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The Extent to Which Such Institutions, Transactions, or Types of Accounts Are Used for Legitimate Business Purposes, C. The Extent to Which Action by FinCEN Would Guard Against International Money Laundering and Other Financial Crimes, V. Considerations in Selecting the Special Measure Prohibiting Transmittals of Funds, A. . [32] As noted above, dealings with the Russia-connected darknet market Hydra represented a notable percentage of Bitzlato's business. Pursuant to section 9714, these measures included: (1) the special measures described in 31 U.S.C. Burgess, Matt. Pursuant to Treasury Order 180-01 (January 14, 2020), the authority of the Secretary of the Treasury to administer the BSA, including but not limited to 31 U.S.C. the official SGML-based PDF version on govinfo.gov, those relying on it for 37. Kramer, Andrew; Schwirtz, Michael; and Troianovski, Anton. Conti ransomware shows signs of being Ryuk's successor, [21] As noted above, by comparison to U.S.-domiciled CVC exchanges, Bitzlato represents a relatively limited percentage of daily CVC transfers, by volume. Bitzlato's significant connections to Russia are evidenced by the following: (1) Moscow, Russia is the listed location for Bitzlato found on public websites, with a recent study performed by a blockchain analysis company expressly identifying Bitzlato as having a presence in Moscow City, Russia (during the period between 2019 and 2021);[37] In particular, none of the special measures described in 31 U.S.C. Although ransomware actors and darknet markets are not always state-affiliated, the notorious ransomware group Conti has significant connections to Russia and pledged allegiance to Russia on February 25, 2022. Further, the U.S. financial system is being used to send significant amounts of U.S. funds as ransom payments to foreign actorsboth cybercriminals and nation-state actors. . III. The record further amply demonstrates that Bitzlato's services are used, to an unusually large extent, to facilitate illicit finance, particularly when compared to other CVC exchanges, and by illicit actors who seek to circumvent AML/CFT obligations and obfuscate the source of funds or their intended use. Document Drafting Handbook Analysis Regarding Finding That Bitzlato Is a Financial Institution Operating Outside of the United States That Is of Primary Money Laundering Concern in Connection With Russian Illicit Finance, A. 5318A would effectively address the threat posed by Bitzlato. 39. Washington Post Since Hydra's closure in April 2022, these three darknet markets show notably increased transaction volumes with Bitzlato as one of their top counterparties by total sending and receiving volumes. The Extent to Which Bitzlato Is Used To Facilitate or Promote Money Laundering in Connection With Russian Illicit Finance, Including Through Connections to Money Laundering Activity by Organized Criminal Groups, B. 18. More information and documentation can be found in our As such, prohibiting or placing conditions upon the opening of such accounts would be ineffective at addressing the money laundering concern. For this reason, the order explains that a covered financial institution will not be in violation of the order where, upon identifying that it has received CVC that originated from Bitzlato or from an account or CVC address administered by or on behalf of Bitzlato, the financial institution (i) prevents the intended recipient from accessing the CVC, and (ii) returns the CVC to Bitzlato or the CVC address from which it originated. In particular, CVC wallet addresses associated with the Conti ransomware strain and its affiliates, including Trickbot, have engaged in significant BTC transactions involving Bitzlato. Although Bitzlato offers services that could potentially be used by licit actors, those services may be found other VASPs, including VASPs located in jurisdictions with robust AML/CFT frameworks and regulatory oversight. Use the PDF linked in the document sidebar for the official electronic format. Based on public and non-public information available to FinCEN, Bitzlato operates outside the United States and, although identified as registered under the laws of Hong Kong, Bitzlato has significant ties to and connections with Russia. [9] FinCEN has documented numerous transactions between Conti-associated CVC addresses and Bitzlato. 