US authorities have designated cryptocurrency exchange Bitzlato Ltd. as a major money laundering problem and accused its founder of allegedly facilitating money laundering for criminals.
The Treasury Department designated 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 ransomware actors based in Russia. This type of action, a rarely used so-called death penalty that cuts an entity out of the US financial system, has been used mainly in the past against banks and other financial institutions, and in most cases has forced the institution to close.
Bitzlato, which is based in Hong Kong but operates globally, is said to have exchanged more than $700 million in cryptocurrency with Hydra Market, a darknet that was the world’s largest before it was shut down in April 2022 ., the US Department of Justice said. Bitzlato also received more than $15 million in ransomware proceeds, the Justice Department said.
Anatoly Legkodimov, the founder and majority owner of Bitzlato, was arrested Tuesday night in Miami. Mr Legkodimov is a 40-year-old Russian who lives in Shenzhen, China, according to the Ministry of Justice.
Joel DeFabio, a federal criminal lawyer in Miami, has been hired to represent Mr. Legkodimov, according to court records. Mr. DeFabio did not respond to a request for comment.
Mr Legkodimov made his first appearance on Wednesday in a federal court in Florida and was ordered detained, according to a spokesman for the US Attorney’s Office for the Eastern District of New York, which prosecuted the case along with the Justice Department in Washington. Mr Legkodimov faces charges of running an illegal money transfer business and could face up to five years in prison if convicted, according to the Ministry of Justice.
Concurrent with the US action, French authorities took their own enforcement measures, including shutting down Bitzlato’s digital infrastructure and seizing its cryptocurrency.
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U.S. prosecutors said Bitzlato lacked effective know-your-customer procedures to verify the identity of users, as required by U.S. anti-money laundering laws, and did significant business with U.S.-based customers, despite claiming not to accept US users
Bitzlato representatives could not be reached for comment. Bitzlato’s website shows it has been confiscated by French authorities.
“Today, the Department of Justice dealt a significant blow to the crypto-crime ecosystem,” Deputy Attorney General Lisa Monaco said Wednesday. “Today’s actions send a clear message: Whether you break our laws from China or Europe — or abuse our financial system from a tropical island — you can expect to be held accountable for your crimes in a United States courtroom.”
Deputy Finance Minister Wally Adeyemo said authorities were still investigating whether Bitzlato was used to help circumvent sanctions imposed on Russia over 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 are ready to act if they see it happening, he said, adding that there could be other charges against Bitzlato or its founder.
“The message [to those using crypto tools to circumvent Russia sanctions]: We, in cooperation and coordination with our allies and the Ministry of Justice, will find you and go after you and take action against you with the tools at our disposal,” Mr. Adeyemo said at the press conference on Wednesday announcing the enforced actions.
The Department of Justice said enforcement actions taken in recent weeks against the crypto industry have shown that investments in improving its track record in the sector are paying off. Ms. Monaco told The Wall Street Journal last month that the Justice Department’s increased resources in cryptocurrency investigations more than a year ago helped prosecutors quickly bring charges against FTX founder Sam Bankman-Fried and the move foreshadows a series of aggressive enforcement actions. The Justice Department is coordinating cryptocurrency enforcement efforts through a 25-member national team, she added.
Crypto exploded in 2022 as investors lost faith in digital assets and the industry was hit by a crisis. But unlike other crashes, it has largely avoided ripples in 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 face scrutiny following upheaval 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’ home in California as he faces federal fraud charges to which he has pleaded not guilty.
Bitzlato was a little-known exchange before Wednesday’s action. The Financial Crimes Enforcement Network, the Treasury Department’s anti-money laundering division, 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 by 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 the largest in the US, according to research site CoinMarketCap.com.
A blog post from last year by blockchain analytics firm Chainalysis Inc. said Bitzlato received about $2 billion worth of cryptocurrency between 2019 and 2021, and nearly half of that value is considered illegal or risky.
The enforcement action against Bitzlato seems to have shocked users. Minutes after the Justice Department’s announcement, a Russian-language Telegram group for Bitzlato users flooded with complaints about the exchange’s shutdown and the actions of US authorities.
“They got Hydra, it looks like Bitzlato, the US is pressuring Russia from all sides,” wrote a user posting under the pseudonym Daniel Yanson in the group, which has more than 5,500 members.
Another user named 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 mengqi.sun@wsj.com and Alexander Osipovich at alexo@wsj.com
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