Repost from Law of The Ledger: “OFAC Sanctions Crypto Mixer Following Allegations of Laundering Funds to North Korea” The full report and all related findings are available on the official website of Law of The Ledger.

The U.S. authorities are increasingly taking actions against big-name crypto mixers for potential violations of sanctions regulations. On November 29, 2023, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) sanctioned Sinbad.io (“Sinbad”), which is a virtual currency mixer. As a result, U.S. persons are generally prohibited from dealings involving Sinbad or its property interests. Virtual currency mixers are anonymized software tools that allow users to conceal the source or owner of digital assets.

According to OFAC’s press release, Sinbad processed millions of dollars’ worth of virtual currency from the Lazarus Group, a North Korean state-sponsored cyber hacking group, in order to generate revenue for North Korea’s weapons of mass destruction and ballistic missile programs. OFAC also stated that cybercriminals used Sinbad for sanctions evasion, drug trafficking, the purchase of child sexual abuse materials and illicit sales on darknet marketplaces. Immediately following the announcement, Sinbad’s website was down stating that its services have been seized as part of a coordinated law enforcement action.

This recent action against Sinbad is the latest in OFAC’s multiple enforcement actions in the past couple of years targeting crypto mixers. On September 13, 2019, OFAC sanctioned the Lazarus Group after identifying it as cyber hacking group controlled by the Government of North Korea. Subsequently, on May 6, 2022, OFAC sanctioned Blender.Io, a crypto mixer which was used by the Lazarous Group to process over $ 20.5 million of illicit proceeds. OFAC’s sanction against Blender was the first time OFAC ever sanctioned a virtual currency mixer. In its press release, OFAC stated that it is concerned that “[v]irtual currency mixers that assist illicit transactions pose a threat to U.S. national security interests.” OFAC stated its commitment to “exposing components of the virtual currency ecosystem…that are critical to the obfuscation of the trail of stolen proceeds from illicit cyber activity.” A couple of months later, on August 8, 2022, OFAC sanctioned ethereum-based mixer, Tornado Cash, for similarly assisting the Lazarus Group to launder more than $96 million of illegal funds to North Korea. The founders of Tornado Cash have since been indicted by the United States Department of Justice for conspiring to commit money laundering, conspiring to commit sanctions violations, and conspiring to operate an unlicensed money transmitting business.

These enforcement actions prompted the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to propose a new rule pursuant to section 311 of the USA Patriot Act that would require financial firms to report information about transactions that they suspect involve crypto mixers. FinCEN announced the proposed rule on October 19, 2023, which would impose a requirement that covered financial institutions implement certain recordkeeping and reporting requirements on transactions that the covered financial institutions know, suspect, or have reason to suspect involve virtual currency mixing within or involving jurisdictions outside the United States. Financial institutions and other stake holders have until January 22, 2024 to provide written comments to FinCEN’s new proposed rule. Once the rule is finalized, financial institutions in the U.S. will be expected to develop policies and procedures to identify reportable transactions and report the transactions with necessary information to FinCEN.

In light of U.S. authorities’ heightened focus on crypto mixers and increased enforcement actions against these companies, it is important for financial institutions to be prepared for FinCEN’s new rule to become final and accordingly implement their anti-money laundering controls. Financial institutions should also re-evaluate their current systems in place and consider any enhancements that may be needed to properly screen and monitor crypto mixing transactions in accordance with FinCEN’s new rule.