Binance was among Bitzlato’s top three counterparties by the amount of bitcoin received between May 2018 and September 2022, the U.S. Treasury’s FinCEN said last week

Crypto giant Binance processed nearly $346m in bitcoin for digital currency exchange Bitzlato, whose founder was arrested by U.S. authorities last week for allegedly running a ‘money laundering engine,’ according to blockchain data seen by Reuters.

The US Justice Department on Jan. 18 said it charged Bitzlato’s co-founder and majority shareholder Anatoly Legkodymov with operating an unlicensed money exchange business that ‘fuelled a high-tech axis of cryptocrime’ by processing $700 million in illicit funds.

The Justice Department said that Bitzlato had touted the laxity of its background checks on clients, adding that when the exchange did ask users for ID information, ‘it repeatedly allowed them to provide information belonging to ‘straw man’ registrants.’

The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) said last week that Binance was among Bitzlato’s top three counterparties in terms of the amount of bitcoin received from May 2018 to September 2022. FinCEN said that Binance was the only major crypto exchange among Bitzlato’s top counterparties.

It said darknet drugs marketplace Hydra, a small exchange called LocalBitcoins and a crypto investment website called Finiko, were the others to transact with Bitzlato. FinCEN did not provide details on the scale of the interactions with Bitzlato.

FinCEN added that Bitzlato was a ‘primary money laundering concern’ related to Russian illicit finance. FinCEN said that it will ban the transmission of funds to Bitzlato by financial institutions from February 1. It did not name individual firms among those subject to the ban.

According to a Binance spokesperson, it had ‘provided substantial assistance’ to international law enforcement to support their investigation of Bitzlato. The company is committed to ‘working collaboratively’ with law enforcement, the spokesperson added, declining to give details about its dealings with Bitzlato or the nature of its cooperation with such agencies.

Finland-based LocalBitcoins denied ‘any kind of cooperation or relationship’ with Bitzlato. Some P2P traders at LocalBitcoins ‘would also have been trading in BitZlato’s P2P market’, the exchange said, adding that ‘there have practically been no transactions between LocalBitcoins and BitZlato since October 2022.’

Between May 2018 and its closure last week, Binance moved more than 20,000 bitcoin, then valued at $345.8 million, across some 205,000 transactions for Bitzlato, showed a review of previously unreported data. The figures were compiled by leading U.S. blockchain researcher Chainalysis.

The data showed that during that period, Bitcoin worth nearly $175 million was transferred to Binance from Bitzlato, making Binance its largest receiving counterparty.

Data from Chainalysis showed that nearly $90 million of the total transfers took place after August 2021, when Binance said it would require users to submit identification to combat financial crime. Binance said in a blog last year that such checks tackle ‘the funding and laundering of money from illicit activities.’

In February 2022, Chainalysis had warned that Bitzlato was high risk. In a report, Chainalysis said around half of Bitzlato’s transfers between 2019 and 2021 were ‘illicit and risky’. It identified nearly $1 billion in such transactions.

The U.S. action against Bitzlato comes as the Justice Department investigates Binance for possible money laundering and sanctions violations. Some federal prosecutors have concluded that the evidence collected justifies filing charges against executives including founder and CEO Changpeng Zhao, Reuters reported in December.

Binance as well as Bitzlato were significant counterparties of Hydra. Hydra was shut down by U.S. and German authorities last year. The Justice Department said Bitzlato exchanged over $700 million in crypto with Hydra, either directly or through intermediaries.