Crypto giant Binance processed about $346 million in Bitcoin for digital currency exchange Bitzlato, whose founder was arrested by US authorities last week for running a “money laundering engine”, Reuters reported, citing blockchain data.
On January 18, the US Department of Justice said it charged Bitzlato co-founder and Russian citizen Anatoly Legkodimov, who lives in China, with running an unlicensed money exchange business that “fuels the high-tech crypto-criminal axis” through processing. 700 million dollars in illegal funds.
The Department of Justice Bitzlato highlighted the weakness of background checks on customers, adding that when the exchange asked users for ID information, “it repeatedly allowed them to provide information related to ‘strawman’ registrants.”
The US Treasury’s Financial Crimes Enforcement Network (FinCEN) said last week that Binance, the world’s largest cryptocurrency, was among Bitzlato’s top three partners in terms of the amount of Bitcoin it acquired between May 2018 and September 2022.
Binance was the only major cryptocurrency exchange among Bitzlato’s top partners, FinCEN said. Others that transacted with Bitzlato were Russian-language “dark web” 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,” it said. FinCEN did not detail the extent of the businesses’ interactions with Bitzlato.
FinCEN added that Hong Kong-registered Bitzlato was a “primary money-laundering concern” linked to illicit Russian financing. FinCEN said it will ban money transfers to Bitzlato by U.S. and other financial institutions starting Feb. 1. It did not name Binance or other individual firms among those banned.
A Binance spokesperson said in an email that it is providing “reasonable assistance” to international law enforcement agencies to support their investigation into Bitzlato. The company is committed to “working cooperatively” with law enforcement agencies, they added, declining to elaborate on its relationship with Bitzlato or the nature of its cooperation with such agencies.
Bitzlato, which said its website had been seized by French authorities, could not be reached by Reuters. Legkodymov has made no public comments since his arrest in Miami last week and did not respond to email requests for comment.
An attorney for Finiko founder Kirill Doroni said FinCEN’s statement was “unfortunate for him.” [Doronin], because he continues to hope that cryptocurrency will be returned to investors from the people who stole it.” Lawyer Dmitri Grigoriadi said that during Finiko’s tenure, Doronin did not use investors’ cryptocurrency.
The Hydra operator, who was indicted 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 on LocalBitcoins “would also trade on BitZlato’s P2P market,” he said, adding that “since October 2022, there have been virtually no transactions between LocalBitcoins and BitZlato.”
There is no evidence that Bitzlato, Binance, LocalBitcoins or Finiko’s transactions with Bitzlato, which Reuters described as a “haven for the proceeds of crime and funds intended for use in criminal activity” by the Department of Justice, violated any rules or laws.
However, a former US bank regulator and a former law enforcement official said that Binance’s status as one of the top partners will draw the attention of the Justice Department and the US Treasury to Binance’s compliance checks with Bitzlato.
“I wouldn’t call it a warning shot over the bow, I’d 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 issues. FinCEN cites Binance and LocalBitcoins.
The Justice Department and FinCEN declined to comment.
Binance moved more than 20,000 Bitcoins, valued at $345.8 million, between about 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.
During that period, approximately $175 million worth of bitcoins were transferred from Bitzlato to Binance, making Binance the largest recipient.
About $90 million of the total transfers occurred after August 2021, when Binance said it would require users to provide identification to fight financial crime, according to data from Chainalysis, which declined to comment. Binance said in a blog post last year that such checks combat “the financing and laundering of illegal activities.” Reuters has not been able to determine whether Binance has enforced its ID requirements with Bitzlato.
Chainalysis, which is used by US authorities to monitor illicit cryptocurrency flows, warned in February last year that Bitzlato was high risk. In a report, Chainalysis said that about half of Bitzlaton’s transfers between 2019 and 2021 were “illegal and risky” and identified about $1 billion in such transactions.
The US action against Bitzlato comes as the Department of Justice investigates possible money laundering and sanctions violations at Binance. In December, Reuters reported that some federal prosecutors concluded that evidence gathered warranted charges against executives, including founder and CEO Changpeng Zhao.
Reuters was unable to determine whether Binance’s relationship with Bitzlato was under review.
Binance, which has not disclosed the location of its main exchange, has processed at least $10 billion in payments for criminals and companies trying to evade US sanctions.
The report also found that Binance maintained lax anti-money laundering controls and planned to evade regulators in the U.S. and elsewhere, according to former executives and company filings.
Binance disputed the articles, calling the illegal fund calculations inaccurate and the descriptions of compliance controls “outdated.” The exchange said last year it was “managing higher industry standards” and working to improve its ability to detect illegal crypto activity.
Both Binance and Bitzlato were significant partners in Hydra, the world’s largest darknet drug marketplace. The Russian-language site was closed by the US and German authorities last year. The Justice Department said Bitzlato exchanged more than $700 million in cryptocurrency with Hydra, either directly or through intermediaries.
In an article published last June, Reuters reviewed blockchain data showing that buyers and sellers in Hydra used Binance to make and receive roughly $780 million worth of cryptocurrency payments between 2017 and 2022. A Binance spokesperson said at the time that the number was “accurate and inaccurate.” over-inflated”.