In a significant development, the United States Department Of Justice (DOJ) announced that Artur Schaback, the co-founder and former Chief Technology Officer (CTO) of Paxful Inc., has pleaded guilty to conspiracy charges related to failing to maintain an effective anti-money laundering (AML) program. This case underscores the critical importance of robust AML and know your customer (KYC) protocols in the financial technology sector.
Paxful's Lax AML Practices Exposed
From July 2015 to June 2019, Schaback, a 36-year-old resident of Tallin, Estonia, operated Paxful, an online peer-to-peer virtual currency platform. Paxful allowed users to trade virtual currencies for various items, including fiat currency, pre-paid cards, and gift cards. However, Schaback's management of the platform was marred by significant compliance failures.
According to court documents, Schaback permitted customers to open accounts and trade on Paxful without collecting adequate KYC information. He even marketed Paxful as a platform that did not require KYC, presenting fake AML policies to third parties. Despite being aware of suspicious and criminal activities on the platform, Schaback failed to file a single suspicious activity report.
Consequences of Non-Compliance
Schaback's negligence in implementing AML and KYC programs turned Paxful into a haven for money laundering, sanctions violations, and other criminal activities, including fraud, romance scams, extortion schemes, and prostitution. His actions have had far-reaching implications, highlighting the necessity for stringent compliance measures in the cryptocurrency industry.
Schaback has pleaded guilty to conspiracy to willfully fail to establish, develop, implement, and maintain an effective AML program as mandated by the Bank Secrecy Act. He is scheduled for sentencing on November 4 and faces a maximum penalty of five years in prison. Additionally, Schaback will resign from Paxful Inc.’s Board of Directors.
Legal and Investigative Efforts
The announcement of Schaback's guilty plea was made by Principal Deputy Assistant Attorney General Nicole M. Argentieri, head of the Justice Department’s Criminal Division; U.S. Attorney Phillip A. Talbert for the Eastern District of California; Special Agent in Charge Tatum King of Homeland Security Investigations (HSI) San Francisco; and Acting Special Agent in Charge Michael Mosley of the IRS Criminal Investigation (IRS-CI) Oakland Field Office.
The case is being investigated by HSI and IRS-CI, with prosecution led by Bank Integrity Unit Deputy Chief and National Cryptocurrency Enforcement Team Deputy Director Kevin Mosley, along with Trial Attorneys Emily Cohen, Victor Salgado, and Caylee Campbell of the Criminal Division’s Money Laundering and Asset Recovery Section (MLARS), and Assistant U.S. Attorney Matthew Thuesen for the Eastern District of California.
The Role of the Bank Integrity Unit
The Bank Integrity Unit within MLARS is dedicated to investigating and prosecuting banks and other financial institutions, including their officers, managers, and employees, whose actions compromise the integrity of the financial system. This case is part of an Organized Crime Drug Enforcement Task Forces (OCDETF) investigation, which aims to identify, disrupt, and dismantle high-level drug traffickers, money launderers, gangs, and transnational criminal organizations.
Implications for the Cryptocurrency Industry
This case serves as a stark reminder of the critical importance of AML and KYC compliance in the cryptocurrency industry. Financial institutions and virtual currency platforms must prioritize the implementation of robust compliance programs to prevent their platforms from being exploited for illicit activities.
