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Blockchain data reveals that cryptocurrency firm Binance processed around $346M in bitcoin for the Bitzlato digital currency exchange, whose CEO was detained by US authorities last week for allegedly running a "money laundering engine."
On January 18, the Justice Department announced that it had charged Anatoly Legkodymov, a Russian citizen who now resides in China and is the majority shareholder of Bitzlato, with operating an unlicensed money exchange business that "fueled a high-tech axis of cryptocrime" by processing $700M in illicit funds.
According to the Justice Department, Bitzlato had bragged about how lightly it conducted customer background checks and that when the exchange did request users' ID information, "it repeatedly allowed them to provide information belonging to "straw man" registrants."
According to the Financial Crimes Enforcement Network (FinCEN) of the US Treasury, Binance, the largest cryptocurrency exchange in the world, was one of Bitzlato's top three counterparties in terms of the amount of bitcoin received between May 2018 and September 2022.
According to FinCEN, of Bitzlato's top counterparties, only Binance was a significant cryptocurrency exchange.
It stated that apart from Binance, the other to transact with Bitzlato were the Russian-language darknet drug marketplace Hydra, LocalBitcoins, a minor exchange, and Finiko, which it referred to as "an alleged crypto Ponzi scheme based in Russia." The extent of the entities' dealings with Bitzlato was not specified by FinCEN.
Bitzlato, a company established in Hong Kong, was a "primary money laundering concern" associated with Russian illicit finance, according to FinCEN. Beginning on February 1st, it will ban US and other financial institutions from transmitting funds to Bitzlato, FinCEN declared.
It did not specifically mention Binance or any other individual firms as being subject to the ban.
In an email, a representative for Binance said that the company had "provided substantial assistance" to international law authorities in support of their Bitzlato investigation.
While denying to provide specifics of its interactions with Bitzlato or the nature of its cooperation with such entities, they noted that the firm is dedicated to "working collaboratively" with law enforcement.
Reuters was unable to contact Bitzlato, which claims to have been seized by French authorities on its website. Since his arrest in Miami last week, Legkodymov has not made any public statements and has not returned emails requesting comment.
Requests for comment were not answered by either the US-indicted operator of Hydra or the founder of Finiko's lawyer. LocalBitcoins from Finland did not respond either.
According to the Justice Department's description of Bitzlato as a "haven for criminal proceeds and funds intended for use in criminal activity," Reuters has no proof that the Binance, LocalBitcoins, or Finiko transactions with this company violated any rules or laws.
The Justice Department and U.S. Treasury, according to a former US banking regulator and a former law enforcement official, will pay close attention to Binance's compliance checks with Bitzlato because it is one of the key counterparties.
In reference to FinCEN's citation of Binance and LocalBitcoins, Ross Delston, an independent American lawyer and former financial regulator who is also an expert witness on anti-money laundering issues, said, "I wouldn’t call it a warning shot over the bow, I would call it a guided missile."
FinCEN and the Justice Department both declined to comment.
According to an analysis of previously published data, Binance handled more than 20,000 bitcoin, valued $345.8M at the time they were transacted, across almost 205,000 transactions for Bitzlato between May 2018 and its closure last week. Leading American blockchain researcher Chainalysis generated the data, which was obtained by Reuters.
The records suggest that during that time, Bitzlato sent Bitcoin worth around $175M to Binance, making Binance its largest receiving counterparty.
According to statistics from Chainalysis, which declined to comment, about $90M of the total transfers occurred after August 2021, when Binance announced it would require users to present identity in order to combat financial crime.
These controls address "the funding and laundering of money from illicit activities," according to a blog post by Binance from last year. Whether Binance implemented its ID requirements with Bitzlato was unknown to Reuters.
Bitzlato was flagged as high risk in February of last year by Chainalysis, a tool used by U.S. authorities to monitor illicit crypto transactions.
In a research, Chainalysis identified roughly $1BN in "illicit and risky" transactions, claiming that nearly half of Bitzlato's transfers between 2019 and 2021 were so.
As the Justice Department looks into Binance for potential money laundering and sanctions violations, the US takes action against Bitzlato. According to a December report by Reuters, several federal prosecutors have come to the conclusion that the information gathered supports the filing of charges against executives, including founder and CEO Changpeng Zhao.
Whether Binance's transactions with Bitzlato are being investigated could not be confirmed by Reuters.
According to a series of articles published by Reuters last year based on blockchain data, court documents, and company records, Binance, which withholds the location of its core exchange, has processed at least $10 billion in payments for criminals and businesses trying to skirt US sanctions.
According to former executives and business records, the reporting also revealed that Binance set out to deceive regulators in the US and internationally by maintaining lax anti-money laundering standards.
Binance contested the articles, calling the representations of its compliance systems "outdated" and the estimations for illicit funds "inaccurate." The exchange stated in a previous statement that it is "driving higher industry standards" and working to enhance its capacity to identify fraudulent cryptocurrency activities.
The largest darknet drug market Hydra had substantial counterparties in Binance and Bitzlato. German and American authorities shut down the Russian-language website last year. According to the Justice Department, Bitzlato engaged in direct or indirect cryptocurrency exchanges worth more than $700 million with Hydra.
Blockchain data revealed in a Reuters article from last June that Hydra buyers and sellers used Binance to send and receive cryptocurrency payments totaling over $780 million between 2017 and 2022. At the time, a Binance representative referred to the Hydra figure as "inaccurate and overblown."
By fLEXI tEAM