The Financial Crimes and Enforcement Network (FinCEN) identified Binance and Hydra as two of the top three RBitzlato, a Russian P2P exchange whose owner was recently accused of money laundering, is accepting counterparties.
According to the FinCEN report, Binance, darknet marketplace Hydra, and a Russian Ponzi scheme called “The Finiko” were among Bitzlato’s top three counterparty recipients. Bitzlato’s top three sending counterparties were Hydra, Finnish P2P exchange LocalBitcoins, and “The Finick.” The report alleges that most of the counterparties “have clear ties to and/or significant operations in Russia”.
Binance’s counterparty had poor AML/KYC
According to US 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.”
Breonna Peace, the US Attorney in the Brooklyn, New York office prosecuting the case, said BitzLato allegedly made the exchange a haven for criminals through weak KYC policies. A user can reportedly sign up with only an email address and no photo.
The DoJ alleges that Bitzlato facilitated $700 million to cover transactions involving drugs and illegal gambling services.
Bloomberg reported on January 18, 2022, that Bitzlato CEO Anatoly Legkodimov reportedly admitted in an internal chat that most of Bitzlato’s customers were criminals.
Illegal finance policies under scrutiny
Binance’s partnership with Bizzlato is likely to raise some eyebrows, given the exchange’s past 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 September 2022 that the DoJ requested complete records of Binance’s AML/KYC procedures. It also asked the exchange to reveal correspondence between Zhao and other senior employees on Binance’s ability to detect illegal transactions. The result of the request could not be established at the time.
After interviews with several former senior employees and partners and a review of confidential Binance correspondence, Reuters reported in January 2022 that Binance had concerns about its finances and corporate governance when it applied for registration in Malta. It also reportedly went against recommendations from its own compliance department, despite CEO Changpeng Zhao publicly championing the regulation.
Three months later, Reuters reported that Binance had processed billions of dollars in payments for sanctioned entities and criminals. Binance later downplayed the report, calling parts of Reuters’ findings out of date and inaccurate.
Speaking in a recent eloquent talk at the 2023 World Economic Forum Summit in Davos, Changpeng Zhao stressed the need for the industry to regain trust and start working with regulators in 2022 after multiple crypto explosions. Other commentators suggested that law enforcement was using BitzLato to build a case against Binance.
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