Market News

How a Russian Crypto Exchange Evaded U.S. Sanctions and Helped Terrorists, Criminals and Wealthy Russians Move Billions

Crypto, Garantex, money laundering, Russia, Sanctions, terrorism financing

The U.S. Treasury Department has imposed sanctions on dozens of Russian crypto enterprises in an attempt to curb their use by cybercriminals, sanctioned entities and wealthy individuals looking to evade the financial blockade on Russia. However, one of them, Garantex, has not only survived but thrived, becoming a major conduit for illicit funds and cross-border transactions.

Garantex is a Moscow-based crypto exchange that allows customers to deposit and withdraw cash in exchange for crypto, mainly stablecoins that are pegged to the U.S. dollar. The exchange has little customer verification and compliance controls, making it attractive for hackers, drug traffickers and other crime groups to launder their earnings, according to the U.S. Treasury.

The exchange has also been used by Palestinian militants to finance their operations in the lead-up to the Oct. 7 attacks in Israel, according to a report by Elliptic, a crypto research firm. The report said that digital wallets controlled by Palestinian Islamic Jihad and Hamas received a portion of $93 million via Garantex.

Garantex was sanctioned by the U.S. in April 2023, shortly after Russia invaded Ukraine, as part of a broader effort to cut off Russia’s access to the global financial system. The sanctions prohibit U.S. persons and entities from dealing with Garantex and freeze any assets it may have under U.S. jurisdiction.

However, the sanctions have had little impact on Garantex’s operations, as the exchange has no assets in the U.S. and has moved its IT infrastructure to Russia, beyond the U.S.’s reach. The exchange has also set up partnerships with local operators in popular destinations for Russian émigrés, such as Dubai, Thailand and Spain, where customers can cash out their crypto in local currencies.

Garantex’s volumes have soared since the sanctions, reaching around $865 million in July 2023, more than triple what it processed the month it was sanctioned, according to Coinpaprika, a crypto data provider. The exchange is by far the most popular crypto platform in Russia for ruble trading, as there are few local alternatives for large-scale transactions.

Garantex’s rise shows how crypto has emerged as a major weak point in the U.S.’s sanctions regime against Russia, which has targeted over 80% of the Russian banking sector. Crypto offers an alternative method for Russians to move money across borders without relying on traditional banks or intermediaries.

A senior Treasury official told The Wall Street Journal that the department was closely monitoring Garantex and was working with partners and allies to close it off as a payment channel. The official said that Treasury was considering future action against actors that were using Garantex for cross-border transactions.

Garantex was founded in 2019 by Stanislav Drugalev, a Russian internet entrepreneur, and Sergey Mendeleev, a former deputy of a Moscow district. The company’s mission was to help Russians move cash around the globe quickly and cheaply.

Drugalev died in mysterious circumstances in Dubai in February 2023, shortly before Garantex was sanctioned. His laptop was missing and his phone was used by an unknown person who demanded payment for its return. His wife said she never received a full explanation from police in Dubai about his death.

Garantex has faced pressure from Russian law enforcement as well, who have raided its premises and demanded information on its users. The company has cooperated with Russian authorities within legal boundaries, according to its communications director Evgenia Burova.

Burova disputed Treasury’s characterization of Garantex as a hub for illicit funds, saying that the exchange had zero tolerance for money laundering and used state-of-the-art Russian-made compliance software. She said that Treasury had a political agenda for targeting Garantex, whose servers, staff and customer base were all located in Russia.

Garantex has continued to expand its services and partnerships despite the sanctions and police scrutiny. It has announced new withdrawal options in Turkey, Kazakhstan and other countries bordering Russia. It has also told customers that it regularly changes its digital wallet addresses to evade tracking software used by authorities and other crypto exchanges.

Garantex’s customers have remained loyal to the exchange, praising its convenience and reliability. Some have even seen the U.S. sanctions as a badge of honor and a sign of Garantex’s popularity.

Leave a Comment