Anatoly Legkodymov, the founder and majority owner of the cryptocurrency exchange Bitzlato Ltd. (Bitzlato), is facing charges of operating an illegal money transmitting business that transported and transmitted more than $700m of illicit funds. The exchange, which was run without proper anti-money-laundering requirements, became a go-to place for criminal activity.
“As alleged, the defendant helped operate a cryptocurrency exchange that failed to implement required anti-money-laundering safeguards and enabled criminals to profit from their wrongdoing, including ransomware and drug trafficking,” said Assistant Attorney General Kenneth A Polite, Jr. of the Justice Department’s Criminal Division.
“Today the Department of Justice dealt a significant blow to the cryptocrime ecosystem,” added Deputy Attorney General Lisa O Monaco.
“Overnight, the Department worked with key partners here and abroad to disrupt Bitzlato, the China-based money-laundering engine that fueled a high-tech axis of cryptocrime, and to arrest its founder, Russian national Anatoly Legkodymov. Today’s actions send the clear message: whether you break our laws from China or Europe – or abuse our financial system from a tropical island – you can expect to answer for your crimes inside a United States courtroom,” she said.
Poor KYC procedures
Allegedly, the exchange advertised itself as requiring only minimal identification from its users, where “neither selfies nor passports [are] required”.
On times when users were asked to submit identifying information, the exchange allowed them to “provide information belonging to ‘straw man’ registrants”.
As a result of the insufficient know-your-customer (KYC) procedures, the exchange became a safe haven for criminal activity. Especially with Hydra Market (Hydra), an anonymous, illicit online marketplace for narcotics, stolen financial information, fraudulent identification documents, and money-laundering services. Hydra was the largest and longest-running darknet market in the world until it was shut down in April 2022.
Up until then, Hydra’s users exchanged more than $700m in cryptocurrency with Bitzlato, directly and through intermediaries. Bitzlato also received more than $15m in ransomware proceeds.
“Legkodymov knowingly allowed Bitzlato to become a perceived safe haven for funds used for and resulting from a variety of criminal activities.”
Michael J Driscoll, Assistant Director in Charge of the FBI New York Field Office
Staff helped with Hydra requests
Besides that, customers also used Bitzlato’s service portal to request support for transactions with Hydra, which were often provided. Users even admitted in chats with Bitzlato personnel that they were trading under false identities.
“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,” said Assistant Director in Charge Michael J. Driscoll of the FBI New York Field Office.
Moreover, Legkodymov and Bitzlato’s other managers were aware that illicit activity was common among the accounts and that many users were registered under false identities.
“Positives: No KYC. Negatives: Dirty money.”
Bitzlato’s internal document
Facing prison
On May 29, 2019, Legkodymov used Bitzlato’s internal chat to write to a colleague that its users were “known to be crooks,” and that they were using others’ identity documents to register their accounts.
Legkodymov was repeatedly warned by colleagues that the customer base consisted of “addicts who buy drugs at Hydra” and “drug traffickers”. Nontheless, an internal spreadsheet encapsulated the company’s view of itself: “Positives: No KYC. Negatives: Dirty money.”
Even if the exchange claimed not to accept users from the United States, a substantial amount of business was made with US-based customers. Customer service representatives also repeatedly advised users that they could transfer funds from financial institutions in the US.
To add to that, Legkodymov managed Bitzlato from Miami in 2022 and 2023, and received reports on the substantial website traffic coming from US-based IP addresses, which was over 250 million just in July 2022.
Legkodymov has been charged with conducting an unlicensed money transmitting business. He faces a maximum penalty of five years in prison if he’s convicted.
Russian illicit finance
In addition, the Treasury Department’s FinCEN has announced an Order pursuant to section 9714(a) of the Combating Russian Money Laundering Act, as amended, where Bitzlato is identified as a “primary money laundering concern” in connection to Russian illicit finance. The order will impose a special measure prohibiting certain transmittals of funds involving Bitzlato by any covered financial institution.
“Bitzlato poses a global threat by allowing Russian cybercriminals and ransomware actors to launder the proceeds of their theft,” said FinCEN Acting Director Himamauli Das.
FinCEN’s claims that “Bitzlato facilitates a substantially greater proportion of money laundering activity in connection with Russian illicit finance compared to other virtual currency exchanges”.