Tuesday, December 5, 2023

Why do sanctioned entities use Tether?

Tether, a stablecoin, has been in the news for offering sanctioned actors such as Hamas a means to participate in the global payments ecosystem.

In this post I want to explore in more depth how Tether is being used to dodge sanctions. I'm going to avoid drawing on the Hamas example, which has been controversial, and will instead dissect the U.S. Department of Justice's recent indictment of group of business people who brokered oil purchases from PDVSA, Venezuela's sanctioned state-owned oil company.

Let's get right into things. In this particular case, the buyers  who indirectly represented a sanctioned Russian aluminum company  seem to have used two methods for settling payments with Venezuela: bank wires and cash. (Tether makes an appearance in the second.)  

Before we get to Tether, we need to understand how the bank wires worked.

The Russian buyers operated through a network of shell companies, or fronts, set up in places like Dubai. "Because of [sanctions] we are using 'fronting'" the Russians admit. The Russians' Dubai-based shell companies had accounts at an Egyptian bank with a branch in Dubai. In a lovely line, one of the Russians, Orekhov, describes this bank as the "shittiest bank in the Emirates ... They have no issues, they pay to everything."

...the shittiest bank in the Emirates [link]

The more reputable Dubai banks probably didn't want to risk enabling the potentially sanctioned transactions of a Russian shell company, but here was a bank that had no qualms.

The Russian front companies couldn't wire U.S. dollars directly to the PDVSA; it was sanctioned. Instead, the payments were sent via the Egyptian bank to a number of foreign shell companies owned by the PDVSA, located in places like Australia, Hong Kong, and the UK. With the payments sent, the Russian's boats could be loaded with Venezuelan oil.

The second payment method was U.S. banknotes. In fact, the PDVSA seemed to have preferred cash. In the excerpt below, the Venezuelan contact, Serrano, says that the Russian middleman, Orekhov, lost out on a previous oil shipment because a competing buyer offered to pay 100% in U.S. banknotes. "The key is cash," says Serrano. Venezuela is mostly dollarized, and with the PDVSA cut off from U.S. banks, you can understand why U.S. paper money would be quite valuable to the PDVSA.

"The key is cash" [source]

In response, the Russians suggest two cash-based payments options. In the first, they will send a bank wire to a Panamanian bank, and the Panamanian bank will pay the PDVSA cash in Venezuela. "This is simply a service that they do," says Orekhov. The second option that he suggests is to bring paper money to Evrofinance in Moscow. Evrofinance is a bank that is controlled by the PDVSA and has been sanctioned by the U.S.

The indictment doesn't detail whether either of these two solutions was chosen, but instead focuses on a third cash-based solution, one that involves using Tether, or USDt, as a switch.

The indictment documents this transaction particularly well. It's November 2021 and the Russians' ship is about to berth in Venezuela for loading. The Venezuelan contact, Serrano, notifies the Russian, Orekhov, that he needs to get ready to pay for 500,000 barrels of PDVSA oil. Orekhov responds by sending $17 million worth of USDt to a broker in Venezuela, who converts the USDt to cash. "No worries, no stress," says the Russian to his Venezuelan contact. "USDT works quick like SMS."

"...quick like SMS" [link]

Once the broker receives the $17 million USDt, the cash is placed in a bank where PDVSA officials can collect it. Now the boat can be loaded.

So in this case Tether is being used as third-party rail for buying cash in Venezuela. It is serving as an alternative to a set of bank wires made through shell companies, a notably speedier one. "It's quicker than telegraphic transfer," says Orekhov. "That why everyone does it now. It's convenient, it's quick."

Going the Tether route also has the benefit of not requiring a single know-your-customer (KYC) check. Orekhov could have bought $17 million USDt, and sent it to the Venezuelan broker, and neither of the two would have had to show the owner of the platform, Tether, their ID or fill out any forms. It's like using the "shittiest bank in the Emirates," except with even fewer hassles.

Delving further into the indictment, we learn that another key benefit of Tether is that it provides a degree of protection from the legal hazards of a traditional bank wire transfer. If you scroll down to the part of the indictment where charges are being laid, particularly Count Two, it is the bank wires that are at the root of Orekhov and Serrano's legal woes, not the Tether transactions.

Among many other crimes, Orekhov and his Venezuelan counterpart, Serrano, are accused of sanctions evasion, more specifically conspiring to violate the International Emergency Economic Powers Act (IEEPA). The IEEPA is the bit of legislation that contains U.S. sanctions law.

What specific actions incriminated them? This is a good question, because on first glance the defendants seem to be beyond the pale of U.S. jurisdiction. Both men were foreign nationals operating outside of the U.S. They connected a non-US buyer to a non-US seller. The product is not made in the America. Without a U.S. nexus, it would appear that Serrano and Orekhov are safe from the long reach of U.S. law enforcement.

