Tornado Cash: Founders Charged With AML Violations
Two founders of Tornado Cash, the now infamous Ethereum-based digital asset tumbler, were recently charged with money laundering offenses and sanction violations by US authorities. This article delves into the indictment against them and discusses the series of events that led to the charges. We'll also look at the broader issue of sanctions evasion in the crypto-asset economy and reveal the key takeaway from the latest developments.
Tornado Cash: The Latest Developments
On August 23, 2023, the US Attorney's Office Southern District of New York, announced that Tornado Cash founders Roman Storm and Roman Semenov have been charged with laundering more than $1 Billion in criminal proceeds.
If that wasn't enough to potentially land them years in jail, the defendants were also charged with "conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmitting business."
But that's not all.
On the same day, the US Office of Foreign Assets Control (OFAC) also released a separate statement announcing that it had sanctioned Roman Semenov (one of the co-founders). Furthermore, according to the statement from the DOJ, naturalized US citizen and co-founder, Roman Storm, was arrested. But Semenov, who is a Russian national, remains at large.
We'll talk more about the charges in a moment. But first, some background.
Tornado Cash: The Background
As many readers know, cryptocurrency mixers (also referred to as tumblers or blenders) are privacy-enhancing tools designed to increase the anonymity of cryptocurrency transactions.
According to data, Tornado Cash has mixed over $7.6 Billion worth of Ethereum since launching in August 2019.
And why do criminals run to crypto mixers?
Because they break the traceability of individual transactions - making it more challenging to link the original sender with the final recipient. You can read more about them in this sanctions.io article.
Further research from 2022 predicted that around 30% of the funds sent through Tornado Cash can be tied to illicit actors.
The US government's first significant legal move against the widely-used mixer took place in August 2022, when the Office of Foreign Asset Control (OFAC) sanctioned Tornado Cash, placing it on its Specially Designated Nationals (SDN) and Blocked Persons List.
In layperson's terms, if an individual or organization is on this list, they are blacklisted from all economic activity in the US. Also, doing business with those on the SDN list is a serious offense that may lead to hefty financial penalties, criminal prosecutions, and reputational damage - which are some of the reasons why sanctions screening of customers and business partners is so important.
At the time, the sanctions.io blog covered this move by OFAC. You can read about it here: OFAC's Tornado Cash Sanctions.
The latest 2023 development is essentially a continuation and doubling-down by US prosecutors on their efforts to hold individuals from Tornado Cash accountable for allegedly enabling money laundering and sanctions evasion.
New Tornado Cash Charges: Digging Into the Specifics
We already know that two Tornado Cash founders have been charged with money laundering offenses and sanction violations. OFAC also sanctioned Roman Semenov.
The press release issued by the DOJ mentions that the indictment alleges that the defendants "operated a $1 Billion scheme designed to help other criminals launder and conceal funds using cryptocurrency."
But what is the meat on the bone behind these charges?
In two words: North Korea. The indictment charges Roman Storm and Roman Semenov (two of the three founders of Tornado Cash) with knowingly engaging in a conspiracy to launder hundreds of millions of dollars and evade sanctions for the Lazarus Group, a sanctioned North Korean state-backed hacking group.
An interesting part of the information released publicly by the DOJ on August 23, 2023, is how the defendants repeatedly ignored warnings and failed to take appropriate action.
For example:
Complaints From Hacking Victims
Cybercriminals allegedly laundered their illegal proceeds through Tornado Cash. The defendants received complaints and requests for help from victims of hacking and other cybercrimes.
Prosecutors say the defendants refused to implement controls following these complaints, and the Tornado Cash service continued.
Sanctions Compliance Announcement
US prosecutors state that the defendants knew that the Tornado Cash service was engaging in the alleged sanctions-violating transactions with the Lazarus Group (the North Korean cybercrime organization) to launder hundreds of millions of dollars in hacked dirty money.
The DOJ press release continues and states that Roman Storm and Roman Semenov then "made a change in the service so that they could make a public announcement that they were compliant with sanctions."
Implementing a change so that Tordando Cash was sanctions-compliant sounds like a positive move, right?
Yes. Except, the defendants also knew the change would be ineffective and continued to allegedly facilitate hundreds of millions of dollars in further sanctions-violating transactions for the Lazarus Group, according to the DOJ (who mention private chats as evidence).
Key Takeaway From the Latest Tornado Cash Legal Developments
The latest legal action against two of the three Tornado Cash founders sends a firm message from the US government:
Crypto decentralization is no defense from sanctions. It can also not be used by criminals laundering illegal proceeds from reprehensible acts, such as human trafficking.
It's important to remember that the vast majority of people and organizations working in the crypto industry are not bad actors and comply with sanctions, anti-money laundering (AML), and combating the financing of terrorism (CFT) regulations. Also, Roman Storm and Roman Semenov are both innocent until proven guilty in a court of law.
But, as many readers know, there is a fierce debate and disagreement between the crypto industry and the US government. At the crux of the clash is over privacy, security, and regulation.
In August 2023, a group of crypto investors and developers lost a lawsuit (funded by Coinbase) against the US Treasury, arguing that it overstepped its authority in sanctioning Tornado Cash.
In this article, we can't go into this debate. But the key takeaway from the latest charges in the Tornado Cash saga is this:
The US government is making clear that the cryptocurrency industry must play by the rules that everybody else is already playing (which most crypto organizations are committed to doing) as it continues to integrate into the traditional financial system.
NOW READ: AML Guide for the Cryptocurrency Industry.
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