LONDON, Jan 24 (Reuters) – Crypto giant Binance has handled nearly $346 million in bitcoin for digital currency exchange Bitzlato, whose founder was arrested by U.S. authorities last week for allegedly mining a “money laundering engine,” according to blockchain data seen by Reuters shows.
On Jan. 18, the Justice Department said it had charged Bitzlato co-founder and majority shareholder Anatoly Legkodymov, a Russian national living in China, with operating an unlicensed currency exchange business that “fed a high-tech cryptocurrency axis” by processing $700 million in illicit funds.
Bitzlato had touted its lax background checks on customers, the Justice Department said, adding that when the exchange asked users for credentials, “it repeatedly allowed them to provide information belonging to to registered “straw men”.
Binance, the world’s largest crypto exchange, was among Bitzlato’s top three counterparties by amount of bitcoins received between May 2018 and September 2022, the US Treasury’s Financial Crimes Enforcement Network (FinCEN) said last week.
Binance was the only major crypto exchange among Bitzlato’s top counterparties, FinCEN said. He said the other transactions with Bitzlato were Hydra, the Russian-language darknet drug market, 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 extent of the entities’ interactions with Bitzlato.
Bitzlato, registered in Hong Kong, was a “primary money laundering concern” linked to Russian illicit financing, FinCEN added. It will prohibit the transmission of funds to Bitzlato by the United States and other financial institutions from February 1. FinCEN said. He did not name Binance or other individual companies among those subject to the ban.
A Binance spokesperson said via email that it had “provided substantial assistance” to international law enforcement to support their investigation of Bitzlato. The company pledged to “work cooperatively” with law enforcement, they added, declining to elaborate on its relationship with Bitzlato or the nature of its cooperation with those agencies.
Bitzlato, whose website says it was seized by French authorities, could not be reached by Reuters. Legkodymov, has not made any public comments since his arrest in Miami last week and did not respond to email 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 the cryptocurrency to investors from the people who stole it.” Doronin did not use the investors’ crypto while Finiko was operating, the attorney, Dmitry Grigoriadi, said.
The Hydra operator, who was indicted in the United States last year, did not respond to requests for comment.
Finland-based LocalBitcoins said it never had “any kind of cooperation or relationship” with Bitzlato. Some LocalBitcoins peer-to-peer (P2P) traders “would have also been trading on BitZlato’s 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 transactions with Bitzlato, which the Justice Department has described as a “safe haven for proceeds of crime and funds intended for use in criminal activities”, violated rules or laws.
However, a former US banking regulator and former law enforcement official said Binance’s status as one of the top counterparties would focus the US Department of Justice and Treasury’s attention on security checks. Binance compliance 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 banking regulator who is also an expert witness on issues of fight against money laundering, referring to Citing Binance and LocalBitcoins by FinCEN.
The Justice Department and FinCEN declined to comment.
Binance moved more than 20,000 bitcoins, worth $345.8 million at the time of their transaction, out of some 205,000 transactions for Bitzlato between May 2018 and its shutdown last week, according to a review of unreported data previously. The figures were compiled by prominent US blockchain researcher Chainalysis and seen by Reuters.
Around $175 million worth of bitcoins were transferred to Binance from Bitzlato during this period, making Binance its largest receiving counterparty, according to the data.
About $90 million of the total transfers took place after August 2021, when Binance said it would require users to submit ID to combat financial crime, according to data from Chainalysis, which declined to comment. comment. These controls, Binance said in a blog post last year, address “the 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 illicit crypto flows, warned in February last year that Bitzlato was high risk. In a report, Chainalysis said nearly half of Bitzlato transfers between 2019 and 2021 were “illicit and risky,” identifying nearly $1 billion in such transactions.
The US action against Bitzlato comes as the Department of Justice investigates Binance for possible money laundering and sanctions violations. 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 establish whether Binance’s relationship with Bitzlato is under review.
Binance, which does not reveal the location of its main exchange, processed at least $10 billion in payments for criminals and companies seeking to evade US sanctions, Reuters found in a series of articles last year. based on blockchain data, court and corporate records.
The report also showed that Binance was intentionally keeping anti-money laundering controls weak and conspiring to evade regulators in the US and elsewhere, according to former executives and company documents.
Binance took issue with the articles, calling the calculations of illicit funds inaccurate and the descriptions of its compliance checks “outdated”. The exchange said last year that it “implements higher industry standards” and seeks to improve its ability to detect illegal cryptographic activity.
Binance and Bitzlato were major counterparties to Hydra, the world’s largest darknet drug marketplace. The Russian-language site was shut down by US and German authorities last year. The Justice Department said Bitzlato traded more than $700 million in crypto with Hydra, either directly or through intermediaries.
In an article published last June, Reuters examined blockchain data that showed Hydra buyers and sellers used Binance to make and receive crypto payments worth around $780 million between 2017 and 2022. A Binance spokesperson 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 Heavens
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