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FinCEN also noted that Bitzlato has significant operations in Russia, it has been used to facilitate the deposit and transfer of funds by Russian ransomware groups and their affiliates, and it has facilitated transactions on Russian darknet markets on behalf of both customers and vendors. 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. Enforcing sanctions, export controls and other restrictive measures that have been imposed against Russia since the 2022 invasion of Ukraine remains a top U.S. foreign policy and national security priority. 5318A would effectively address the threat posed by Bitzlato. Through its exchange services, Bitzlato organizes trading for digital assets, their derivatives and other market instruments with [t]rading conducted via standard contracts or orders.[8] On its website as of March 2022, Bitzlato purported to maintain an AML/KYC policy designed to prevent and reduce the potential risks of Bitzlato being involved in any illegal activity, stating that in accordance with international and local regulations, Bitzlato implements effective internal procedures and mechanisms to prevent money laundering, terrorist financing, drug and human trafficking, the proliferation of weapons of mass destruction, corruption and bribery and to respond to any form of suspicious activity on the part of its Users [sic].[36] As such, this action will complement previous actions taken by the U.S. Government and will serve the United States' national security and foreign policy interests by protecting U.S. businesses and interests from known ransomware threat actors, by publicly countering a financing mechanism used by illicit entities, including entities that seek to further the Russian state's aims of political and economic destabilization, and by reinforcing the expectations of AML/CFT compliance in the virtual asset ecosystem in order to improve the identification and reporting of suspicious activity by financial institutions and agencies around the world. 3, Conti refers to both a criminal group, the eponymous ransomware strains it spawned, and other affiliated actors. Section 9714(a) does not require consideration of particular factors in determining which one or more special measures to apply to address an identified primary money laundering concern. 31. Although Hydra has been shut down, Bitzlato continues to facilitate transactions for growing Russia-connected darknet markets. Federal Law No. 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. On January 1, 2021, as part of the National Defense Authorization Act, the U.S. Congress enacted the Anti-Money Laundering Act of 2020, the Corporate 31 U.S.C. Notwithstanding its stated AML/KYC policy, Bitzlato advertises the utility of simple registration and does not collect the types of information typically used to conduct effective (AML/CFT). 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. https://www.state.gov/reward-offers-for-information-to-bring-darkside-ransomware-variant-co-conspirators-to-justice. Furthermore, Bitzlato has significant links to Russian illicit finance and Russian criminal actors. Russia is a haven for cybercriminals, where the government often enlists them for its own malicious purposes. Russia-based ransomware group Conti issues warning to Kremlin foes, This memorandum is considered advertising under applicable state laws. This table of contents is a navigational tool, processed from the 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. Khalil N. Maalouf 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. (June 5, 2021). Section 9714 of the Act, which became law as part of the National Defense Authorization Act (NDAA) for Fiscal Year 2021, expressed Congresss concerns that the Russian government, state-owned enterprises, and sanctioned Russian oligarchs and elites would use a variety of mechanisms to disguise and launder their assets.1 Such actions, according to Congress, could further enable Russias influence and destabilization operations and threaten U.S. and European democracy and national security. 24. 91-508) and its major component, the Currency and Foreign Transactions Reporting Act. Forbes Moreover, by providing for the rejection of CVC, this order ensures that covered financial institutions will not be subject to an undue cost or burden associated with compliance. Consequently, ransomware attacks are a direct threat to the U.S. economy, to its citizens, and to its national security. 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. The FinCEN Resource Center, 1-800-767-2825 or electronically at In providing for the rejection of CVC under certain limited circumstances, FinCEN acknowledges that, at this time, there are technological limitations that may limit or preclude covered financial institutions from declining CVC transfers originating at addresses or prohibit, or impose conditions upon, certain transmittals of funds (to be defined by the Secretary) by any domestic financial institution or domestic financial agency, if such transmittal of funds involves any such institution, The authority of the Secretary of the Treasury (the Secretary) to administer both section 9714(a) and the Bank Secrecy Act (BSA) has been delegated to FinCEN.