HK-registered cryptocurrency exchange Bitzlato and its Russian founder face enforcement actions from US authorities

466

By Turner Wright, Cointelegraph/U.S DOJ

19th January 2023 – (Washington) The United States Department of Justice announced a “major international cryptocurrency enforcement action” against crypto firm Bitzlato, Hong Kong-registered cryptocurrency exchange and the arrest of its founder Anatoly Legkodymov.

In a 18th January announcement, U.S. Deputy Attorney General Lisa Monaco said authorities had taken enforcement actions against Bizlato in coordination with France, seizing Bitzlato’s website and labeling the business as a “primary money laundering concern” connected to Russian illicit finance. According to Monaco, the Department of Justice worked with the Treasury Department and French law enforcement to take action against Bitzlato for allegedly “conducting a money transmitting business that transported and transmitted illicit funds and that failed to meet U.S. regulatory safeguards.”

As part of the case against Bitzlato, FBI officials arrested Legkodymov, a Russian national based in China, on 17th January in Miami. He is scheduled to be arraigned in the U.S. District Court for the Southern District of Florida.

U.S. authorities said the criminal complaint against Bitzlato was based on the firm being a “crucial financial resource” for the Hydra darknet marketplace, allowing users to launder funds including those from ransomware attacks:

“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.

The enforcement action was a coordinated effort across Europe and the U.S. to seize many of Bitzlato’s resources — including the firm’s servers — as well as take the founder into custody. Monaco referred to the case as the “most significant enforcement effort” against an exchange since the National Cryptocurrency Enforcement Team was launched in October 2021.

Assistant Attorney General Kenneth Polite of the Department of Justice’s criminal division suggested U.S. authorities were “just getting started” in cracking down on similar firms involved in facilitating money laundering. Though no official directly commented on the ongoing case against crypto exchange FTX and its former CEO Sam Bankman-Fried, Monaco referenced crimes against the U.S. financial system “from a tropical island”.

“The FBI will continue to pursue actors who attempt to mask their criminal activity behind keyboards and use means such as cryptocurrency to evade law enforcement,” stated FBI Assistant Deputy Director Turner.  “We, along with our federal and international partners, will work relentlessly to disrupt and dismantle these types of criminal enterprises.  Today’s arrest should serve as a reminder the FBI will impose risk and consequences upon those who engage in these activities.”

“As alleged today, Legkodymov knowingly allowed Bitzlato to become a perceived safe haven for funds used for and resulting from a variety of criminal activities.  The FBI and our partners remain steadfast in our commitment to keeping cryptocurrency markets – as with any financial market – free from illicit activity.  Today’s action should serve as an example of this commitment as Legkodymov will now face the consequences of his actions in our criminal justice system,” stated FBI Assistant Director-in-Charge Driscoll.

According to court documents, Legkodymov is a senior executive and the majority shareholder of Bitzlato Ltd. (Bitzlato), a Hong Kong-registered cryptocurrency exchange that operates globally. Bitzlato has marketed itself as requiring minimal identification from its users, specifying that “neither selfies nor passports [are] required.” On occasions when Bitzlato did direct users to submit identifying information, it repeatedly allowed them to provide information belonging to “straw man” registrants.

As a result of these 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.

As alleged in the complaint, Bitzlato’s customers routinely used the company’s customer service portal to request support for transactions with Hydra, which Bitzlato often provided, and admitted in chats with Bitzlato personnel that they were trading under assumed identities.  Moreover, Legkodymov and Bitzlato’s other managers were aware that Bitzlato’s accounts were rife with illicit activity and that many of its users were registered under others’ identities. For instance, on 29th May, 2019, Legkodymov used Bitzlato’s internal chat system to write to a colleague that Bitzlato’s users were “known to be crooks,” using others’ identity documents to register their accounts. Legkodymov was repeatedly warned by colleagues that Bitzlato’s customer base consisted of “addicts who buy drugs at [] Hydra” and “drug traffickers,” with one senior executive even stressing that Bitzlato should combat drug dealers only “nominally,” to avoid hurting the company’s bottom line.  An internal spreadsheet saved in Bitzlato’s shared management folder encapsulated the company’s view of itself: “Positives: No KYC. . . . Negatives: Dirty money. . . .”

As alleged in the complaint, although Bitzlato claimed not to accept users from the United States, it did substantial business with U.S.-based customers, and its customer service representatives repeatedly advised users that they could transfer funds from U.S. financial institutions. Moreover, Legkodymov – who himself administered Bitzlato from Miami in 2022 and 2023 – received reports reflecting substantial traffic to Bitzlato’s website from U.S.-based Internet Protocol addresses, including over 250 million such visits in July 2022.

The charge in the complaint is an allegation and the defendant is presumed innocent unless and until proven guilty. If convicted of operating an illegal money transmitting business, he faces a maximum penalty of five years in prison.

Comments