Bitzlato: An AML Policy on Paper, Email-Only Accounts in Practice

The Bitzlato money laundering case centered on an exchange whose founder and majority owner pleaded guilty to operating an unlicensed money-transmitting business that transported and transmitted illicit funds. The Justice Department’s account of the guilty plea describes minimal customer identification, accounts opened with other people’s identities, and repeated warnings reaching the person in charge.

The department described Bitzlato as a Hong Kong-registered exchange operating globally. The Financial Crimes Enforcement Network’s separate findings put significant operations in Russia and described a business with custody of customers’ digital assets.

Minimal Identification Was Part of the Sales Pitch

Bitzlato promoted easy account opening while publishing a policy that promised controls against money laundering. In its order concerning the exchange, the Financial Crimes Enforcement Network described the contrast between the website’s promises and the information the business actually collected.

As of March 2022, the website advertised:

The same advertisement said an email was enough. By September, the wording had become less explicit about skipping identity checks, but the email-only offer remained. Meanwhile, the exchange’s anti-money-laundering policy described a verification procedure, a compliance official, transaction monitoring and risk assessment.

The Justice Department’s plea announcement described another opening. The public filings it summarized alleged that Bitzlato repeatedly let users supply identification belonging to straw registrants when it did ask for identifying information. Asking for a document accomplished little if the business accepted someone else’s identity, as the filings alleged.

The exchange also had practical control over the assets. The Financial Crimes Enforcement Network described Bitzlato’s peer-to-peer service as offering wallets, storage and escrow to support trades between registered users. Its terms reserved the ability to freeze a user’s digital-asset wallet. These were decisions about custody and access, made by a business that could hold a customer’s funds and stop that customer from using them.

An onboarding employee may know what identification the business accepted. Someone in wallet operations may know who could restrict access to the assets. Together, those records connect the customer to the exchange’s control over the funds.

Hydra Buyers and Sellers Used the Same Exchange

Hydra was Bitzlato’s largest cryptocurrency counterparty, according to the Justice Department’s account of the criminal case. Hydra users exchanged more than $700 million in cryptocurrency with Bitzlato, directly or through intermediaries, before U.S. and German authorities shut the market down in April 2022.

The Justice Department described Hydra as a market for narcotics, stolen financial information, fraudulent identification documents and money-laundering services. The Financial Crimes Enforcement Network found that Bitzlato facilitated purchases and sales for both Hydra customers and vendors. The same exchange served the seller of criminal goods and the customer buying them.

Hydra’s closure did not end the pattern the agency described. In its January 2023 order, the agency reported that other Russian darknet markets had become prominent Bitzlato counterparties after Hydra closed. As of June 2022, BlackSprut, OMG!OMG! and Mega were among its top counterparties by transaction count. The order described increased transaction volumes between these markets and Bitzlato after the shutdown.

A control designed only around a familiar market’s name would miss the same business moving elsewhere. The relevant comparison is the exchange’s customer and transaction activity before and after the market disappeared.

The Justice Department also said Bitzlato received ransomware proceeds. The Financial Crimes Enforcement Network documented transactions between Bitzlato and addresses associated with the Conti ransomware group. Its order described the cash-out service as part of what made the attacks profitable.

The order also cited a blockchain analysis study covering 2019 to 2021: the value of transactions involving Russian illicit finance or otherwise risky sources amounted to 48 percent of all known Bitzlato transactions. The weak identity checks sat alongside a substantial business in risky funds.

Criminal-Proceeds Warnings Reached the Majority Owner

Bitzlato’s criminal-proceeds warnings concerned both where cryptocurrency came from and what customers intended to do with it. The Justice Department’s plea announcement said the founder was repeatedly advised that funds routed through the exchange represented proceeds of crime or were intended for illicit transactions.

Those warnings connect the customer-identification failures to the person with a controlling ownership stake.

For an insider, the useful detail is the decision after the warning. Who received it? Who controlled the account or transaction? What did the business do next? Those are the connections we examine with someone who knows how the exchange actually worked. A written policy describes the promised control. The escalation history can show what happened when that control was needed.

What FinCEN’s Bitzlato Order Changed

The Financial Crimes Enforcement Network’s order prohibited covered financial institutions from sending or receiving funds involving Bitzlato, including accounts and cryptocurrency addresses administered by or on its behalf. The order took effect on February 1, 2023.

The agency based its action on Bitzlato’s role in Russian illicit finance, including ransomware proceeds and darknet-market transactions. It found that the exchange’s Hong Kong registration did not change the significance of its Russian operations, customer base and transaction relationships.

The ban reached the crypto transfers themselves. Restricting traditional bank accounts alone would have missed transactions that did not depend on them.

What an Exchange Insider Can Add to the Blockchain

An exchange insider can connect a public transfer to the customer credited inside the business and the decisions made about that customer’s access. Hosted exchanges can reconcile transfers on internal ledgers while the public chain shows only some movements. Customer records, wallet records, screening decisions and escalation histories hold different pieces of that account.

Blockchain transparency can make those internal connections more valuable. Hudson Institute’s 2021 report, Countering Global Kleptocracy: A New US Strategy for Fighting Authoritarian Corruption, explains how a public ledger can help investigators:

The report describes the investigative value of obtaining a point of identification on a Bitcoin ledger. In an exchange, that connection may sit in a customer account, an internal credit or a wallet assignment. The next connection is to the employee or manager who knew about the activity and could act on it.

Bitzlato makes the distinction tangible. The Financial Crimes Enforcement Network described a platform able to freeze wallets. The criminal filings alleged that Bitzlato accepted identity information from straw registrants and that warnings reached the majority owner. Matching the account, the assets and the response to a warning is how an insider’s knowledge can explain the business behind the transaction.

The Same Gap Between Policy and Practice

Other exchange cases show how public access restrictions can diverge from the business retained inside the platform. In its criminal guilty plea, Binance admitted conduct that included email-only onboarding, retaining U.S. customers while publicly claiming to exclude them, and helping valuable users use offshore entities.

BitMEX admitted willfully failing to maintain anti-money-laundering controls in its corporate guilty plea, as the Justice Department’s account of the criminal case describes. The criminal information alleged email-only accounts, nominal exclusion of U.S. customers and false descriptions to a bank.

These cases give an exchange employee a practical comparison: the customers the policy describes, the customers the platform accepts, and the decisions that keep those customers trading. Bitzlato adds repeated warnings about criminal proceeds to that comparison.

Whistleblower Rewards Depend on the Case

The separate money-laundering whistleblower program generally provides awards totaling 10% to 30% of eligible sanctions collected in covered Treasury or Justice Department actions exceeding $1 million. We work with exchange insiders to identify the case their information can support and bring in crypto money-laundering whistleblower lawyers with the expertise to pursue it.

A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What Happened After the Warning

If you saw an exchange accept borrowed identities or keep handling funds after criminal-proceeds warnings, talk with our whistleblower experts about the decisions you witnessed. We build the case around your knowledge of the accounts, assets and people with authority, bring in crypto money-laundering whistleblower lawyers, and stay beside you throughout the case.