On August 8, 2022, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) announced that it was imposing U.S. economic sanctions on Tornado Cash, a cryptocurrency mixer. The imposition of sanctions on this decentralized currency mixing service has created massive headaches for everyone involved, from regulators to cryptocurrency users to innocent third parties.
The issue is extremely complex, and several independent parties have found themselves targeted by OFAC investigations after inadvertently acquiring virtual currency associated with Tornado Cash.
Tornado Cash: A Virtual Currency Mixer
Tornado Cash is a cryptocurrency service provider. Launched in August, 2019, the basic service that Tornado Cash provides is to accept virtual currency, put it into a pool of similarly proffered cryptocurrency, mix it all together so it is difficult to trace, and then hold it for the beneficiary’s eventual withdrawal, all for a small fee.
While this provides a general overview of how Tornado Cash works, it is important to understand three important, but more nuanced, aspects of its structure:
- Tornado Cash is a smart contract, or static computer code that cannot be altered and that runs its course on the blockchain
- Tornado Cash is non-custodial, meaning it never actually gains custody of the funds that it mixes
- It is decentralized, meaning the people who run Tornado Cash are difficult to identify
This makes Tornado Cash an excellent way to launder money and make it hard for law enforcement agents to trace it. However, proponents also claim that it is a valuable tool for people who:
- Want to hide how much wealth they have
- Make financial transactions in privacy
- Pay people, like political or charitable causes, without being associated with them
OFAC Sanctions Tornado Cash for Laundering Money in High-Profile Case
In its announcement of the imposition of sanctions against Tornado Cash, OFAC claimed that the program had been used to launder over $7 billion worth of cryptocurrency over the course of its three years in existence. This included over $455 million that was stolen by North Korea’s state-sponsored hacking organization, the Lazarus Group, as well as other major cryptocurrency heists. OFAC would later announce that some of the funds mixed through Tornado Cash had been connected to the development of weapons of mass destruction in North Korea.
By sanctioning the virtual currency mixer, OFAC hoped to tie off an extremely valuable service for other targets of U.S. economic sanctions. By sanctioning Tornado Cash, OFAC stood to better enforce its sanctions against other blocked parties by taking away one of the easiest ways to launder their money.
However, in the year since the sanctions were announced, sanctioning a cryptocurrency mixer has proven to be far more difficult to do than expected.
Complications Arise in Enforcing Sanctions Against Tornado Cash
Several aspects of cryptocurrency, the blockchain, and Tornado Cash’s place within these structures have made it extremely difficult to enforce those OFAC sanctions against the currency mixer, and have also created compliance risks for completely independent parties.
Just a few of the most prominent problems have been:
- Cryptocurrency miners handling coins associated with Tornado Cash through their normal business conduct
- Blocking, rather than tracing, cryptocurrency transactions is extremely difficult and potentially even impossible for a variety of other players in the cryptocurrency industry
- Third parties may be unable to reject gifts of virtual currency that has been tainted by its association with Tornado Cash, putting that innocent third party at risk of prosecution
Each of these raises important compliance concerns.
Miners Face Scrutiny When They Handle Tainted Coins
Cryptocurrency miners can get caught up in these OFAC sanctions in their ordinary course of business.
Miners earn cryptocurrency coins when they provide the computational power necessary to track transactions using virtual currency and notate them on the blockchain. This raises the question of whether they are violating OFAC sanctions if they should happen to mine a block on the blockchain that contains a transaction involving Tornado Cash.
Miners and people and other entities in similar roles for other cryptocurrencies, like validators and staking pools for coins that use blockchains that require proof of stake, face complicated decisions and extremely vague OFAC guidance if they encounter a Tornado Cash transaction.
Blocking Cryptocurrency Transactions is More Difficult Than Tracking Them
Another complication that OFAC is encountering is just how difficult it can be to block a cryptocurrency transaction, rather than merely tracking it.