[6]. As explored in greater detail below, section 9714 is a powerful tool that allows the Treasury Department to move quickly to address perceived threats to the U.S. financial system. regulatory information on FederalRegister.gov with the objective of 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. (May 12, 2021). 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. Section 9714 special measures can be imposed immediately through written order, thereby avoiding the more onerous and time-consuming rulemaking process required under similar anti-money laundering (AML) authorities. and Mega as Russian darknet markets that offer narcotics and potentially other illicit goods. [FR Doc. is of money laundering concern in connection with Russian illicit finance. The order defines transmittal of funds as the sending or receiving of any funds, including CVC, and it defines covered financial institution as any financial institution under the BSA. Bitzlato, FinCEN was guided in its analysis by the following considerations: (1) the extent to which the institution is used to facilitate or promote money laundering in connection with Russian illicit finance, including through connections to money laundering activity by Russian organized criminal groups; (2) the extent to which the institution is used for legitimate business purposes; and (3) the extent to which action by FinCEN would guard against international money laundering and other financial crimes. Specifically, section 9714 authorizes FinCEN, acting on authority delegated by the Treasury Secretary, to designate as a primary money laundering concern in connection with Russian illicit finance (i) financial institutions operating outside of the United States; (ii) classes of transactions within, or involving, a jurisdiction outside of the United States; or (iii) types of accounts within, or involving, a jurisdiction outside of the United States. 39. 11. Start Printed Page 3922 2 The Currency and Foreign Transactions https://bitzlato.com To expand the scope of the meetings of the supervisory team on countering illicit finance, to improve the combating of Russian money 13694, as amended, for its part in facilitating funds transfers for ransomware actors and for providing material support to SUEX OTC, S.R.O. Separately, based on blockchain analysis, other ransomware groups have used Bitzlato to facilitate transactions involving ransomware, including ransomware groups based in or linked to Russia. [22] 20. 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. Pursuant to section 9714, these measures included: (1) the special measures described in 31 U.S.C. These attacks have destabilized private businesses, healthcare facilities, school districts, and critical infrastructureincluding domestic energy distribution, such as in the 2021 Colonial Pipeline attack,[16] Bitzlato, 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. The Russian Federation If you are using public inspection listings for legal research, you Section 9714(a) of the Combating Russian Money Laundering Act, as amended by section 6106(b) of the National Defense Authorization Act for Fiscal Year 2022 (hereafter section 9714(a)),[4] 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. 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. These penalties can be severe and a financial institution that engages in a transaction that violates a section 9714 order faces a civil penalty of no less than twice the value of the transaction up to and no greater than $1,667,030(under todays penalty figures) and a criminal fine of no less than twice the value of the transaction and no greater than $1,000,000. https://www.fincen.gov/sites/default/files/advisory/2021-11-08/FinCEN%20Ransomware%20Advisory_FINAL_508_.pdf. 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. These markup elements allow the user to see how the document follows the Given Bitzlato's significant connections to Russia and links to Russian illicit finance and Russian criminal actors, the record demonstrates that, in this case, the statutory threshold under section 9714(a) is met. Start Printed Page 3924 By contrast, a CVC price and volume aggregator estimates that a large U.S.-domiciled exchanger processed more than $2.7 Financial Crimes Enforcement Network (FinCEN), Treasury. Bing, Christopher. This order: (1) sets forth FinCEN's determination that Bitzlato Limited (Bitzlato), a virtual asset service provider (VASP) incorporated in the Hong Kong Special Administrative Region of the People's Republic of China (Hong Kong), is a financial institution operating outside of the United States that is of primary money laundering concern[1] For complete information about, and access to, our official publications 5312. The covered financial institution, and any of its officers, directors, employees, and agents, may be liable for civil or criminal penalties under 31 U.S.C. 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. Consideration of Alternative Special Measures, VII. 3. WebAct (BSA; P.L. 9. Ransomware is a form of malicious software (malware) used by an attacker to block access to a computer system or data, often by encrypting data or programs on information technology (IT) systems. As FinCEN is not aware of timing considerations associated with such service redundancy or availability, there is also no adverse impact associated with the timing of this action. 