"The U.S. last year sanctioned a Moscow-based crypto exchange to stymie Russian efforts to evade the financial blockade imposed after the events in Ukraine.
A year on, the exchange is booming.
Despite its place on the U.S. blacklist, which restricts transactions with sanctioned entities, Garantex has become a major channel through which Russians move funds into and out of the country, according to trading data and people familiar with the firm.
It has also been a vehicle for Russian cybercriminals to launder their earnings, U.S. authorities say.
Garantex's growing role as a global conduit for illicit funds was underscored by evidence Palestinian militants in part financed their operations through crypto ahead of the Oct. 7 attacks in Israel. Digital wallets controlled by Palestinian Islamic Jihad, which joined Hamas in the attacks, received a portion of $93 million via Garantex, according to analysis by researcher Elliptic, which said Hamas also used a similar financing strategy.
The U.S. Treasury, in a report last year, said gaps in financial crime controls at crypto exchanges can allow terrorist groups to misuse them. Israeli Defense Minister Yoav Gallant said last summer the use of digital currencies was making the job of stopping terrorist financing ever more complex.
In Russia, the exchange is used to move rubles into other currencies, which is more difficult amid sanctions on Russian banks after the invasion of Ukraine. Customers deposit rubles in cash at Garantex's offices to receive crypto, primarily in the form of stablecoins, a popular type of digital currency often pegged to the U.S. dollar. These can then be withdrawn as traditional currency abroad from a network of local partners, with little trackable record of the transactions.
Customer transactions on the platform totaled around $865 million in July, more than triple what it processed the month it was sanctioned, according to crypto data provider Coinpaprika.
The numbers show how crypto has emerged as a major weak point in the Biden administration's efforts to strangle Russia's economy. The Treasury Department has sanctioned over 80% of the Russian banking sector, restricting how Russians can move money through foreign banks.
Crypto has become "an alternative method" to settle transactions and transfer funds, the Bank of Russia said this year.
Garantex's expansion raises questions about the effectiveness of U.S. sanctions when targeted at entities that are financially insulated in a hostile territory, said Juan Zarate, a former senior Treasury and White House counterterrorism official. "It does suggest the limits of what OFAC can do," said Zarate, referring to Treasury's Office of Foreign Assets Control. "OFAC tools, though powerful, aren't a silver bullet."
A senior Treasury official told The Wall Street Journal the department was closely monitoring Garantex and was working with partners and allies to close it off as a payment channel. Treasury assessed that wealthy Russian individuals were often using Garantex to move money out of the country. The department is considering action against actors that are using Garantex for cross-border transactions, the official said.
Launched in 2019, Garantex is by far the most popular crypto exchange in Russia for ruble trading. Until recently, Binance, the world's largest crypto exchange, also allowed Russians to convert rubles into crypto, though its ruble trading volumes were a fraction of Garantex's. Binance sold its Russia business in September, a month after the Journal wrote about its customers' use of sanctioned Russian banks.
The Treasury Department has sanctioned a string of Russian crypto enterprises to fight cybercrime and their use by sanctioned entities. Some closed down but re-emerged under new guises, taking advantage of the ease with which crypto infrastructure, particularly the digital wallets that hold tokens, can be replicated, analysts said.
Garantex has lived on -- and even prospered. To continue to serve its client base, Garantex migrated its IT infrastructure to Russia from an original undisclosed location and set up partnerships in popular locations for Russian emigres such as Dubai and Thailand.
A Garantex administrator bragged to clients that Treasury's sanctions against the exchange were just good advertising for its services.
The company has long been popular among criminal groups looking to launder illicit funds, according to the U.S. Treasury. The exchange demanded little information or identification from clients depositing cash, so criminals could convert earnings into crypto and withdraw them as a different currency.
Evgenia Burova, Garantex's communications director, told the Journal that its volumes had increased in sync with the growth in crypto trading in Russia over the past year.
