LONDON, Jan 24 (Reuters) – Crypto giant Binance has processed nearly $346 million worth of bitcoin for digital currency exchange Bitzlato, whose founder was arrested by US authorities last week on charges of handling a “money laundering engine,” as blockchain data seen by Reuters shows.
The Justice Department said on Jan. 18 that it had charged Bitzlato co-founder and majority shareholder Anatoly Legkodymov, a Russian national living in China, with running an unlicensed money trading business that “fueled a high-tech axis of cryptocrime” by processing $700 million in illicit funds.
Bitzlato had touted the laxness of its customer background checks, the Justice Department said, adding that when the exchange asked users for identity information, it “repeatedly allowed them to provide information belonging to “straw man” registrants “.
Binance, the world’s largest cryptocurrency exchange, was among Bitzlato’s top three counterparties by amount of bitcoins received between May 2018 and September 2022, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) said last week.
Binance was the only major cryptocurrency exchange among Bitzlato’s major counterparts, FinCEN said. It said the others that transacted with Bitzlato were Russian-language darknet drug marketplace Hydra, a small exchange called LocalBitcoins, and a cryptocurrency investment website called Finiko, which FinCEN described as “an alleged scheme Russia-Based Crypto Ponzi”. FinCEN did not detail the extent of the entities’ interactions with Bitzlato.
Bitzlato, registered in Hong Kong, was a “major money laundering concern” linked to Russia’s illicit finance, FinCEN added. It will ban the transmission of funds to Bitzlato by the United States and other financial institutions from February 1. Said FinCEN. He did not name Binance or any other individual companies as those subject to the ban.
A Binance spokesperson said via email that it has “provided substantial assistance” to international law enforcement agencies to support their investigation into Bitzlato. The company is committed to “working collaboratively” with law enforcement agencies, they added, declining to provide details about its dealings with Bitzlato or the nature of its partnerships with those agencies.
Bitzlato, whose website says it was seized by French authorities, could not be reached by Reuters. Legkodymov, has not released any public comment since his arrest in Miami last week and has not responded to emailed requests for comment.
A lawyer for Finiko 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 investors’ cryptocurrencies while Finiko was trading, lawyer Dmitry Grigoriadi said.
The operator of Hydra, which was indicted in the US last year, did not respond to requests for comment.
Finland-based LocalBitcoins said it has never had “any kind of cooperation or relationship” with Bitzlato. Some LocalBitcoins peer-to-peer (P2P) traders “also allegedly traded in the BitZlato P2P marketplace,” he said, adding that “there have been virtually no transactions between LocalBitcoins and BitZlato since October 2022.”
Reuters has no evidence that Binance, LocalBitcoins or Finiko’s transactions with Bitzlato, which the Justice Department has described as a “haven for criminal proceeds 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 would 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 would call it a guided missile,” said Ross Delston, an independent US attorney and former bank regulator who is also an expert witness in anti-money laundering matters, referring to FinCEN’s subpoena. of Binance and LocalBitcoins.
The Justice Department 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 closure 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 to Binance by Bitzlato during that time, making Binance its largest receiving counterparty, data shows.
About $90 million of the total transfers occurred after August 2021, when Binance said it would require users to present identification to fight financial crime, according to data from Chainalysis, which declined to comment. Those controls, Binance said in a blog last year, address “financing and laundering of money from illicit activities.” Reuters could not determine whether Binance enforced its identification requirements with Bitzlato.
Chainalysis, which is used by US authorities to track flows of illicit cryptocurrencies, 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 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 under scrutiny.
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 report also showed that Binance intentionally maintained weak anti-money laundering controls and plotted to evade regulators in the United States and elsewhere, according to former executives and company documents.
Binance took issue with the articles, calling the calculations of illicit funds inaccurate and descriptions of its compliance checks “outdated”. The exchange said last year that it is “promoting higher industry standards” and that it is looking to improve its ability to detect illegal cryptographic activity.
Both Binance and Bitzlato were significant counterparts 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 traded more than $700 million in cryptocurrencies 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 payments in cryptocurrencies worth approximately $780 million between 2017 and 2022. A spokesperson for Binance said at the time that Hydra’s figure was “inaccurate and exaggerated.”
Reporting by Tom Wilson and Angus Berwick in London; Editing by Elisa Martinuzzi and Louise Cieli
Our standards: the Thomson Reuters Trust Principles.