Crypto giant Binance processed nearly $346 million in Bitcoin for the Bitzlato digital currency exchange, whose founder was arrested by US authorities last week for allegedly running a “money laundering machine,” Reuters reports citing blockchain data.
The U.S.Justice Department said on Jan.18 that it charged Bitzlato’s co-founder and majority owner Anatoly Legkodymov, a Russian national living in China, with operating an unlicensed money exchange business that “fuelled a high-tech axis of crypto-crime” by processing $700 million in illicit funds.
Bitzlato had touted the laxity of its customer background checks, the Justice Department said, adding that when the exchange asked users for ID information, “it repeatedly allowed them to provide information that belonged to ‘straw man’ registrants”.
Binance, the world’s largest crypto exchange, was among the top three counterparties to Bitzlato in terms of the amount of Bitcoin received between May 2018 and September 2022, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) said last week.
Binance was the only major crypto exchange among Bitzlato’s top counterparties, FinCEN said.It said others transacting with Bitzlato included Russian-language “darknet” drug marketplace Hydra, a small exchange called LocalBitcoins, and a crypto investment website called Finiko, which FinCEN described as “an alleged crypto Ponzi scheme based in Russia.” FinCEN did not provide details on the extent of the entities’ interactions with Bitzlato.
Hong Kong-registered Bitzlato was a “key money laundering concern” linked to Russian illicit financing, FinCEN added.It will ban the transfer of funds to Bitzlato from the US and other financial institutions from Feb.1, FinCEN said.It did not name Binance or other individual companies as among the companies covered by the ban.
A Binance spokesperson said via email that it had provided “substantial assistance” to international law enforcement in support of their investigation of Bitzlato.
The company is committed to “cooperating” with law enforcement, they added, refusing to provide details about its dealings with Bitzlato or the nature of its collaboration with such agencies.
Bitzlato, whose website says it has been seized by French authorities, could not be reached by Reuters.Legkodymov has not commented publicly since his arrest last week in Miami and has not responded to email requests for comment.
A lawyer for Finiko founder Kirill Doronin said FinCEN’s statement was “unfortunate for him” [Doronin]while continuing to hope for the return of the cryptocurrency to investors from the people who stole it.” Doronin did not use investors’ crypto while Finiko was operating, the attorney, Dmitry Grigoriadi, said.
The Hydra operator, who was sued in the US last year, did not respond to requests for comment.
Finland-based LocalBitcoins said it has never had “any kind of partnership or relationship” with Bitzlato.Some peer-to-peer (P2P) traders at LocalBitcoins “were also alleged to have traded in BitZlato’s P2P market,” it said, adding that “there have been practically no transactions between LocalBitcoins and BitZlato since October 2022.”
Reuters has no evidence that the Binance, LocalBitcoins or Finiko transactions with Bitzlato, which the Justice Department described as a “haven for criminal proceeds and funds intended for criminal activity,” violated any rules or laws.
However, a former US banking regulator and a former law enforcement official said that Binance’s status as one of the major counterparties would draw the attention of the Justice Department and the US Treasury Department to Binance’s compliance checks with Bitzlato.
“I wouldn’t call it a warning shot across the bow, I would call it a guided missile,” said Ross Delston — an independent U.S.
attorney and former banking regulator who is also an expert witness on anti-money laundering matters — referring to FinCEN quotes Binance and LocalBitcoins.
The Justice Department and FinCEN declined to comment.
Binance moved more than 20,000 Bitcoin, worth $345.8 million, in some 205,000 transactions for Bitzlato between May 2018 and last week’s shutdown, according to a review of previously unreported data.The numbers were compiled by leading US blockchain researcher Chainalysis and viewed by Reuters.
Bitcoin worth about $175 million was transferred from Bitzlato to Binance during that period, making Binance the largest receiving counterparty, the data shows.
About $90 million of the total transfers took place after August 2021, when Binance said users would be required to provide identification to fight financial crime, according to data from Chainalysis, which declined to comment.Such controls, Binance said in a blog last year, address “the financing and money laundering of illegal activities.” Reuters was unable to determine whether Binance was enforcing its ID requirements with Bitzlato.
Chainalysis, which is used by US authorities to track illicit crypto flows, warned last February that Bitzlato was at high risk.In a report, Chainalysis said nearly half of Bitzlato’s transfers between 2019 and 2021 were “unauthorized and risky,” identifying nearly $1 billion in such transactions.
The US action against Bitzlato comes as the Justice Department is investigating Binance for possible money laundering and sanctions violations.Some federal prosecutors have concluded that the evidence gathered justifies the filing of charges against executives, including founder and CEO Changpeng Zhao, Reuters reported in December.
Reuters was unable to determine whether Binance’s dealings with Bitzlato were being reviewed.
Binance, which does not reveal the location of its core exchange, has processed at least $10 billion in payments for criminals and companies looking to evade US sanctions, Reuters found in a series of articles last year based on blockchain, court and corporate data.
The reporting also revealed that Binance deliberately maintained weak money laundering controls and conspired to evade regulators in the US and elsewhere, according to former executives and company documents.
Binance disputed the articles, calling the illicit fund’s calculations inaccurate and the descriptions of the compliance checks “out of date”.
The exchange said last year that it is “pursuing higher industry standards” and is seeking to improve its ability to detect illicit crypto activity.
Both Binance and Bitzlato were major counterparties to the world’s largest darknet drug marketplace Hydra.
The Russian-language site was shut down by US and German authorities last year.The Justice Department said Bitzlato has exchanged more than $700 million in crypto with Hydra, either directly or through intermediaries.
In an article published last June, Reuters reviewed blockchain data showing that buyers and sellers on Hydra used Binance to make and receive crypto payments worth approximately $780 million between 2017 and 2022.A Binance spokesperson said at the time that this figure was “inaccurate and exaggerated”..