31. Section 6106(b) of the National Defense Authorization Act for Fiscal Year 2022 (Public Law 117-81) amended section 9714 of the Combatting Russian Money Laundering Act (Pub. and 6. This E.O. 2 See Treasury Identifies Virtual Currency Provider Liberty Reserve as a Financial Institution of Primary Money Laundering Concern under USA Patriot Act Section 311 (May 28, 2013, press release). Furthermore, Bitzlato has significant links to Russian illicit finance and Russian criminal actors. for better understanding how a document is structured but FinCEN, however, believes that the action will provide a strong signal to the international community of the risks posed by Bitzlato and urges counterpart jurisdictions to consider such risks in its supervision of VASPs. Moreover, FinCEN notes that Bitzlato engaged in significant transactions with each of these counterpartiesall of whom are associated with illicit activitiesafter publishing its AML/KYC policy (further described below), demonstrating the permissive or ineffective nature of its internal controls. U.S. authorities and global law enforcement took unprecedented action last week against a cryptocurrency exchange, charging the company and arresting its owner That Bitzlato is registered in Hong Kong (or that it maintains a registered office in Hong Kong) does not alter FinCEN's assessment that Bitzlato 13757. FIN-2019-G001, Application of FinCEN's Regulations to Certain Business Models Involving Convertible Virtual Currencies (May 9, 2019); FIN-2013-G001, Application of FinCEN's Regulations to Persons Administering, Exchanging, or Using Virtual Currencies (March 18, 2013). Translation of "to combat money-laundering" in Russian neither selfies nor passports required. This is the first order issued pursuant to section 9714 (a) of the Combating Russian Money Laundering Act, as amended, and highlights the serious threat that As of April 2022, Bitzlato maintained a daily BTC balance that was 0.0185 percent as large as the largest U.S.-domiciled CVC exchange, and it has 0.55 percent as many BTC transfers. Because of its significant operations in, and connection to, Russia and Russian illicit finance, Bitzlato threatens U.S. national security, the integrity of the U.S. and international financial sectors, and businesses and institutions worldwide. 20. [FR Doc. https://bitzlato.com Australia is awash with dirty money heres how to close the Treasurys action today sends a clear message that we are prepared to take action against any financial institution including virtual asset service providers with lax controls against money laundering, terrorist financing, or other illicit finance. Consideration for Imposing the Special Measure Prohibiting Certain Transmittals of Funds by Order, B. Pursuant to the order, covered financial institutions are prohibited from engaging in any transmittal of funds from or to Bitzlato, or from or to any account or CVC address administered for or on behalf of Bitzlato. All terms used but not otherwise defined herein shall have the meaning set forth in 31 CFR Chapter X and 31 U.S.C. BILLING CODE: 4810-02 DEPARTMENT OF THE TREASURY Anti-Money Laundering (AML) in Russia - Sanction Scanner Today as part of the US governments actions against the virtual currency exchange Bitzlato, Treasurys Financial Crimes Enforcement Network FinCEN has taken steps that expose and disrupt Russian cybercriminals and their enablers. [33] Additionally, Bitzlato advertises user-privacy and anonymity, allowing one to buy and sell CVC with a P2P fiat-to-crypto exchange, further stating, you exchange fiat money and cryptocurrency directly with another person.[35] A Rule by the Financial Crimes Enforcement Network on 01/23/2023. (2) the vast majority of its customer base is located in Russia; (3) historical Bitzlato website information claimed it was created by persons in Russia; (4) a registered address in Hong Kong that is a Solo Workshops addressa shared workspace that other Russian companies use as their address of record; (5) as of May 2022, an internet job posting for Bitzlato advertised for a management position in Russia; and (6) in providing an example of a means to purchase or cash out CVC with/to fiat currency, Bitzlato cites transfers in rubles to or from bank accounts with Sberbank, a prominent Russian financial institution that is the subject of Russia-related sanctions administered and enforced by OFAC. The record amply establishes that Bitzlato has significant ties to Russia and facilitates a significant number of money laundering transactions involving Russia-related ransomware and Russia-related darknet market proceeds. The U.S. government has long engaged on efforts to counter the threat of ransomware, and on April 1, 2015, the President issued Executive Order (E.O.) Chainalysis, The 2022 Crypto Crime Report, at 128 (February 2022). including attacks against U.S. entities and institutions. Thank you, Lisa, and thanks to your colleagues who have been excellent partners on