Crypto platform Bitzlato accused of laundering over $700 million in illicit money

US authorities have designated the cryptocurrency exchange Bitzlato Ltd. as a primary money laundering firm and accused its founder of allegedly facilitating money laundering for criminals.

The Treasury Department named Bitzlato under a section of the USA Patriot Act, a law used to combat money laundering and terrorist financing, for allegedly laundering illicit funds for Russian-based ransomware actors . This type of action, a rarely used so-called lethal sanction that cuts the entity off from the U.S. financial system, has been used primarily in the past against banks and other financial institutions and has in most cases forced the institution to to close.

Bitzlato, which is based in Hong Kong but operates globally, reportedly traded more than $700 million in cryptocurrency with Hydra Market, a darknet market 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 Tuesday night in Miami. Mr. Legkodymov is a 40-year-old Russian national who lives in Shenzhen, China, according to the Justice Ministry.

Joel DeFabio, a federal criminal attorney in Miami, was retained to represent Mr. Legkodymov, according to court records. Mr. DeFabio did not respond to a request for comment.

Mr. Legkodymov made his first appearance in federal court in Florida on Wednesday and was ordered to be taken into custody, according to a spokesperson for the U.S. Attorney’s Office for the Eastern District of New York, who brought the charge to the alongside the Department of Justice in Washington. Mr Legkodymov is accused of operating an illegal money transfer business and could face up to five years in prison if convicted, according to the Justice Ministry.

Along with the US action, French authorities took their own enforcement actions, including shutting down Bitzlato’s digital infrastructure and seizing its cryptocurrency.

U.S. prosecutors said Bitzlato lacked effective know-your-customer procedures to verify user identities as required by U.S. anti-money laundering laws, and did substantial business with customers based in the United States, although it claims not to accept users from the United States.

Representatives for Bitzlato could not be reached for comment. Bitzlato’s website shows it was seized by French authorities.

“Today the Department of Justice has delivered a massive blow to the cryptocurrency ecosystem,” Assistant Attorney General Lisa Monaco said Wednesday. “Today’s actions send a clear message: whether you are breaking our laws from China or Europe, or abusing our financial system from a tropical island, you can expect to be held accountable for your crimes before a American court.”

Deputy Treasury Secretary Wally Adeyemo said authorities are continuing to investigate whether Bitzlato was used to help circumvent sanctions imposed on Russia following its invasion of Ukraine. The enforcement action should serve as a warning against the use of crypto to launder illicit funds and a reminder that US authorities are ready to act if they see this happening, he said, adding that he there could be other charges against Bitzlato or its founder.

“The message [to those using crypto tools to circumvent Russia sanctions]: We will, in collaboration and coordination with our allies and with the DOJ, find you and prosecute you and take action against you with the tools at our disposal,” Mr. Adeyemo said at the press conference of Wednesday announcing the enforcement action.

The Department of Justice said that the enforcement measures imposed in recent weeks against the crypto industry have shown that investments in improving its expertise in the sector are paying off. Ms. Monaco told the Wall Street Journal last month that an increase in Justice Department resources in cryptocurrency investigations more than a year ago helped prosecutors quickly indict the FTX founder. , Sam Bankman-Fried, and this decision bodes well for a series of aggressive law enforcement actions to come. The Justice Department coordinates cryptocurrency enforcement efforts through a 25-member national team, she added.

Crypto imploded in 2022 as investors lost faith in digital assets and the industry was in the grip of crisis. But unlike other collapses, it largely avoided spillovers to other markets. WSJ explains how crypto has become so interconnected. Illustration: Mallory Brangan

The enforcement action against Bitzlato comes as the crypto industry continues to come under scrutiny following the upheavals in the sector last year. US prosecutors charged Mr Bankman-Fried last month with eight counts of fraud after FTX filed for bankruptcy in November. Mr Bankman-Fried is under house arrest at his parents’ California home 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’s anti-money laundering unit, said in its order against Bitzlato that the exchange “represents a limited percentage of daily crypto transfers” by US and international standards.

FinCEN said that in April 2022, Bitzlato had a daily bitcoin balance that was 0.0185% of the largest US-based crypto exchange. Although FinCEN did not name the largest exchange, Coinbase Global Inc.

is ranked as the largest in the United States, according to research site CoinMarketCap.com.

A blog post from last year by blockchain analytics firm Chainalysis Inc. said that Bitzlato received around $2 billion worth of cryptocurrency between 2019 and 2021, and almost half of that value was believed to be illicit or risky.

The enforcement action against Bitzlato 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, it also looks like Bitzlato, the United States is squeezing Russia from all sides,” wrote a user posted under the handle Daniel Yanson in the group, which has more than 5,500 members.

Another user, with the handle No, wrote: “Is this even legal? Let’s say the owner laundered something there. What about ordinary people?… Is the US just taking their money or what?

Write to Mengqi Sun at mengqi.sun@wsj.com and Alexander Osipovich at alexo@wsj.com

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