US authorities designated cryptocurrency exchange Bitzlato Ltd. as the primary money laundering company and accused its founder of allegedly promoting money laundering for criminals.
The Treasury Department has named Bitzlato under a section of the USA Patriot Act for allegedly laundering illegal funds for Russia-based ransomware actors. This type of measure, a rarely used so-called death penalty that disconnects the company from the US financial system, has been used primarily against banks and other financial institutions in the past, and in most cases has forced the institution to close.
Bitzlato, which is based in Hong Kong but operates globally, has reportedly exchanged more than $700 million in cryptocurrency with Hydra Market, a dark web marketplace that was the largest in the world before it shut down in April 2022. said the US Department of Justice. Bitzlato also received more than $15 million in ransomware proceeds, the Justice Department said.
Anatoly Legkodymov, the founder and majority owner of Bitzlato, was arrested in Miami Tuesday night. Mr Legkodymov is a 40-year-old Russian citizen who lives in Shenzhen, China, according to the Justice Ministry.
According to court documents, Joel DeFabio, a federal criminal prosecutor in Miami, has been hired to represent Mr. Legkodymov. Mr. DeFabio did not respond to a request for comment.
Mr Legkodymov appeared in federal court in Florida for the first time on Wednesday and was sentenced to jail, according to a spokesman for the US Attorney’s Office for the Eastern District of New York, which took the indictment alongside the Justice Department in Washington. Mr Legkodymov faces charges of operating an illegal money transfer business and could face up to five years in prison if convicted, according to the Justice Department.
Simultaneously with the US action, French authorities launched their own enforcement actions, including shutting down Bitzlato’s digital infrastructure and confiscating its cryptocurrency.
Subscribe to Newsletter
WSJ | Risk and Compliance Journal
Our morning risk report provides insights and updates on governance, risk and compliance.
U.S. prosecutors said Bitzlato lacked effective know-your-customer procedures to verify users’ identities as required by U.S. anti-money laundering laws, and did not close any U.S. users despite the claim accept significant business with US customers
Bitzlato officials could not be reached for comment. Bitzlato’s website shows that it was confiscated by French authorities.
“Today, the Justice Department dealt a major blow to the cryptocrime ecosystem,” Assistant Attorney General Lisa Monaco said on Wednesday. “Today’s actions send a clear message: whether you break our laws in China or Europe — or abuse our financial system from a tropical island — you can face justice for your crimes in a United States courtroom.”
Deputy Finance Minister Wally Adeyemo said authorities are still investigating whether Bitzlato was used to circumvent sanctions imposed on Russia for its invasion of Ukraine. The enforcement action should serve as a warning against using crypto to launder illicit funds and as a reminder that US authorities stand ready to act if they see this, he said, adding that there are other charges against Bitzlato or his founder could give.
“The message [to those using crypto tools to circumvent Russia sanctions]: We will find and pursue you, in cooperation and coordination with our allies and the DOJ, and will take action against you with the resources at our disposal,” Mr. Adeyemo said at Wednesday’s news conference announcing the enforcement actions.
The Justice Department said the enforcement measures taken against the crypto industry in recent weeks have shown that investing in improving their expertise in the sector pays off. Ms Monaco told The Wall Street Journal last month that a flood of Justice Department resources into cryptocurrency investigations more than a year ago helped prosecutors quickly indict FTX founder Sam Bankman-Fried, and the Step heralds a barrage of aggressive enforcement action. The Justice Department is coordinating cryptocurrency enforcement efforts through a 25-strong national team, she added.
Crypto imploded in 2022 as investors lost confidence in digital assets and the industry was hit by a crisis. But unlike other meltdowns, it has largely avoided spreading to other markets. WSJ explains how crypto became so connected. Picture: Mallory Brangan
The enforcement action against Bitzlato comes as the crypto industry continues to face scrutiny following the upheaval in the industry over the past year. US prosecutors indicted Mr Bankman-Fried last month on eight counts of fraud 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 ahead of Wednesday’s action. The Financial Crimes Enforcement Network, the Treasury Department’s anti-money laundering unit, said in its order against Bitzlato that the exchange represents “a limited percentage of daily” crypto transfers by U.S. and international standards.
FinCEN said that as of April 2022, Bitzlato had a daily Bitcoin balance equivalent to 0.0185% of the largest US-based crypto exchange. Although FinCEN has not named the largest exchange, Coinbase Global Inc. is ranked as the largest in the US, according to research site CoinMarketCap.com.
A blog post by blockchain analysis firm Chainalysis Inc. last year states that Bitzlato received about $2 billion worth of cryptocurrency between 2019 and 2021, and almost half of that value was deemed illegal or risky.
The Bitzlato enforcement action seems to have come as a shock to its users. Minutes after the Justice Department’s announcement, a Russian-language Telegram group for Bitzlato users filled with complaints about the exchange’s shutdown and the actions of US authorities.
“They took Hydra, looks Bitzlato too, US is squeezing Russia from all sides,” wrote a user, who posted under the handle Daniel Yanson, in the group, which has more than 5,500 members.
Another user with the Handle Non wrote: “Is this even legal? Let’s say the owner washed something there. What about ordinary people? …is the US just taking their money or what?”
—Ian Talley contributed to this article.
Write to Mengqi Sun at [email protected] and to Alexander Osipovich at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8