this. WASHINGTON Today, the U.S. Department of the Treasurys Financial Crimes Enforcement Network (FinCEN) issued an order identifying the virtual currency exchange Bitzlato Limited (Bitzlato) as a primary money laundering concern in connection with Russian illicit finance pursuant to section 9714(a) of the Combatting Russian Money Laundering Act, as amended. This memorandum is considered advertising under applicable state laws. Nevertheless, although not bound by the factors, FinCEN considered, in this instance, the factors identified in 31 U.S.C. The anti-money laundering law. The documents posted on this site are XML renditions of published Federal N.Y. Times Register, and does not replace the official print version or the official The order also highlights Bitzlatos lack of any meaningful AML policies, procedures or internal controls, and underscored its failure to perform KYC on its users. (July 9, 2020). [26] According to the most reliable estimates, Russia has the worlds largest volume of dark money hidden abroadabout $1 trillionboth in absolute terms and as a Bitzlato's transaction history with this same U.S.-domiciled CVC exchange totals fewer than $26 million in CVC over four years. Terms and Definitions in Bitzlato's Terms of Service page on its website, Bitzlato is identified as registered under the laws of Hong Kong and located at Unit 617, 6/F, 131-132 Connaught Road West, Solo workshops, Hong Kong.[12] Further, the Hydra darknet market almost entirely catered to Russian customers and illicit goods and service providers before it was shut down by law enforcement in April 2022. legal research should verify their results against an official edition of A ransomware strain is the specific kind of malware that encrypts or exfiltrates data from a victim in order to perpetrate cyber extortion. Any additional recordkeeping, information collection, or reporting requirement would be insufficient to guard against the risks posed by covered financial institutions processing transmittals of funds involving Bitzlato, as such measures may allow such transfers to continue to benefit of illicit actors connected to Russian ransomware activities, darknet markets, and scams. This exchange process allows for transfers to or from a traditional financial institution, as well as other traditional methods, and emphasizes that it does not require users to go through the sort of extensive KYC procedures that are required on other exchanges. The fifth special measure, codified at 31 U.S.C. Department of State, Reward Offers for Information to Bring DarkSide Ransomware Variant Co-Conspirators to Justice, (November 4, 2021), Unlike section 311, section 9714 also authorizes FinCEN to restrict or outright prohibit certain funds transmittals involving the designated target. The order defines a CVC exchanger as any person engaged as a business in the exchange of CVC for fiat currency, funds, or other CVC. billion Finding That Bitzlato Is a Financial Institution Operating Outside of the United States of Primary Money Laundering Concern in Connection With Russian Illicit Finance, A. Bitzlato Is Used To Facilitate Processing and Laundering Proceeds From Ransomware Attacks, B. Bitzlato Is Used To Facilitate Darknet Markets and Scams, C. Bitzlato Has Engaged in a Significant Volume of Russian Illicit Finance Transactions, D. Bitzlato Does Not Adequately Combat Money Laundering and Illicit Financing on its Platform, IV. 3. on NARA's archives.gov. 40. Accordingly, given the extensive flow of illegitimate funds through Bitzlato, FinCEN believes that the need to protect U.S. financial institutions from the money laundering risks presented by Bitzlato outweighs any potential legitimate utility its services may provide. CryptoNews, See, e.g., Bitzlato plays a critical role in facilitating transactions for the Conti ransomware group and other global ransomware actors, including actors that operate out of Russia. In order to ensure orderly implementation, FinCEN will delay the effective date of this order until February 1, 2023. Bitzlato further notes that its P2P services include arranging storage of digital assets . Start Printed Page 3924 CVC exchangers, such as Bitzlato, are money transmitters, and therefore, financial institutions within the meaning of section 9714(a). CNN daily. Identifying Bitzlato as a primary money laundering concern effectively renders the exchange an international pariah. While these considerations were drawn from factors identified in 31 U.S.C. The order includes a detailed narrative setting forth the basis for FinCENs determination that Bitzlato is a primary money laundering concern in connection with Russian illicit finance. [30] Nothing in this