US authorities have identified cryptocurrency exchange Bitzlato Ltd. as a major money-laundering concern and charged its founder with allegedly helping to launder money for criminals.
The Treasury Department designated Bitzlato as part of the USA Patriot Act, which is used to combat money laundering and terrorist financing, for allegedly laundering illegal money for Russia-based ransomware actors. Such actions, such as the rarely used death penalty, which cuts an entity out of the U.S. financial system, have been used primarily against banks and other financial institutions in the past, often forcing the institution to close.
Bitzlato, which is based in Hong Kong but operates globally, exchanged more than $700 million in cryptocurrencies with Hydra Market, the world’s largest darknet marketplace, before it was shut down in April 2022, according to the US Department of Justice. Bitzlato also generated more than $15 million in ransomware revenue, according to the Department of Justice.
Bitzlato’s founder and majority owner, Anatoly Legkodimov, was arrested in Miami on Tuesday night. According to the Department of Justice, Mr. Legkodimov is a 40-year-old Russian citizen living in Shenzhen, China.
Joel DeFabio, a federal criminal prosecutor in Miami, was retained to represent Mr. Legkodimov, according to court documents. Mr. DeFabio did not respond to a request for comment.
Mr. Legkodimov made his first appearance in federal court in Florida on Wednesday and was ordered arrested, according to a spokesman for the U.S. Attorney’s Office for the Eastern District of New York, which brought the prosecution along with the Justice Department in Washington. According to the Justice Department, Mr. Legkodimov is charged with running an illegal money transfer business and could face up to five years in prison if convicted.
Coinciding with the US move, French authorities took their own enforcement steps, including shutting down Bitzlato’s digital infrastructure and seizing its cryptocurrency.
U.S. prosecutors said Bitzlato did significant business with U.S.-based customers despite claiming it did not have effective know-your-customer procedures to verify users’ identities as required by U.S. anti-money laundering laws.
Bitzlato representatives could not be reached for comment. Bitzlato’s website shows it has been seized by French authorities.
“Today, the Department of Justice dealt a significant blow to the cryptocriminal ecosystem,” Deputy Attorney General Lisa Monaco said Wednesday. “Today’s actions send a clear message: Whether you break our laws from China or Europe, or abuse our financial system from a tropical island, you can expect to answer for your crimes in a US courtroom.”
Treasury Undersecretary Wally Adeyemo said authorities were continuing to investigate whether Bitzlato was used to help evade sanctions imposed on Russia over its involvement in Ukraine. He said the enforcement action should serve as a warning against the use of cryptocurrency for money laundering and a reminder that U.S. authorities are prepared to act if they see it happening, adding that other charges could be brought against Bitzlato or its founder.
“Message [to those using crypto tools to circumvent Russia sanctions]: We will find you and go after you in cooperation and coordination with our allies and the DOJ and take action against you with the tools at our disposal,” Mr. Adeyemo said at a press conference on Wednesday announcing the enforcement action.
The Department of Justice said that enforcement actions against the cryptocurrency industry in recent weeks have shown that investments in improving its expertise in the sector are paying off. Ms. Monaco told The Wall Street Journal last month that the Justice Department’s focus of resources on cryptocurrency investigations more than a year ago helped prosecutors quickly indict FTX founder Sam Bankman-Fried, a move that signals aggressive enforcement action ahead. The Justice Department is coordinating cryptocurrency enforcement efforts through a 25-person national team, he added.
The enforcement action against Bitzlato comes as the cryptocurrency industry continues to face scrutiny following last year’s upheaval in the sector. US prosecutors charged Mr Bankman-Fried with eight counts of fraud last month after FTX filed for bankruptcy in November. Mr. Bankman-Fried is under house arrest at his parents’ home in California as he faces federal fraud charges, to which he has pleaded not guilty.
Bitzlato was a little-known exchange before Wednesday’s move. The Financial Crimes Enforcement Network, the Treasury’s anti-money laundering division, said in its order against Bitzlato that the exchange represented a limited percentage of “daily” crypto transfers under US and international standards.
As of April 2022, FinCEN said Bitzlato had a daily bitcoin balance of 0.0185% of the largest cryptocurrency exchange in the United States. Although FinCEN did not disclose the name of the largest exchange, Coinbase Global Inc.
CoinMarketCap.com ranks it as the largest in the United States.
In a blog post last year by blockchain analytics firm Chainalysis Inc, Bitzlato said it bought about $2 billion worth of cryptocurrency between 2019 and 2021, with about half of that value considered illegal or risky.
The enforcement action against Bitzlato appears to be a shock to its users. Minutes after the Justice Department’s announcement, a Russian-language Telegram group for Bitzlato users was flooded with complaints about the exchange’s shutdown and the actions of US authorities.
In a group with more than 5,500 members, a user under the handle Daniel Janson wrote, “They took Hydra, it looks like Bitzlato, the US is squeezing Russia from all sides.”
Another user with the handle Non wrote: “Is this even legal? Let’s say the owner washed something there. What about ordinary people?…Does the US take their money or what?’
-Ian Talley contributed to this article.
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