US authorities and global law enforcement took unprecedented action against a cryptocurrency exchange last week, indicting the company and arresting its owner for laundering more than $700 million in a a Russian illicit finance scheme.
The US Department of Justice (MJ) and the Treasury Department announced charges last week against cryptocurrency exchange Bitzlato and the arrest of its owner in Miami for facilitating illicit Russian financing.
As Carole House, a former senior FinCEN and White House National Security Council official who led many U.S. government efforts on digital assets, told me: “Bitzlato’s 9714 designation marks the first-ever historic designation under critical congressional authority. donated FinCEN in 2021 to combat Russian illicit finance targeting Russia’s ongoing war of aggression against Ukraine, as well as ransomware groups operating in Russia that launder their proceeds through institutions around the world.
A few minutes after the announcement “What is Bitzlato?” was trending on crypto-Twitter with a litany of snooze emojis filling the feeds. A few even asked (ironically) if Hong Kong-registered exchange Bitzlato was actually the name of a new beverage offering at Starbucks.
Treasury uses new authority for the first time
First, while Bitzlato’s action was mostly seen through a crypto lens, it was actually much more about Russia. Since Russia’s invasion of Ukraine, the United States, Europe and democratic allies have mounted a relentless sanctions campaign in an effort to cut Russia off from the global financial system. The actions directly connect Bitzlato to Russian illicit finance – specifically the ransomware and darknet markets – allowing the Treasury’s Financial Crimes Enforcement Network (FinCEN) to issue, for the first time, a order under section 9714(a) Russian anti-money laundering law. The order designates Bitzlato as a “primary money laundering concern” in connection with Russian illicit financing, and prohibits certain money transfers involving Bitzlato by any covered financial institution.
If for no other reason, the first use of 9714(a) alone makes Bitzlato action a big deal. The use of the 9714(a) authority under the Russian Anti-Money Laundering Act – passed as part of the National Defense Authorization Act 2020 (NDAA), which included the Anti-Money Laundering Act of 2020 – signals that the Treasury is focusing more broadly on Bitzlato as a Russian illicit financial problem. The authority’s intent – think of it like what Section 311 of the Patriot Act does for terrorist financing – is to isolate and cut foreign financial institutions used for money laundering from the US financial system. . As Ms. House explained, “These measures could range from record-keeping or reporting requirements to even prohibiting U.S. financial institutions and agencies from engaging in certain money transfers.” A 9714 action can mean a death sentence for foreign financial institutions.
Over the past 18 months, we have seen the United States and partner nations execute a knife-edge strategy of pursuing what Treasury official Todd Conklin has called the “illicit lower abdomen” of the crypto ecosystem. We have seen action against non-compliant Russian exchanges Suex, Chatex and Garantex, like Bitzlato, for having weak or no AML controls and for facilitating ransomware and darknet activity. In her prepared remarks, Assistant Attorney General Lisa Monaco directly linked Bitzlato’s action to the earlier breakup of Hydra, explaining, “Hydra and Bitzlato formed a high-tech axis of cryptocurrency: Hydra buyers funded illicit purchases – of illegal drugs, stolen financial information, and hacking services – from crypto accounts hosted at Bitzlato, and sellers of these illegal goods and services at Hydra sent criminal proceeds to accounts at Bitzlato – all to the tune of over $700 million in direct and indirect transfers between 2018 and 2022.” Bitzlato stock is another example – like stocks against Suex, Chatex, Garantex, Hydra and darknet mixers Helix and Bitcoin
Sending a message
Besides making a statement in the Russian context, the Bitzlato action was also meant to send a message to the wider crypto space that non-compliance is a non-starter. The DOJ’s criminal complaint is an unprecedented discussion of an entity’s lack of anti-money laundering (AML) controls and is replete with references to Bitzlato’s intentional disregard for compliance. According to the DOJ, “Bitzlato presented itself as requiring minimal identification from its users, stating that “no selfies or passports [are] obligatory. . . As a result of these deficient know-your-customer (KYC) procedures, Bitzlato is said to have become a safe haven for proceeds of crime and funds intended to be used in criminal activities,” including $700 million in transactions with the sanctioned darknet market Hydra. and $15 million worth of ransomware. process. The DOJ and Treasury’s emphasis on Bitzlato’s lack of AML controls is an attempt to remove a bad actor – particularly one facilitating Russian illicit financing – from the financial system, but it also sends a clear message to others. exchanges that authorities expect robust AML controls. While strong AML checks are already standard for US-based exchanges like Coinbase and Kraken, actions such as Bitzlato against non-compliant Virtual Asset Service Providers (VASPs) aim to send a message that which every exchange – wherever it is – must prioritize protection from illicit actors.
Finally, Bitzlato’s actions implicated not only US authorities, but also law enforcement around the world. In the Bitzlato case, law enforcement from the United States, the Netherlands, France and EUROPOL were all involved in the dismantling and arrest. For example, we saw US law enforcement arrest the owner of Bitzlato, a Russian national living in China, in Miami. Meanwhile, French authorities took down Bitzlato’s website and FinCEN used its powers to cut Bitzlato out of the US financial system. This comprehensive approach to crypto-related investigations was a key part of the White House framework for digital assets, because both DOJ and Treasury provided reports on the importance of international engagement and cooperation in response to last year’s Crypto Executive Order.
The DOJ report, for example, highlights the importance of cross-border collaboration, information sharing, and global capacity-building efforts to ensure global standards for anti-money laundering and other controls. .
Despite the visceral backlash from many on crypto Twitter, Bitzlato’s action was indeed significant as the first use of a powerful new Treasury authority and as part of a much larger puzzle over the US response. and world to illicit finance and Russian aggression in particular. So if you decide to order that Bitzlato – two shots of sugar-free vanilla – take a sip knowing that a bad actor has been removed from the growing crypto economy.