U.S. Continues Crackdown on Crypto Mixers in New Criminal Proceedings

U.S. Continues Crackdown on Crypto Mixers in New Criminal Proceedings

One story dominated international headlines this week, as two key cogs in the multinational underground operation that is Tornado Cash have been charged with laundering over $1 billion in criminal proceeds. Roman Storm and Roman Semerov, the primary developers of this über-popular Russia-based cryptocurrency mixer, were named in a recently unsealed indictment by the U.S. Attorney’s Office in the Southern District of New York. The indictment alleges that these individuals knowingly facilitated money laundering through their platform, while openly marketing its advantages to shady individuals and entire criminal enterprises as a means of laundering their ill-gotten gains under the guise of offering technically “sophisticated financial privacy services.” All told, the indictment formally charges the two men with multiple crimes including conspiracy to commit money laundering, conspiracy to commit sanctions violations, and conspiracy to operate an unlicensed money transmitting business.2  

The use and misuse of crypto mixing and blending services has grown exponentially over the past decade, much in line with the run on cryptocurrencies as a whole seen over this span. The premise of these operations is to further the likelihood of decreased detection for individuals making transactions in a space that is already synonymous with anonymity. Via the use of third-party outlets such as Tornado Cash, various entities are effectively able to mix their source funds/coins of either legitimate or illegitimate origins with other privately-pooled funds before they are ultimately transferred to their designated receivers – generally other members of an individual’s organization, outside entities as a means of payment for underhanded goods/services, or simply other accounts held by said individual originating the transaction. Using these platforms allows source funds to subsequently become obscured and as such more difficult to trace by law enforcement and government bodies seeking to crack down on illicit financial activity within this space. The platform offering these services also receives a fee (generally 1-to-3 percent of the total value of the transaction), which not only further makes them an accessory to the laundering that takes place, but lines their pockets while allowing these nefarious activities to extend further across the globe.

Given the destabilizing ramifications of these activities, as of last year the United States began taking tangible action to help limit the proliferation of money laundering through these outlets. One such move saw the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) levy sanctions against Tornado Cash in August of 2022, effectively prohibiting American citizens from utilizing the platform. At that time, the mixer was alleged to haveplayed a direct role in the laundering of more than $7 billion worth of crypto since its creation in 2019, with that figure likely much larger today. Government officials have since confirmed that a significant portion of the laundering activity that was allowed was performed on behalf of several sanctioned Russian and North Korean entities, respectively, with the mixer directly tied to what remains the largest crypto heist seen to date involving North Korea’s sanctioned Lazarus hacking group dating back to April of 2022. Lazarus was ultimately found to have made off with upwards of $615 million worth of tokens from Ronin, a network supporting the non-fungible token (NFT) game Axie Infinity, with the group also behind a separate $100 million attack on U.S.-based cross-chain bridge Harmony Horizon in June of 2022.1 Altogether, novel blockchain analytics tools are emerging that have helped to “de-mix” cryptocurrency transactions sent through blenders, though this remains a timely process given the sheer volume of transactions made through operations of this variety on a daily basis. However, CNBC writes that blockchain analytics firm Elliptic has reportedly found that at least $1.5 billion in proceeds from crimes such as ransomware, hacks and fraud involving various bad actors have been laundered through Tornado Cash, and that the entirety of the aforementioned $100 million stolen from the Harmony bridge was laundered through the service.1

It is also worth noting that the indictment alleges that Storm and Semenov ultimately chose against implementing know-your-customer (KYC) and anti-money laundering (AML) protocols as required by international law, further reinforcing the fact that they were well aware of the illicit activity that was taking place through their respective offering.1 Thus far Roman Storm has already been apprehended in Washington state according to a statement from the U.S. Justice Department, while his co-founder Roman Semenov remains at large. Despite mounting evidence to the contrary and his “partner in crime” remaining on the run, Roman Storm claims to be innocent of any criminal conduct. Storm’s attorney, Brian Klein, issued a statement expressing their disappointment with the decision by the DOJ to charge his client – this after “fully cooperating” with law enforcement since the original sanctions against the company were issued last year. The FBI countered with a statement of their own as it seems they are attempting to make an example out of the two Romans. FBI Director Christopher A. Wray stated,

 “Today’s announcement should remind criminal organizations everywhere in the world that they are neither untraceable nor anonymous.  You can’t hide from us behind a keyboard — whether you’re a hacker or facilitator.  Those charged today engaged in a conspiracy to launder money for cybercriminals, including for a North Korean cybercrime organization seeking to evade sanctions.  As we have with this operation, the FBI is going to keep dismantling the infrastructure used by cyber criminals to commit and profit from their crimes, and holding anyone who assists those criminals accountable.”2

Citations

  1. Sigalos, MacKenzie. “Tornado Cash Founders Charged with Laundering More than $1 Billion, Including Millions for North Korea.” CNBC, CNBC, 23 Aug. 2023. 
  2. “Tornado Cash Founders Charged with Money Laundering and Sanctions Violations.” United States Attorney’s Office Southern District of New York , 23 Aug. 2023. 
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