1503 & 1507. 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. 21. According to its website, Bitzlato is a modern company working in the field of blockchain technologies and [CVC].[7] N.Y. Times The majority of ransomware incidents reported to FinCEN in the second half of 2021 were conducted by Russia-related ransomware variants. 35. In order to ensure that is the case, FinCEN has elected to provide within this order for the rejection of certain transmittals of CVC that are received from or originate at Bitzlato and outline the steps a covered financial institution should take in such circumstances. Start Printed Page 3920 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 Some https://bitzlato.com WebThis subtitle [subtitle B ( 97119714) of title XCVII of div. . 13694, as amended, for providing material support to the threat posed by criminal ransomware actors. 25. Further, compliance with the prohibition on certain transmittals of funds set out in this order requires no tools or competencies other than those already employed by domestic financial institutions to maintain their current AML/CFT compliance programs. It is not intended to reflect the applicability of, or obligations under, any provision of the Bank Secrecy Act (BSA) or its implementing regulations, and FinCEN has not considered the extent to which Bitzlato does business in the United States. 2. 17. https://bitzlato.com/anti-moneylaundering-policy-and-know-your-client-policy To the contrary, on February 25, 2022, Conti pledged allegiance to the Government of Russia and vowed to retaliate against international state actors for their support of the Government of Ukraine amidst the Russian invasion. Federal Register provide legal notice to the public and judicial notice The terms of this order are effective February 1, 2023, with no cessation date. and services, go to Its purpose is to extort ransom payments from victims in exchange for decrypting the information, restoring victims' access to their systems or data, and/or not disclosing or destroying data or programs on IT systems. January 18, 2023. 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). Egan, Matt. 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. 34. As noted above, dealings with the Russia-connected darknet market Hydra represented a notable percentage of Bitzlato's business. 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. Chainalysis, The 2022 Crypto Crime Report, at 128 (February 2022). Chainalysis, The 2022 Crypto Crime Report, at 128 (February 2022). FinCEN notes that CVC payment systems are often designed to limit the control of specific financial institutions over transactions and to prevent rejections of funds by persons or entities other than the sender of funds. It is not an official legal edition of the Federal 15. Section 9714 and section 311 both authorize the designation of primary money laundering concerns and the imposition of special measures, and section 311 has been used in the past against a virtual currency provider.2 Notably, though, section 311 special measures may be imposed with respect to any designated primary money laundering concern, whereas section 9714 requires that the primary money laundering concern relate to Russian illicit finance. the current document as it appeared on Public Inspection on This is a unique step that has only been taken a handful of times in Treasurys history for some of the most egregious money laundering cases, and is the first of its kind specifically under new authorities to combat Russian illicit finance. has no substantive legal effect. 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. Prohibition of the Transmittal of Funds Involving Bitzlato, 2. neither selfies nor passports required. 40. 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.) In addition to complying with the relevant prohibitions, the guidance specifies that covered financial institutions should incorporate Bitzlatos designation into their AML compliance programs. 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. https://bitzlato.com, [26] A review of illicit actors' direct exposure to Bitzlato shows that a majority of those illicit actors were based in, or had ties to, Russia and Russia-based cybercriminal forums. 8. 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]. . The application of FinCEN's authorities in this order is specific only to section 9714 of the Combating Russian Money Laundering Act. frc@fincen.gov. Counts are subject to sampling, reprocessing and revision (up or down) throughout the day. [40] 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. 27. These tools are designed to help you understand the official document Only official editions of the SUEX, a CVC exchanger located in Moscow City, Russia, was itself designated by OFAC on September 21, 2021, pursuant to E.O. 