The Financial Crimes and Enforcement Network (FinCEN) identified Binance and Hydra as two of the top three receiving counterparties of Bitzlato, a Russian P2P exchange whose owner was recently charged with money laundering.
According to the FinCEN report, Binance, darknet marketplace Hydra, and a Russian Ponzi scheme called “The Finiko,” were Bitzlato’s top three receiving counterparties. Bitzlato’s top three sending counterparties were Hydra, Finnish P2P exchange LocalBitcoins, and ”The Finik.” Most of the counterparties ”have evident ties to and/or significant operations in Russia,” the report alleges.
Binance’s Counterparty Had Poor AML/KYC
According to U.S. Deputy Attorney General Lisa Monaco, Bitzlato facilitated customer transactions between itself and several darknet marketplaces, including Hydra. Monaco announced a National Cryptocurrency Enforcement Team in 2021 to combat “crimes committed by virtual currency exchanges, mixing and tumbling services, and money laundering infrastructure actors.”
Breon Peace, the U.S. attorney at the Brooklyn, New York office that is prosecuting the case, said that Bitzlato allegedly made the exchange a haven for criminals through weak KYC policies. A user could reportedly sign up with only an email address and no photograph.
The DoJ alleges that Bitzlato facilitated $700 million to cover up transactions involving drugs and illegal gambling services.
Bloomberg reported on Jan. 18, 2022, that the CEO of Bitzlato, Anatoly Legkodymov, allegedly admitted over an internal chat that most of Bitzlato’s clients were criminals.
Illicit Finance Policies Under Scrutiny
Binance’s involvement with Bizlato is likely to raise a few eyebrows, considering the exchange’s previous run-ins with law enforcement. Bloomberg first reported that the DoJ and the Internal Revenue service sought key compliance information from Binance in 2021.
Reuters reported in Sep. 2022 that the DoJ requested thorough records of Binance’s AML/KYC processes. It also asked the exchange to reveal Zhao’s correspondence with other senior employees on Binance’s ability to detect illicit transactions. The outcome of the request could not be established at the time.
After interviews with several former senior employees and partners and reviewing confidential Binance correspondence, Reuters reported in Jan. 2022 that Binance had been cagey about its finances and corporate governance when applying for registration in Malta. It also reportedly went against the recommendations of its own compliance department, despite CEO Changpeng Zhao publicly courting regulation.
Three months later, Reuters added that Binance had processed billions of dollars in payments for sanctioned entities and criminals. Binance later slammed the reports as inaccurate, calling parts of Reuters’ findings obsolete and incorrect.
Speaking at a recent fireside chat at the 2023 World Economic Forum summit in Davos, Changpeng Zhao emphasized the need for the industry to regain trust and start working with regulators after several crypto implosions in 2022. He also slammed the Bitzlato news as pure FUD, with other commentators suggesting that law enforcement was using Bitzlato to build a case against Binance.
BeInCrypto has reached out to company or individual involved in the story to get an official statement about the recent developments, but it has yet to hear back.