals are foreigners operating outside of the United States, connecting non-US buyers with non-US sellers. The product is not manufactured in the US. Without US ties, Serrano and Orekhov would seemingly not be subject to long-arm jurisdiction by US law enforcement agencies.

The final trap for Orekhov and Serrano is that some of their transactions are considered to have taken place within the United States. They use the “worst bank in the UAE” for wire transfers, which are ultimately processed through intermediary banks located in the New York metropolitan area.

To understand how banks in New York process these transactions, you need to grasp the workings of wire transfers. In order to facilitate dollar transfers, the “worst bank in the UAE” needs to open an account with a large US intermediary bank, such as JPMorgan. Similarly, the banks used by the PDVSA shell companies also have accounts with US intermediary banks to receive dollar transfers. Intermediary banks are banks that provide specialized services to foreign financial institutions in addition to regular banking activities.

In short, when the US dollar funds are transferred from the Egyptian bank to the shell accounts of the Venezuelan national oil company, most of the underlying activities supporting this fund transfer occur on the books of US banks like JPMorgan.

This is the Department of Justice’s conclusive evidence. Serrano and Orekhov are accused of “causing” a US financial institution to violate IEELianGuai regulations by handling tens of millions of dollars’ worth of payments.

In contrast, Tether transactions do not provide any incriminating evidence to the Department of Justice. USDT transfers occur on Tether’s books (registered in the British Virgin Islands) and completely bypass the New York intermediary banking system. Therefore, when Serrano and Orekhov make payments using USDT, they don’t “cause” the US party to do anything wrong.

In other words, if Russians and Venezuelans conduct all transactions with Tether and cash, and completely avoid bank wire transfers, it would be impossible for the US to prosecute them for violating IEELianGuai. Thus, not only is Tether “fast like a text message,” but it also provides a certain level of sanctuary from sanction laws.

But will this last?

In a recent letter to Congress, the US Treasury Department stated that stablecoins like Tether pose a risk of bypassing sanctions and requested legislation to close this loophole. The Treasury Department noted that while it already has jurisdiction over offshore wire transfers because they “pass through US intermediary financial institutions” or banks, it does not have the same authority over “tether-linked stablecoin transactions” because certain stablecoin transactions do not involve a US touchpoint. (This is the crux of the discussion in the previous paragraphs.)

To address this issue, the Treasury Department hopes that Congress will update its sanctions toolkit to grant it “extraterritorial jurisdiction” over stablecoin transactions pegged to the US dollar. In parentheses, it also adds “other dollar-denominated transactions” to its wishlist. This seems to convey the message (though I may be mistaken) that the Treasury Department wants to leverage the symbol of the US dollar, specifically its role as the primary unit of account, as a new link to control foreign transactions.

If such a law were to pass, people like Serrano and Orekhov could now be charged not only for the traditional crime of offshore USD wire transfers “causing” New York banks to violate sanctions laws, but also for using Tether for payment, as the latter references the USD trademark.

The authority gained by using the USD as the unit of account for foreign transactions is a huge step, much broader than relying on intermediary banks as authorities. Doing so would expand the US sanction power to a wider range of foreign economic activities, not just transactions based on USD stablecoins, but also potentially including USD cash payments, as these also use the USD as the unit of account. Congress must seriously consider this before approving the Treasury Department’s request.

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