DOJ and Treasury announce actions against Bitzlato exchange for facilitating Russian illicit finance

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DOJ and Treasury announce actions against Bitzlato exchange for facilitating Russian illicit finance

January 19, 2023

Yesterday, the U.S. Department of Justice and the U.S. Treasury Department announced a coordinated action against non-compliant Hong Kong-registered cryptocurrency exchange Bitzlato, and the arrest of its owner for “conducting a money transmitting business that transported and transmitted illicit funds and that failed to meet U.S. regulatory safeguards, including anti-money laundering requirements.”

The actions directly link Bitzlato to Russian illicit finance — particularly, ransomware and darknet markets — allowing Treasury’s Financial Crimes Enforcement Network (FinCEN) to issue for the first time an order pursuant to section 9714(a) of the Combating Russian Money Laundering Act. This order designates Bitzlato as a “primary money laundering concern” in connection with Russian illicit finance, and prohibits certain transmittals of funds involving Bitzlato by any covered financial institution.

As explained in the DOJ release, “As a result of deficient know-your-customer (KYC) procedures, Bitzlato allegedly became a haven for criminal proceeds and funds intended for use in criminal activity. Bitzlato’s largest counterparty in cryptocurrency transactions was Hydra Market, an anonymous, illicit online marketplace for narcotics, stolen financial information, fraudulent identification documents, and money laundering services that was the largest and longest running darknet market in the world. Hydra Market users exchanged more than $700 million in cryptocurrency with Bitzlato, either directly or through intermediaries, until Hydra Market was shuttered by U.S. and German law enforcement in April 2022. Bitzlato also received more than $15 million in ransomware proceeds.”

According to Deputy Attorney General Lisa Monaco, “Overnight, the Department worked with key partners here and abroad to disrupt Bitzlato, the China-based money laundering engine that fueled a high-tech axis of cryptocrime, and to arrest its founder, Russian national Anatoly Legkodymov. Today’s actions send the 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 inside a United States courtroom.”

The coordinated actions against Bitzlato are significant for four key reasons:

1. Bitzlato builds on prior Treasury and DOJ actions

Over the last 18 months, we have seen targeted actions against what Treasury Official Todd Conklin called the “illicit underbelly” of the crypto ecosystem. We have seen actions against non-compliant Russia-based exchanges Suex, Chatex, and Garantex, like Bitzlato, for having weak or no AML controls and for facilitating ransomware and darknet activity. In her prepared remarks, Deputy Attorney General Lisa Monaco directly linked the Bitzlato action to the earlier takedown of Hydra, explaining, “Hydra and Bitzlato formed a high-tech axis of cryptocrime: Hydra buyers funded illicit purchases — of illegal drugs, stolen financial information, and hacking services — from crypto accounts hosted at Bitzlato, and sellers of these illegal goods and services at Hydra sent criminal proceeds to accounts at Bitzlato — all to the tune of over $700 million in direct and indirect transfers between 2018 and 2022.” The Bitzlato action is another example — like Suex, Chatex, Garantex, Hydra and darknet mixers Helix and Bitcoin Fog — of the U.S. targeting the illicit parts of the crypto economy without striking at the growing and overwhelmingly licit ecosystem.

2. Bitzlato represents the first use of 9714(a) authorities by FinCEN 

In its action, FinCEN identified Bitzlato as a “primary money laundering concern” in connection with Russian illicit finance. But what does this mean?

In the 2020 National Defense Authorization Act (NDAA), which included the Anti-Money Laundering Act of 2020, Congress passed the Combating Russian Money Laundering Act, introducing a new authority, 9714(a), which specifically targets Russian illicit finance by cutting off designated actors from the U.S. financial system.

In yesterday’s action, FinCEN issued an order prohibiting certain transmittals of funds involving Bitzlato by any covered financial institution. As TRM’s Head of Legal & Regulatory Affairs explained to NBC, “If the U.S. Treasury Department designates a financial institution as a ‘Primary Money Laundering Concern,’ the goal is to isolate them. Being cut off from the U.S. financial system, not being able to transact in U.S. dollars, is essentially a death sentence.” 

In coordination with yesterday’s action FinCEN issued FAQ’s on 9714(a).

3. This a model for interagency and international cooperation

In response to the White House executive order on cryptocurrencies, both DOJ and Treasury provided reports on the importance of international engagement and cooperation. In the Bitzlato case, law enforcement agencies in the United States, Netherlands, France, and EUROPOL were all involved in the takedown and arrest. We saw DOJ arrest Legkodymov, a Russian national living in China, in Miami. Meanwhile, French authorities took down the Bitzlato website, and FinCEN used its authorities to cut Bitzlato off from the U.S. financial system. 

This type of global coordination on cases that reach across borders is inevitable in light of the nature of crypto and its promise of cross-border value transfer at the speed of the internet.

4. Strong AML controls are not optional

Finally, the case highlights the importance of AML controls. The DOJ complaint highlights that Bitzlato advertised weak AML controls as a selling point and is another message from regulators that compliance is critical to protecting the ecosystem as it grows.

For more on this emerging story, read CNN’s coverage which includes commentary from TRM’s Head of Legal & Regulatory Affairs, Ari Redbord.

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