The ultimate hook that catches Orekhov and Serrano is that part of their dealings were deemed to have occurred on U.S. soil. They made wire transfers using the "shittiest bank in the Emirates," and those wire transfers were ultimately processed through correspondent banks based in the New York metropolitan area.

To understand how New York-based banks touched the transaction, you need to know a little bit about how wire transfers work. To be capable of making a U.S. dollar wire transfer, the "shittiest bank in the Emirates" needed to have an account with a large U.S.-based correspondent bank, like JP Morgan. Likewise, the bank that the PDVSA shell companies were using would have also had accounts at a U.S. correspondent bank in order to accept U.S. dollar wires. A correspondent bank is a bank that, in addition to conducting regular banking business, specializes in serving foreign financial institutions.

So long story short, when U.S dollar funds moved from the Egyptian bank to the PDVSA shell accounts, much of the underlying activity to support this fund transfer occurred back in the U.S. the on the books of a bank such as JP Morgan.

That's the Department of Justice's smoking gun. Serrano and Orekhov are accused of having "caused" a U.S.-based financial institution to process tens of millions in U.S. dollar-denominated payments in violation of the IEEPA.

The Tether transactions, by contrast, do not provide the Department of Justice with anything incriminating. USDt transfer occurs on the books of Tether (which is registered in the British Virgin Islands), completely bypassing the New York correspondent banking system. So when they paid with USDt, Serrano and Orekhov didn't "cause" a U.S-based actor to do anything wrong.

Put differently, if the Russians and Venezuelans had conducted all their transactions with Tether and cash, and avoided bank wires altogether, it would have been impossible for the U.S. to indict them for violating the IEEPA. Thus, not only is Tether "quick like SMS," it also provides a degree of safe harbour from sanctions law.

But not for long?

In a recent letter to Congress, the U.S. Treasury says that stablecoins such as Tether pose a sanctions risk, and requests legislation to close this loophole. The Treasury notes that while it already has jurisdiction over offshore wires transfers because they "transit intermediary U.S. financial institutions," or correspondent banks, it does not have the same authority over "equivalent-value stablecoin transactions, because certain stablecoin transactions involve no U.S. touchpoints." (That's the core of what we were talking about in the previous paragraphs.)

"...stablecoin transactions involve no U.S. touchpoints"

To remedy this, the Treasury wants Congress to update its sanctions toolbox to give it "extraterritorial jurisdiction" over U.S. dollar-pegged stablecoin transactions. In brackets, it also adds "other U.S dollar-denominated transactions" to its wish list. What this appears to be conveying, and I could be wrong, is that the Treasury wants the ability to leverage the U.S. dollar symbol, more specifically the dollar's role as the dominant unit-of-account, as a new nexus for controlling transactions made by foreigners. 

If such a law were to pass, folks like Serrano and Orekhov could now be indicted not only for the traditional crime of making offshore U.S. dollar wire transfers that "cause" New York banks to violate sanctions law, but also for paying with Tether, because the latter invokes the U.S. dollar trademark. 

Leveraging the unit-of-account role of the U.S. dollar to get authority over foreign transactions is a huge step to take, certainly much broader than relying on correspondent banking as authority. Doing so would extend U.S. sanctioning power to a much wider set of foreign economic activity, not just U.S. dollar stablecoin-based transactions, but also potentially to U.S. cash payments, since those too make use of the U.S. dollar accounting unit. Congress will have to think hard before it grants the Treasury's request.


  1. Interesting. What's the other leg of the trade for the Venezuelan intermediary? They need people with too much cash who want to swap it for USDT... who could that be? ;-)

    1. I can only speculate, but one guess is rich Venezuelans, some of whom are sanctioned, who are trying to get their U.S. dollars out of the country, say to places like Dubai, and they can't use bank wires to do so.

  2. In Hong Kong, one can do USD transactions between banks which are not processed through New York correspondent banks as Hong Kong Interbank Clearing Limited operates a USD RTGS in addition to their HKD one.
    How does that interact with U.S. sanctions right now?

    1. There's a case of this in Singapore, which also serves as an offshore dollar clearing centre. Two companies were found guilty of evading U.S. sanctions, even though it's not apparent that U.S.-based correspondents were used:


      "But that doesn’t stop OFAC from inaccurately claiming that every dollar transaction conducted by CSE through its Singapore accounts caused a transfer of financial services from the United States to Iran."

  3. At some point I don't understand why people just don't use another currency such as the Euro for these transactions. Yes, there would be a similar touchpoint through correspondent banking to one of the 21 countries that use the Euro officially but at least some of these transactions aren't even prohibited by law in the EU.