Burova disputed Treasury's characterization of Garantex, saying the exchange has zero tolerance for money laundering and used what she called state-of-the-art Russian-made compliance software. Treasury had a political agenda for targeting Garantex, whose servers, staff and customer base were all located in Russia, she said. "We are a leader in one dimension only: cryptocurrency trades vs. the Russian ruble," Burova said.
Garantex's clientele has grown during the conflict to include regular Russians and local businesses looking for a fast and cheap method to move large sums of rubles out of and into the country. Although sanctions primarily ban people and firms with U.S. connections from dealing with blacklisted entities, Treasury has also said non-U.S. persons face risk too if they circumvent the sanctions on Russia or provide support to already-sanctioned actors.
For a single transaction, Garantex tells clients it accepts up to 100 million rubles in cash at its Moscow office, or around $1 million at current exchange rates. Ruble transactions of this size often cause concern at international banks, leading to account freezes and demands for customers to provide more information. Garantex customers could make multiple transactions without raising red flags.
Since start of events in Ukraine in February 2022, at least $7 billion has flowed through Garantex, according to Coinpaprika, which says it obtained figures from Garantex's platform.
Another crypto research firm, which tracked flows through Garantex on the blockchain, said the total sum could be multiples of this, estimating as much as $30 billion.
Burova declined to share Garantex's own figures.
Russians have still sent more funds overseas via banks, estimated at $33 billion in 2022 in a report by the Moscow-based Center for Macroeconomic Analysis and Short-term Forecasting. This is because not all Russian banks have been sanctioned and some overseas banks still accept ruble transfers.
Garantex's activity has recently surged, with average daily volumes peaking in August, the most recent month of Coinpaprika data. The U.S. and European Union tightened sanctions on Russian banks this year.
This account of Garantex's rise is based on interviews with current and former government investigators in Russia and Europe, former associates and advisers of its founders, and researchers who have tracked its activity. Information also was drawn from corporate records, blockchain analytics data and Garantex customer chat groups.
Garantex's mission was always to help Russians move cash around the globe. Its co-founders, Stanislav Drugalev, a Russian internet entrepreneur, and Sergey Mendeleev, a former deputy of a Moscow district, set up shop at one of Moscow's most prestigious business addresses, the Federation Tower complex. The company wanted to allow customers to cash out "anywhere in the world, except maybe for Antarctica," Mendeleev told an interviewer.
Business boomed. Hackers, drug traffickers and other crime groups had moved over $100 million through Garantex, Treasury said last year, citing an absence of customer controls. Chainalysis, a leading blockchain researcher that helps U.S. authorities on crypto investigations, has said about a third of the $2 billion in funds sent to Garantex between 2019 and 2021 came from entities connected to crime.
Russian law enforcement has increasingly exerted control over the exchange, conducting raids on its premises and pressuring it to share data on users, people familiar with its operations said.
One night in September 2020, Drugalev's wife, Oksana Drugaleva, was at home in Moscow when armed officers broke open her door. They were looking for her husband. After handing himself in, he agreed to give police information on the criminal groups using Garantex and was released, according to Drugaleva and a former Russian law-enforcement official with direct knowledge of the case.
Drugalev moved to Dubai, while his wife remained in Moscow. The following February, her husband's body was found below a bridge in Dubai. His laptop was missing.
She later told a Russian YouTube channel that she never received a full explanation from police in Dubai about the death.
Within Garantex, details of Drugalev's death were little discussed. Karmo Neider, then a board member at a local unit Garantex established in Estonia, said he was told simply that he had died in an accident.
Two months later, Drugalev's replacement joined other crypto executives at a meeting in Moscow with the Federal Security Service. Police officials said they wanted "the maximum amount of information" on their platforms' users, according to a slide presentation given by police and several attendees.
Burova, the communications director, said Garantex supported national and international initiatives to combat crime. She said the company had no political affiliations and cooperated with Russian law enforcement "within legal boundaries." She declined to comment on Drugalev's death, saying it was a private matter.
Garantex was riding high in January 2022, on the cusp of the Ukraine events. The company hosted an anniversary party in Federation Tower where guests popped Champagne and danced to techno. In a video posted on Instagram, Burova cut a cake covered in what appeared to be mock $100 bills and crypto tokens for the stablecoin tether.