order shall be construed to modify, impair or otherwise affect any requirements or obligations to which a covered financial institution is subject pursuant to the BSA, including, but not limited to, the filing of Suspicious Activity Reports (SARs), or other applicable laws or regulations, such as the sanctions administered and enforced by the U.S. Department of the Treasury's Office of Foreign Assets Control. Federal Law No. In 2006, the Howard government passed the Anti-Money Laundering and Counter-Terrorism Financing Act in response to the Blockchain analysis identifies BlackSprut, OMG!OMG! Key weakness in the current law. Bitzlato processed over 1.46 million direct transfers with the Hydra darknet marketplace between May 2018 and early April 2022, representing transactional flows of nearly 20,000 BTC sent and received during that timeframe. In addition to receiving ransomware proceeds, Bitzlato's receiving and sending transactional activity shows a significant connection to counterparties associated with other suspected illicit activities, such as darknet markets and scams with ties to and operations in Russia. Furthermore, placing condition upon or prohibiting the opening or maintaining in the United States of a correspondent account or payable-through account by any domestic financial institution or domestic financial agency for or on behalf of a foreign banking institution, as described in 31 U.S.C 5318A(b)(5), is similarly inadequate to address the risks of a P2P VASP such as Bitzlato. and Mega as Russian darknet markets that offer narcotics and potentially other illicit goods. developer tools pages. Russian illicit finance. https://bitzlato.com/knowledgebase/how_to_buy_cryptocurrency/ Register documents. US Enacts Historic Legislation To Strengthen Anti-Money This action is effective February 1, 2023. 13. The NDAA for Fiscal Year 2022 amended the Act to specify that the civil and criminal penalties applicable to violations of section 311 special measures will also apply to violations of section 9714 special measures. Ransomware payments are made most often via CVC, which are preferred by ransomware attackers for their ability to obscure the attackers' identities, thus aiding in the attackers' ability to launder their criminal proceeds and continue attacking victims. A review of publicly available material, however, shows that Bitzlato's actual location of operation, its employees, and a job opening are in Russia, with job descriptions written in Russian. daily Federal Register on FederalRegister.gov will remain an unofficial The guidance explains that covered financial institutions are not required to reject CVC transfers in this way where doing so would violate other laws or regulations, such as the sanctions administered by the Treasury Departments Office of Foreign Assets Control (OFAC). In practice, Bitzlato does not appear to be collecting the identifying information that would be necessary to facilitate meaningful KYC analysis. While every effort has been made to ensure that On November 8, 2021, OFAC designated Chatex, pursuant to E.O. Moreover, a section 9714 designation can be made by order, regulation, or other means, whereas a section 311 designation must be made through the rulemaking process, including a notice and comment period. Section 9714(a) does not require that a foreign financial institution be registered or incorporated in Russia to fall within its scope. Although Bitzlato's homepage states that it has a Know Your Client [(KYC)] policy, public reporting shows that Bitzlato does not effectively implement (May 19, 2021). This site displays a prototype of a Web 2.0 version of the daily See31 U.S.C. the Federal Register. 31 U.S. Code 5301 - LII / Legal Information Institute 17. https://bitzlato.com, As of March 2022, Bitzlato's website advertised simple registration without KYC with . While FinCENs identification of Bitzlato as a money laundering concern under section 9714 is unprecedented, we believe it is unlikely to be the last. Bitzlato, see also Only official editions of the 16. FinCEN is unaware of any action that has been taken or is being taken by other nations or multilateral groups with regard to Bitzlato. 11. 34. Nearly 50 percent of all known Bitzlato transactions during that time involved Russian illicit finance or otherwise risky sources. 31 U.S.C. By contrast, a CVC price and volume aggregator estimates that a large U.S.-domiciled exchanger processed more than $2.7 outside of their control, and as such, compliant institutions may find themselves in receipt of CVC from Bitzlato despite a desire and effort to limit such exposure. Bitzlato lacks an adequate AML/CFT program or safeguards, it has a high ratio of illicit transaction exposure relative to total transaction volume when compared to other exchanges, and it has served as the second largest attributable counterparty for the largest darknet market in the world and continues to support Russia-connected darknet markets. Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, In the First Use of Its Section 9714 Powers, the U.S. Treasury Designated Bitzlato as a Russian-Linked Primary Money Laundering Concern, 2023 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates, US Enacts Historic Legislation To Strengthen Anti-Money Laundering and Counterterrorist Financing Legal Framework, Treasury Identifies Virtual Currency Provider Liberty Reserve as a Financial Institution of Primary Money Laundering Concern under USA Patriot Act Section 311, those described in section 311 of the USA PATRIOT Act (section 311), such as certain recordkeeping and transaction reporting requirements, beneficial ownership reporting requirements, and a prohibition or imposition of conditions on the opening and maintenance of correspondent or payable-through accounts; and. This PDF is This document has been published in the Federal Register. FinCEN is issuing an order, pursuant to the Combating Russian Money Laundering Act, as amended by the National Defense Authorization Act for Fiscal Year 2022, to prohibit certain transmittals of funds (as defined in this order) by any covered financial institution involving Bitzlato Limited (Bitzlato), a financial institution operating outside of the United States determined to be of a primary money laundering concern in connection with Russian illicit finance. The actions involve both Russian illicit finance and the digital asset space, two areas that will remain a top priority for the international law enforcement community in 2023. the current document as it appeared on Public Inspection on Remarks by Deputy Secretary of the Treasury Wally Adeyemo on Action Against Russian Illicit Finance, Budget, Financial Reporting, Planning and Performance, Financial Markets, Financial Institutions, and Fiscal Service, Treasury Coupon-Issue and Corporate Bond Yield Curve, Treasury International Capital (TIC) System, Kline-Miller Multiemployer Pension Reform Act of 2014, Unpacking the Boom in U.S. Construction of Manufacturing Facilities, Post 5: Racial Differences in Educational Experiences and Attainment, Treasury Sanctions Illicit Gold Companies Funding Wagner Forces and Wagner Group Facilitator, Treasury Releases Analysis of the Boom in U.S. Construction of Manufacturing Facilities Driven by Invest in America Agenda, Treasurys Federal Insurance Office Releases Report Assessing Climate-Related Risk, Gaps in Insurance Supervision, Remarks by Deputy Secretary of the Treasury Wally Adeyemo at White House Call Announcing Interagency Community Investment Committee One-Year Action Report, Remarks by Deputy Secretary Adeyemo at the First Treasury Department Summit on Investing in the Economic Future of Latino Communities, Remarks by Secretary of the Treasury Janet L. Yellen at High Level Panel at Summit for a New Global Financing Pact, Form 941, employer's quarterly federal tax return, Special Inspector General, Troubled Asset Relief Program (SIGTARP), Administrative Resource Center (ARC)- Bureau of the Fiscal Service. Targeting illicit proceeds obtained by ransomware actors, especially those with a nexus to Russia, is a high priority for the United States, as evidenced by recent OFAC actions and recently established intergovernmental task forces focused on Russia-related illicit finance threats. About the Federal Register Whether the Imposition of Any Particular Special Measure Would Create a Significant Competitive Disadvantage, Including Any Undue Cost or Burden Associated With Compliance, for Financial Institutions Organized or Licensed in the United States, C. The Extent to Which the Action or the Timing of the Action Would Have a Significant Adverse Systemic Impact on the International Payment, Clearance, and Settlement System, or on Legitimate Business Activities Involving Bitzlato, D. The Effect of the Action on U.S. National Security and Foreign Policy, VI. 5321 and 5322 shall apply to violations of any order, regulation, special measure, or other requirement imposed under section 9714, in the same manner and to the same extent described in sections 5321 and 5322. (accessed March 22, 2022), available at Amendments to the BSA and related provisions in the 1980s and 1990s 5318A(b)[5] Bing, Christopher. It was viewed 60 times while on Public Inspection. The order defines P2P exchangers to include persons engaged in the business of buying and selling CVC. Russia aims to combat