In a sign of how complicated enforcing sanctions would be, because Tornado Cash is a decentralized organization, OFAC could not simply add “Tornado Cash” to its list of sanctioned and blocked parties. Instead, it had to list 44 known computer addresses that were identified to be associated with Tornado Cash. Interacting with these 44 addresses could expose the user to penalties for violating OFAC sanctions.
However, these were only the beginnings of the complexities that OFAC has faced. While decentralized finance (DeFi) applications may be able to block a user from connecting with an account with any of the 44 addresses associated with Tornado Cash, there are questions as to whether it is necessary to comply with sanctions by blocking users at that stage or at another one further into the transaction.
Dusting Attacks by Cryptocurrency Users Put Innocent People in Legal Jeopardy
Another interesting, but far from trivial, complication to OFAC’s sanctioning of Tornado Cash has been so-called “dusting attacks.” Cryptocurrency holders who have funds tainted by their association with Tornado Cash have gifted small amounts to unsuspecting third parties, exposing them to legal risks of violating OFAC sanctions by holding Tornado Cash money.
Generally, these third parties have no ability to refuse the gift, letting bad actors weaponize their tainted money against others, who have little defense to it and the subsequent OFAC scrutiny.
Several Frequently Asked Questions About the OFAC Tornado Cash Incident and the Legal Services that The Criminal Defense Firm Can Provide
What are the Penalties for Violating OFAC Sanctions?
Violating U.S. economic sanctions is a serious allegation to face. However, describing the legal penalties that you could be subjected to if you are found guilty or liable is not straightforward. This is because the penalties for violating OFAC sanctions will depend on the law that authorizes the particular sanction at issue. For example, willfully violating economic sanctions that were imposed under the authority of the Trading With the Enemy Act carry up to $91,816 in criminal fines per violation in 2023, while willfully violating sanctions imposed under the Foreign Narcotics Kingpin Designation Act carries fines of up to $1.5 million per violation.
To add to the complexity, OFAC can pursue criminal cases if there is evidence that you willfully violated sanctions, or civil cases if it appears that the violation was not willful. Criminal cases can also carry prison sentences, sometimes of over a decade.
Finally, there is the negative publicity that often comes with an allegation that you violated OFAC sanctions and traded with one of America’s enemies. This can cripple your company’s finances by saddling it with a bad reputation.
What Sets The Criminal Defense Firm Apart from Other OFAC Defense Firms?
The Criminal Defense Firm is unique in several ways.
First, we are a national law firm with offices in major cities across the country. No matter where you need legal guidance regarding cryptocurrency or OFAC matters, chances are that there is a local office for The Criminal Defense Firm near you.
Second, we only have senior-level lawyers and investigators on our staff. This means that you can count on your attorney having extensive experience handling pressing legal issues that are similar to your own. It also means that all of your legal work will be performed by a senior-level attorney who knows what is at stake and how to best represent your interests. While other firms often delegate the lion’s share of the legal work to junior associates and even to paralegals, we cannot do that at The Criminal Defense Firm because we do not have them on our roster.
Why Don't You Call Yourselves the Best OFAC and Cryptocurrency Firm?
We do not like to tout our firm with bold statements like this. Instead, we prefer to let our prior client’s testimonials do this sort of talking for us.
The OFAC and Cryptocurrency Lawyers at The Criminal Defense Firm
Preventing money laundering is an extremely important aspect of enforcing U.S. economic sanctions. Not taking aggressive actions against money laundering services would allow sanctioned entities and individuals to continue to conduct business to the detriment of the United States. However, OFAC’s decision to foray into the cryptocurrency industry and impose sanctions against Tornado Cash has opened a can of worms that has exposed a variety of innocent parties to serious legal risks that they cannot control or even really prevent.
The OFAC and cryptocurrency lawyers at The Criminal Defense Firm have the experience to handle these complicated legal issues that fall in an extremely complex intersection of novel areas of law. Call our national law firm using our central hotline at (866) 603-4540 or contact us online.