LONDON, Jan 24 (Reuters) – Crypto giant Binance processed nearly $346 million worth of Bitcoin for digital currency exchange Bitzlato, whose founder was arrested by US authorities last week for allegedly operating a “money laundering machine”. , as shown by blockchain data from Reuters.
The Justice Department said Jan. 18 it had charged Bitzlato’s co-founder and controlling shareholder Anatoly Legkodymov, a Russian citizen living in China, with operating an unlicensed foreign exchange business that processed $700 million, “a high-tech Cryptocrime Axis Fueled” have illicit funds.
Bitzlato had touted the laxity of its background checks on customers, the Justice Department said, adding that when the exchange asked users for ID information, it “repeatedly allowed them to provide information from ‘straw man’ registrants.”
Binance, the world’s largest crypto exchange, was among Bitzlato’s top three counterparties based on 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. The other deals involving 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 detail the scope of the companies’ interactions with Bitzlato.
The Hong Kong-registered Bitzlato is a “primary money laundering problem” related to illicit Russian finance, FinCEN added. It will ban U.S. and other financial institutions from sending funds to Bitzlato starting Feb. 1, FinCEN said. Binance or other individual companies subject to the ban were not named.
A Binance spokesperson said via email that it had provided “significant assistance” to international law enforcement agencies to aid in their investigations into Bitzlato. The company is committed to “cooperating” with law enforcement, they added, declining to give details about its dealings with Bitzlato or how it is working with such authorities.
Bitzlato, whose website was allegedly seized by French authorities, could not be reached by Reuters. Legkodymov, has not made any public comment since his arrest in Miami last week and has not responded to emailed requests for comment.
An attorney for Finiko’s founder, Kirill Doronin, said FinCEN’s statement was “unfortunate for him as he continues to hope for the return of cryptocurrency to investors from the people who stole it.” Doronin did not use the investors’ cryptocurrency while Finiko was active, lawyer Dmitry Grigoriadi said.
Hydra’s operator, which faced charges in the US last year, did not respond to requests for comment.
Finland-based LocalBitcoins said it never had “any kind of collaboration or relationship” with Bitzlato. Some peer-to-peer (P2P) traders at LocalBitcoins “would have also traded on BitZlato’s P2P market,” it said, adding that “virtually no transactions have taken place 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 for use in criminal activities,” violated any rule or law.
However, a former US banking regulator and former law enforcement official said Binance’s status as a top counterparty would draw the attention of the Justice Department and US Treasury Department to Binance’s compliance reviews with Bitzlato.
“I wouldn’t call it a warning shot over the bow, I would call it a guided missile,” Ross Delston, an American independent attorney and former banking regulator who is also an expert on anti-money laundering issues, told FinCEN, as quoted by Binance and LocalBitcoins.
The Justice Department and FinCEN declined to comment.
According to a review of previously unreported data, between May 2018 and its shutdown last week, Binance moved over 20,000 Bitcoin worth $345.8 million for Bitzlato in around 205,000 transactions. The numbers were compiled by leading US blockchain researcher Chainalysis and viewed by Reuters.
About $175 million worth of Bitcoin was transferred from Bitzlato to Binance during this period, making Binance its 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 anti-financial crime identification, according to data from Chainalysis, which declined to comment. Such controls, Binance said in a blog last year, address “the funding and money laundering from illegal activities.” Reuters was unable to determine whether Binance enforced its ID requirements at Bitzlato.
Chainalysis, used by US authorities to track illicit crypto flows, had warned in February last year that Bitzlato posed a high risk. In a report, Chainalysis said nearly half of Bitzlato’s transfers between 2019 and 2021 were “illegal and risky,” with nearly $1 billion identified in such transactions.
The US action against Bitzlato comes as the Justice Department investigates Binance for possible money laundering and sanctions violations. Some federal prosecutors have concluded the evidence gathered warrants filing charges against executives, including founder and CEO Changpeng Zhao, Reuters reported in December.
Reuters could not determine whether Binance’s dealings with Bitzlato are being verified.
Binance, which does not disclose the location of its core exchange, has processed at least $10 billion in payments for criminals and corporations trying to evade US sanctions, as Reuters highlighted in a series of blockchain-based articles last year -discovered dates, court and company records.
The coverage also showed that Binance was maintaining intentionally weak anti-money laundering controls and planning to dodge regulators in the United States and elsewhere, according to former executives and company documents.
Binance disputed the articles, calling its illicit fund calculations inaccurate and descriptions of its compliance controls “outdated.” The exchange said last year that it is “pushing higher industry standards” and is trying to improve its ability to detect illegal crypto activity.
Both Binance and Bitzlato have been major counterparties to the world’s largest dark web drug marketplace, Hydra. The Russian-language site was shut down by US and German authorities last year. The Justice Department said Bitzlato 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 around $780 million worth of crypto payments between 2017 and 2022. A Binance spokesman said at the time that the Hydra number was “inaccurate” and exaggerated.”
Reporting by Tom Wilson and Angus Berwick in London; Edited by Elisa Martinuzzi and Louise Heavens
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