FinCEN Identifies Virtual Currency Exchange Bitzlato as Primary Money Laundering Concern in Connection with Illicit Russian Finance | Practical Law

FinCEN Identifies Virtual Currency Exchange Bitzlato as Primary Money Laundering Concern in Connection with Illicit Russian Finance | Practical Law

The US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) identified virtual currency exchange Bitzlato Limited as a primary money laundering concern in connection with illicit Russian finance. This is the first order issued under section 9714(a) of the Combating Russian Money Laundering Act, as amended.

FinCEN Identifies Virtual Currency Exchange Bitzlato as Primary Money Laundering Concern in Connection with Illicit Russian Finance

by Practical Law Finance
Published on 26 Jan 2023USA (National/Federal)
The US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) identified virtual currency exchange Bitzlato Limited as a primary money laundering concern in connection with illicit Russian finance. This is the first order issued under section 9714(a) of the Combating Russian Money Laundering Act, as amended.
On January 18, 2023, the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN)) issued a notice of order that identifies the virtual currency (VC) exchange Bitzlato Limited as a "primary money laundering concern" in connection with illicit Russian finance. On January 23, 2023, the FinCEN imposition order (Bitzlato order) was published in the Federal Register and becomes effective February 1, 2023. FinCEN also issued FAQs related to the Bitzlato order.
According to the Bitzlato order, Bitzlato plays a critical role in laundering convertible VC (CVC) by facilitating illicit transactions for ransomware actors operating in Russia. As described in the Bitzlato order, Bitzlato is a VC exchange offering crypto exchange and peer-to-peer (P2P) services that maintains significant operations in and is connected to Russia. The Bitzlato order prohibits covered financial institutions from engaging in transmittal of funds from or to Bitzlato, or from or to any account or CVC address administered by or on behalf of Bitzlato, effective February 1, 2023. For the purpose of the Bitzlato order, a covered financial institution is any domestic financial institution as defined in 31 C.F.R. § 1010.100(t), which includes banks, brokers or dealers in securities, money services businesses, persons subject to supervision by any state or federal bank supervisory authority, futures commission merchants (FCMs), introducing brokers (IBs) in commodities, mutual funds, and certain other parties.
FinCEN’s investigation found that these Russian connections include, but are not limited to, facilitating deposits, funds transfers, and transactions involving ransomware as a service group Conti and the Russia-connected darknet market Hydra, which was the subject of both US sanctions and law enforcement actions that have shuttered its operations (See Legal Update, OFAC Issues First Sanctions Against Virtual Currency Mixer). In the course of its investigation, FinCEN also found that Bitzlato has taken few meaningful steps to identify and disrupt illicit use and abuse of its services or to effectively implement policies and procedures designed to combat money laundering and illicit finance, and has advertised a lack of such policies, procedures, or internal controls.
According to FinCEN, the identification of Bitzlato is the first order issued under section 9714(a) of the Combating Russian Money Laundering Act (Public Law 116-283), as amended by section 6106(b) of the National Defense Authorization Act for Fiscal Year 2022 (Public Law 117-81).
To assist covered financial institutions in complying with the Bitzlato order, FinCEN published FAQs that are solely applicable to the Bitzlato including FAQs:
  • Describing in detail what a section 9714 action entails.
  • Specifying that covered financial institutions should:
    • stop any and all transmittals of funds, including CVC, from or to Bitzlato, or from or to any account or CVC address administered by Bitzlato, except as otherwise set out in the Bitzlato order; and
    • incorporate the determination that Bitzlato is of primary money laundering concern into their anti-money laundering/combating the financing of terrorism (AML/CFT) compliance programs.
  • Describing that covered financial institutions should identify Bitzlato or identify transactions involving Bitzlato by:
    • continuing to implement appropriate AML/CFT procedures and systems, including traditional compliance screening and blockchain tracing software to identify their customers; and
    • determining whether their customers are involved in a transmittal of funds involving Bitzlato.
  • Explaining that if a covered financial institution is unable to proactively prevent the receipt of CVC from Bitzlato, it will be deemed not to have violated the Bitzlato order where, upon determining that it received CVC that originated from Bitzlato or from an account or CVC address administered by or on behalf of Bitzlato, that covered financial institution “rejects” the transaction by:
    • preventing the intended recipient from accessing such CVC; and
    • returning the CVC to Bitzlato or to the account or CVC address from which the CVC originated.
  • Describing the applicable criminal and civil penalties if FinCEN finds a covered financial institution is continuing to transact with Bitzlato in a prohibited manner as:
    • civil penalties in an amount equal to not less than two times the amount of the transaction, but not more than $1,556,481 (as of January 18, 2023); and
    • criminal penalties in an amount equal to not less than two times the amount of the transaction, but not more than $1,000,000.
  • Noting that covered financial institutions are not required to file a Suspicious Activity Report (SAR) when they identify and/or send funds back to Bitzlato.
  • Describing what types of information would be useful in a SAR related to Bitzlato
In a related action, the US Attorney’s Office for the Eastern District of New York announced on January 18, 2023 that an amended affidavit and complaint was unsealed in federal court in Brooklyn charging Anatoly Legkodymov, a Russian national and the majority shareholder (and a senior executive) of Bitzlato, with conducting a money transmitting business that transported and transmitted illicit funds and that failed to meet US regulatory safeguards, including AML requirements. According to a January 18, 2023 Department of Justice (DOJ) announcement, French authorities, working with Europol and partners in Spain, Portugal, and Cyprus, dismantled Bitzlato’s digital infrastructure, seized Bitzlato’s cryptocurrency, and took other enforcement actions.