On Jan. 18, the Justice Minister said it accused Bitzlato co-founder and majority shareholder Anatoly Legkodymov, a Russian national residing in China, of running an unauthorized money-exchange business that “provided an axis of high-tech cryptocurrency” by processing 700 million dollars in illicit money funds. Bitzlato had touted its lax background checks on its clients, the Justice Department said, adding that when the exchange asked users for credentials, it “repeatedly allowed them to provide information belonging to ‘men straw’ registrants.”
Binance, the world’s largest cryptocurrency exchange, was among the top three counterparties of Bitzlato based on the amount of bitcoins received between May 2018 and September 2022, the Financial Crimes Enforcement Network (FinCEN) reported last week.
Binance was the only major cryptocurrency exchange among Bitzlato’s major counterparts, FinCEN said. He said the others who transacted with Bitzlato were Russian-language darknet drug marketplace Hydra, a small exchange called LocalBitcoins, and a cryptocurrency investment website called Finiko, which he described as “an alleged Ponzi scheme.” in cryptocurrencies based in Russia”. FinCEN has not detailed the extent of the entities’ interactions with Bitzlato.
Bitzlato, registered in Hong Kong, was a “prime money laundering concern” linked to illicit Russian financing, FinCEN added. It will ban the transmission of Bitzlato funds by the United States and other financial institutions from February 1. FinCEN said. He did not name Binance or any other individual company among those subject to the ban.
A Binance spokesperson said via email that the company has “provided substantial assistance” to international law enforcement agencies to support their investigation into Bitzlato. The company pledged to “work collaboratively” with law enforcement agencies, they added, declining to elaborate on its relationship with Bitzlato or the nature of its cooperation with those agencies.
Bitzlato, whose website says it was seized by French authorities, could not be reached by Reuters. Legkodymov, has not made public comments since his arrest in Miami last week and has not responded to email requests for comment.
The HYDRA operator, charged in the United States, and a lawyer representing the Finiko founder did not respond to requests for comment. Finland-based LocalBitcoins also did not respond.
Reuters has no evidence that Binance, LocalBitcoins or Finiko’s transactions with Bitzlato, which the Justice Department has described as a “safe haven for the proceeds of crime and funds intended for use in criminal activity,” violated any rules or laws.
However, a former US banking regulator and former law enforcement official said that Binance’s status as a major counterparty will focus the attention of the US Department of Justice and the Treasury on Binance’s compliance checks with Bitzlato.
“I wouldn’t call it a bow warning shot, I would call it a guided missile,” said Ross Delston, an independent US attorney and former bank regulator who is also an expert witness in counterterrorism matters. the listing of Binance and LocalBitcoins by FinCEN.
The Minister of Justice and FinCEN declined to comment.
Binance moved more than 20,000 bitcoins, worth $345.8 million at the time of the transaction, across approximately 205,000 transactions for Bitzlato between May 2018 and its shutdown last week, according to a review of previously unreported data. The figures were compiled by leading US blockchain researcher Chainalysis and seen by Reuters.
About $175 million worth of bitcoin was transferred from Binance by Bitzlato during this period, making Binance its largest receiving counterparty, according to the data.
About $90 million of the total transfers occurred after August 2021, when Binance said it would require users to show ID to fight financial crime, according to data from Chainalysis, which declined to comment. Those controls, Binance said in a blog post last year, concern “funding and money laundering from illicit activities.” Reuters could not determine whether Binance enforces its identification requirements with Bitzlato.
THE DARKNET MARKET
Chainalysis, which is used by US authorities to track illicit cryptocurrency flows, warned in February last year that Bitzlato was at high risk. In a report, Chainalysis said nearly half of Bitzlato’s transfers between 2019 and 2021 were “illicit and risky,” identifying nearly $1 billion in those transactions.
The US action against Bitzlato comes as the Justice Department is investigating Binance for possible money laundering violations and sanctions. Some federal prosecutors have concluded that the evidence gathered supports the filing of charges against executives, including founder and CEO Changpeng Zhao, Reuters reported in December.
Reuters could not determine whether Binance’s transactions with Bitzlato are under review.
Binance, which does not disclose the location of its main exchange, has processed at least $10 billion in payments for criminals and companies trying to evade US sanctions, Reuters found in a series of articles last year based on blockchain data. legal and corporate documents.
The reports also showed that Binance intentionally kept anti-money laundering controls weak and conspired to evade regulators in the United States and elsewhere, according to former executives and company filings.
Binance disputed the articles, calling the calculations of illicit funds inaccurate and descriptions of its compliance checks “outdated”. The exchange said last year that it is “pushing higher industry standards” and is looking to improve its ability to detect illegal cryptographic activity.
Binance and Bitzlato were both major counterparties to the world’s largest darknet drug marketplace, Hydra. The Russian-language site was shut down last year by US and German authorities. The Justice Minister said Bitzlato has traded more than $700 million in cryptocurrencies with Hydra, either directly or through intermediaries.
In an article published last June, Reuters reviewed blockchain data that showed buyers and sellers on Hydra used Binance to make and receive payments in cryptocurrencies worth approximately $780 million between 2017 and 2022. A spokesperson of Binance said at the time that Hydra’s figure was “inaccurate and overblown.”