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. This document has been published in the Federal Register. It was viewed 60 times while on Public Inspection. Bitzlato further states that it implements a verification procedure, and employs an official responsible for compliance with AML standards, transaction monitoring and risk assessment. As such, prohibiting or placing conditions upon the opening of such accounts would be ineffective at addressing the money laundering concern. It was previously known as ChangeBot. For example, Conti v2 is the second strain developed by the Conti ransomware group, the first of which is Conti. A ransomware actor who has used both the Conti strain and the Phobos strain in their attacks is both a Conti and a Phobos affiliate. The order defines a covered financial institution as having the same meaning as financial institution in 31 CFR 1010.100(t). provides, in relevant part, that should the Secretary of the Treasury determine reasonable grounds exist for concluding one or more financial institutions operating outside of the United States is of primary money laundering concern in connection with Russian illicit finance, the Secretary, by order, regulation, or otherwise as permitted by law may require domestic financial institutions and domestic financial agencies to take 1 or more of the special measures described in 31 U.S.C. On November 8, 2021, OFAC designated Chatex, pursuant to E.O. including attacks against U.S. entities and institutions. 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. Eytan J. Fisch 14. Under Section 1. 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. Nevertheless, although not bound by the factors, FinCEN considered, in this instance, the factors identified in 31 U.S.C. corresponding official PDF file on govinfo.gov. 19. Key weakness in the current law. In order to ensure orderly implementation, FinCEN will delay the effective date of this order until February 1, 2023. prior to issuing this order. 41. 13694 (Blocking the Property of Certain Persons Engaging in Significant Malicious Cyber-Enabled Activities), in which he declared a national emergency to deal with the threat of the increasing prevalence and severity of malicious cyber-enabled activities originating from, or directed by persons located, in whole or in substantial part, outside the United States [that] constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.[18], In 2021, roughly 74 percent of ransomware revenue, or over $400 million worth of CVC, went to strains highly likely to be affiliated with Russian organizations. Finding Bitzlato to be a financial institution operating outside of the United States of primary money laundering concern in connection with Russian illicit finance, and prohibiting transmittals of funds, will help insulate the U.S. financial system from international money laundering and other financial crimes. 7. Banks and stock exchanges are even bigger targets for ransomware attacks, 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). Bitzlato's continued facilitation of Russian darknet markets further illustrates its ongoing engagement with actors connected with Russian illicit finance and raises primary money laundering concerns. Bitzlato is particularly active in facilitating illicit activity, but it is ultimately part of a larger ecosystem of cybercriminals that are allowed to operate with impunity in Russia. https://bitzlato.com/terms-of-service-bitzlato/ For example, Bitzlato's top three receiving counterparties, by total amount of BTC received between May 2018 and September 2022 were: (1) Binance, a VASP; (2) the Russia-connected darknet market Hydra; and (3) the alleged Russia-based Ponzi scheme TheFiniko. Similarly, Bitzlato's top three sending counterparties, by total amount of BTC sent between May 2018 and September 2022 were (1) Hydra; (2) Local Bitcoins, a VASP based/incorporated in Finland; and (3) TheFiniko. The majority of these receiving and sending counterparties have evident ties to and/or significant operations in Russia. (last accessed January 2023). In connection with this action, FinCEN consulted with staff at the following Departments and agencies with regard to the proposed order and prohibition: Department of Justice; the Department of State; the Board of Governors of the Federal Reserve System; the Federal Deposit Insurance Corporation the Securities and Exchange Commission; the Commodity Futures Trading Commission; the Office of the Comptroller of the Currency; and the National Credit Union Administration Board. 321(b), Treasury's Under Secretary for Terrorism & Financial Intelligence re-delegated to the Director of FinCEN the authority of the Secretary under section 9714. 32. https://cryptonews.com/reviews/bitzlato/. rendition of the daily Federal Register on FederalRegister.gov does not L. 116283, enacting provisions set out as notes under sections 5311 and 5318A of this title] may be cited as FinCEN believes that, for the reasons described below, this action will not have an adverse systemic impact, and indeed, will have a positive systemic impact on the international payment, clearance, and settlement system, and on legitimate business activities. Federal Register Ryan D. Junck However, even if Bitzlato is not knowingly affiliated with DarkSide or other ransomware groups, FinCEN assesses that it provides an enabling environment for such ransomware criminals to utilize its services to cash out ransomware proceeds due to its minimal Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) protocols, solidifying its reputation as a go-to CVC exchanger for such groups.[29]. By U.S. and international standards, Bitzlato represents a limited percentage of daily CVC transfers.

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