Bitzlato Founder Arrested, Assets Seized: FinCen, DoJ, and Europeans Take Action

On January 18, 2023, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued an order that identifies the digital asset exchange Bitzlato Limited (Bitzlato), which is based in Hong Kong but operates globally, as a “primary money laundering concern” in connection with Russian illicit finance, pursuant to section 9714(a) of the Combating Russian Money Laundering Act. 

In the context of the efforts to avoid illicit money from Russia from flowing into the American financial system, the National Defense Authorization Act for Fiscal Year 2021 included some special regulations regarding the treatment of suspicious funds originating in that country, creating the “Combating Russian Money Laundering Act (the Act)”. The aim of this Act was to prevent kleptocracy funds from this country from permeating national financial institutions, as the money laundering of such funds could assist in the Russian Government’s ongoing political and economic influence and destabilization operations, which in turn could affect the United States and European democracy, national security, and the rule of law. The provisions of this Act could not be more topical, given the circumstances of warfare currently being waged in Ukraine. Therefore, if there was any reasonable ground for concluding that one or more financial institutions operating outside the US is of primary money laundering concern in connection with Russian illicit finance, the Secretary of the Treasury may decide to prohibit the transmittals of funds by any domestic institution or domestic financial agency. On the same note, when dealing with such suspicions, it is mandatory for the domestic institution to identify the beneficial ownership of the anonymous Russian companies, strengthen the customer due diligence and reporting. 

The order against Bitzlato is the first such action under the amended law and highlights the seriousness with which U.S. regulators are taking Russian illicit finance. The order prohibits 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. “As criminals and criminal facilitators evolve, so too does our ability to disrupt these networks. We will continue to leverage the full range of our authorities to prohibit these institutions from gaining access to the U.S. financial system and using it to support Russian illicit finance.”

FinCen indicated that Bitzlato maintains significant operations in and connections to Russia and Russian-based illicit finance through facilitation of funds transfers by ransomware groups (more than $15 million US) and transactions with Russia-connected darknet market Hydra Market (more than $700 million). 

FinCEN further indicated that Bitzlato has taken few meaningful steps to identify and disrupt illicit use and abuse of its services, demonstrating a lack of policies and procedures designed to combat money laundering and illicit finance, even going as far as to advertise the lack of such policies, procedures, or internal controls. 

Effective February 1, 2023, covered financial institutions are prohibited from engaging in the transmittal of funds from or to Bitzlato, or from or to any account or address administered by or on behalf of Bitzlato.

Anatoly Legkodymov, founder and majority owner of Bitzlato, was arrested and charged with unlicensed money transmitting and failing to meet U.S. regulatory safeguards, including anti-money laundering requirements, as announced by the Department of Justice. French authorities have taken action, including closing Bitzlato’s digital infrastructure and seizing Bitzalo-held digital assets.

While an absence of clear regulatory guidance and infrastructure has long been a complaint of web3 market participants, regulators in the U.S. and abroad are now speaking clearly: the existing letter of the law must be followed, even if the application of such requirements were not initially intended to oversee or regulate emerging markets or technologies. In particular, given the current financial and regulatory climate, developers, issuers, and exchanges should take a proactive posture when structuring (or restructuring) their service offerings, with special attention to compliance with securities, AML, KYC, and secrecy law requirements. Failure to do so could lead to short and long-term consequences, up to and including arrest. 

By engaging affirmatively and proactively with experienced counsel, web3 industry participants can mitigate the risk of needing to redo the work of a given course of action, and, if necessary, communicating with regulators following an enforcement or other legal action or inquiry.