DOJ Doubles Down On Tornado Cash UI Charges

• The DOJ argues that it is irrelevant for Storm's criminal prosecution whether Sanctions on the Tornado Cash software were legal
• The DOJ argues that Storm's attempts at complying with sanctions law were "window dressing"
• The DOJ continues to attempt to enforce FATF recommendation 66 against FinCEN guidance and lack of official adoption

Last month, Tornado Cash developer Roman Storm filed a motion to reconsider the dismissal of charges against the developers in light of a Fifth Circuit ruling reversing sanctions against the software.

In its opposition to the motion, the US Government argues that the sanctions reversal has no effect on the criminal trial against Tornado Cash developers, arguing that "it is irrelevant in this case whether those sanctions were legally valid," as the case primarily focuses on the ability to control the Tornado Cash user interface [UI].

"The Tornado Cash service in fact had many connected pieces that together with the pools provided a seamless customer experience," the Government argues, stating that "the charged money transmitting business included the conduct of Tornado Cash’s founders and network of relayers."

The Government alleges that Storm "and his coconspirators took a number of affirmative steps to facilitate and profit from the Lazarus Group’s money laundering and sanctions evasion, including by continuing to pay for critical infrastructure and continuing to maintain the relayer algorithm, the Relayer Registry, and other smart contracts, which were the profit engine for the Tornado Cash service and which provided a key additional layer of anonymity for Tornado Cash customers."

In contrast, the Fifth Circuit had found that "Tornado Cash doesn’t profit from the immutable smart contracts," noting that the record does not suggest that "Tornado Cash itself, which is the designated “entity,” [sic] receives fees from transactions through either mutable or immutable contracts."

"None of the immutable smart contracts entitle the smart-contract creators to a benefit," the Fifth Circuit found.

The Tornado Cash UI offered non-technical users a web interface to interact with the Tornado Cash smart contracts. To adhere to sanctions law, Tornado Cash developers implemented a Chainalysis oracle contract to block sanctioned addresses from interacting with the Dapp.

"Maintaining financial privacy is essential to preserving our freedom, however, it should not come at the cost of non-compliance," the developers wrote in a 2022 announcement.

The Government refers to this measure as "window dressing," as the user interface was only one point of access to Tornado Cash services, and therefore could not reasonably prevent sanctioned entities from interacting with the service.

"The defendant intentionally designed and operated an efficient and user-friendly way to access the pools and paid for critical infrastructure used in accessing the pools," the Government states.

"The defendant’s argument is like a getaway driver for a bank robbery arguing that he should not be liable for his conduct because the robbers could have just driven themselves or taken the bus instead," the Government argues.

Because Tornado Cash contracts are immutable, the Fifth Circuit found that "even if Tornado Cash did not want North Korea, the Lazarus Group, or anyone else, for that matter, using the immutable smart contracts that the Tornado Cash developers created, Tornado Cash—let alone the Department—would be powerless to stop them."

The Government yet alleges that Storm "deliberately participated in and facilitated money laundering transactions—conduct for which he can be held liable regardless of whether those transactions could have happened in some other way without his willful participation."

While the Fifth Circuit found that Tornado Cash does not own or control the smart contracts, the Government again references the case against Silk Road operator Ross Ulbricht, stating that Ulbricht, too, was found guilty of conspiracy to commit money laundering without an allegation that the defendant had control over the criminal proceeds, instead finding that the sole purpose of operating Silk Road was to facilitate illicit transactions.

What's notable is that by current estimations, illicit transactions on the Tornado Cash network only made up around 14% of all activity happening via the software, primarily pertaining to funds originating from hacks.

In Van Loon vs. US Department of Treasury, which fought (and won) Tornado Cash's designation as a sanctioned entity, a judge criticized that the US Government was merely able to cite three cases of sanctions evasion that occurred via the service.

In its opposition, the Government further alleges that "the defendant and his coconspirators in the Tornado Cash service did in fact directly conduct financial transactions in criminal proceeds, even if they did not control or take custody of the proceeds."

The argument stresses the discussion at the heart of the criminal case against the Tornado Cash developers: can software developers be held liable for money transmission charges when the developers do not take custody of funds?

According to FinCEN's own guidance, that would be a no: as FinCEN describes a service provider to only fall under the money transmitter description if "the host has total independent control over the value (although it is contractually obligated to access the value only on instructions from the owner)."

The Government's opposition highlights the DOJ's continued willingness to leverage criminal enforcement as a tool to shape the law – in this case specifically to introduce FATF recommendation 66 on the classification of non-custodial UIs as a category of a "Virtual Asset Service Provider", which have not yet been adopted by the US.

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