money laundering and terrorist financing effectively. Although most such groups take steps to obfuscate their connections to Russia and Russian illicit finance, Conti did not. Federal Register :: Imposition of Special Measure Prohibiting the FinCEN may then impose one or more enhanced due diligence requirements or restrictions (often referred to as special measures) with respect to the designated financial institution, class of transactions, or type of account. In parallel, through its P2P services, Bitzlato operates as an advertising board for digital assets traders offering wallet, escrow and other related services associated with P2P exchanges. Under the special measures applicable to Bitzlato, effective February 1, 2023, U.S. financial institutions are prohibited from engaging in any transmittal of funds to or from Bitzlato, or from any account or CVC address administered by or on behalf of Bitzlato. According to its website, Bitzlato is a modern company working in the field of blockchain technologies and [CVC].[7] Asset Recovery Rewards Act (Subtitle A) and the Combating Russian Money Laundering Act (Subtitle B). Id. As such, a prohibition on the receipt of CVC from Bitzlato could not be feasibly implemented even by the most compliant of financial institutions and compliant institutions may find themselves in receipt of CVC from Bitzlato despite a desire and effort to limit such exposure. in connection with FinCEN Identifies Virtual Currency Exchange Bitzlato as a Federal Register The Russian Federation On January 17, 2023, U.S. law enforcement authorities in Miami arrested Anatoly Legkodymov, a Russian national and the founder and majority owner of Hong Kong-based virtual currency exchange Bitzlato Ltd., on charges of money laundering and violations of the Bank Secrecy Act (BSA). 35. frc@fincen.gov. Greg Seidner. The order defines successor entity as any person that replaces Bitzlato by acquiring its assets, in whole or in part, and/or carrying out the affairs of Bitzlato under a new name. In light of the imminence of the threats posed by the illicit actors facilitated by Bitzlato, as well as the extent of the illicit transactional activity identified, an order prohibiting certain transmittals of funds is the most appropriate course of action. FinCEN FREQUENTLY ASKED QUESTIONS To identify transactions that may be prohibited by the order, the guidance advises the use of both traditional screening and monitoring technology as well as blockchain tracing software. As a result, FinCEN assesses that Bitzlato serves as a VASP that ultimately enables the profitability of ransomware attacks and, at least in the case of Conti, advances the political and economic destabilization interests of the Government of Russia. Chainalysis, The 2022 Crypto Crime Report, at 123 (February 2022). Moreover, the threat of ransomware is not limited to the United States, as ransomware attacks are on the rise across the globe, posing a significant threat to governments, businesses, and institutions on several continents. 8. 36. According to media reporting in 2021, the RaaS group DarkSide, a Russian-speaking group responsible for the Colonial Pipeline Company ransomware incident in May 2021, along with its clientele, also used Bitzlato. This is the largest proportion of illicit funds received by all seven businesses analyzed during that time, with the second largest being SUEX, at 37 percent. Further, a cache of 60,000 leaked chat messages and files from Conti appears to link Conti to the Russian state, including the Russian Federal Security Service.[23]. Bitzlato Review, This repetition of headings to form internal navigation links Unless noted otherwise, all references to Bitzlato's official website, web page, or policies are sourced from pages and links accessed via With respect to a traditional funds transfer involving fiat currency, such as a bank wire or Automated Clearing House transfer, FinCENs guidance states that covered financial institutions must reject the transaction without accepting the funds. Legitimate actors have access to a broad range of comparable services that provide for appropriate transparency and can support international efforts to protect the integrity of the international financial system, including transactions involving CVC. By U.S. and international standards, Bitzlato represents a limited percentage of daily CVC transfers. As a result, although covered financial institutions may institute an internal prohibition on the sending of CVC transactions to another address or entity, FinCEN assesses that there are few, if any, readily available ways for covered financial institutions to reject incoming CVC transactions [prior to receipt].