After the conflict broke out, Garantex told nervous users it had no intention of blocking Russian accounts, as some international crypto firms were doing, according to a private chat for customers seen by the Journal. "There is enough cash for everyone," a Garantex administrator called simply Evgeny said in the chat, which took place on the Telegram messaging app.
Hourslong queues formed at its office on Federation Tower's 14th floor. Day and night, customers waited to deposit rubles and dollars in cash and receive crypto in return -- most commonly tether.
When one user raised concerns about carrying large amounts of currency to the office, Evgeny told them in the chat: "Bring a bigger bag."
Treasury sanctioned Garantex that April. The exchange's staff reassured customers that it would work as usual as it had no assets in the U.S. and its crypto reserves were held "in neutral jurisdictions."
"Our volumes will only grow after such good advertising from abroad," Evgeny told clients in the chat, which has around 7,500 members.
By the time it was sanctioned, Garantex had already moved its IT infrastructure to Russia, beyond the U.S.'s reach, according to Burova, who declined to say where it was previously based.
Three weeks after the sanctions, Garantex told clients it had launched a partnership with an operator called Bithauz in the United Arab Emirates. In person at Bithauz's Dubai office, customers could trade up to $5 million in tether at a time for dirhams, the local currency, and dollars.
Bithauz was run by a Dubai-based firm, MKAN Coin, Bithauz's operators told clients, according to Telegram messages between them. MKAN Coin had been registered in April, just weeks after the Garantex sanctions, by a former Garantex executive, Mohammad Khalifa. He had previously been a senior official at the Dubai International Financial Centre, a business hub overseen by the emirate's financial regulator.
MKAN Coin told the Journal it didn't operate Bithauz -- with which it shares a physical office -- but said Bithauz referred clients to it. MKAN Coin said in an email it didn't discriminate against different nationalities and strictly complied with all U.A.E. laws.
Garantex announced withdrawal options in Turkey, Kazakhstan and other countries bordering Russia that were host to a growing diaspora.
Treasury had designated several of Garantex's digital wallet addresses in its sanctions notice, so the exchange told customers it was regularly changing up its wallets to evade tracking software used by authorities and other crypto exchanges.
To discreetly send crypto to customers, Garantex moved tokens through long chains of wallets, numbering a dozen or more, while mixing in funds from other sources, according to an analysis by Swiss research firm Global Ledger. Garantex often abandoned a wallet after using it for a single transfer, Global Ledger found. A second blockchain analytics firm said it had made similar findings.
Garantex's efforts won over its customers. "There is no replacement for it," Daniel Shishkin, a crypto trader and bar manager in St. Petersburg, wrote in the chat group in June 2022. Shishkin didn't return requests for comment.
On Oct. 10, 2022, video circulated on Russian crypto Telegram channels showing armed police at the Federation Tower headquarters. Garantex issued an alert to clients that its Moscow office was temporarily closed, without explanation. "Will the exchange be shut down?" asked a customer in the chat.
Evgeny, the administrator, confirmed the police visit in messages to another chat group, telling people not to worry.
"There have been so many visits from the authorities that I've lost count. Nothing new in that. Plenty of fraudsters work through P2P, then these guys visit for a debrief," he wrote. He was referring to peer-to-peer crypto trading, in which an exchange serves as a platform to connect buyers and sellers directly with each other.
Evgeny told the Journal he was just a moderator of the Telegram channel and referred questions to Garantex's "official representatives." Burova didn't answer questions about his messages to customers.
By the evening after the police visit, Garantex told clients the office was back to normal. This summer, as trading volumes boomed, Garantex announced in the chat a new partner in Thailand that could help customers buy real estate with crypto. "We are not going to stop there," it said." [1]
1. Crypto Link to Crime, Terror, Rich Russians --- Garantex helps defy Treasury sanctions by channeling rubles to crypto to dollars. Berwick, Angus. Wall Street Journal, Eastern edition; New York, N.Y.. 14 Oct 2023: A.13.
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