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Paxful Holdings Inc., an online virtual currency trading platform, agreed to plead guilty yesterday to a three-count information filed in the Eastern District of California and agreed to pay a criminal penalty of $4 million based on its ability to pay.
“Paxful made millions of dollars in part by knowingly moving cryptocurrency for the benefit of fraudsters, extortionists, money launderers and purveyors of prostitution,” said Acting Assistant Attorney General Matthew R. Galeotti of the Justice Department’s Criminal Division. “The defendant attracted its criminal clientele by promoting its lack of anti-money laundering controls and its deliberate decision not to identify its customers. This conviction shows that no matter the means, the Criminal Division will hold criminals accountable for knowingly engaging in illicit finance to further dangerous criminal activity.”
“Yesterday’s guilty plea by Paxful Holdings holds the company accountable for knowingly facilitating serious criminal conduct in the United States and elsewhere,” said U.S. Attorney Eric Grant for the Eastern District of California. “Through its calculated lack of controls, the company made itself available as a vehicle for money laundering, sanctions violations, and other criminal activity, including fraud, romance scams, extortion schemes, and prostitution. This resolution sends a clear message: those who deliberately turn a blind eye to criminal activity on their platforms will face serious consequences under U.S. law. The Department of Justice remains committed to protecting victims and ensuring that the financial system, including the cryptocurrency ecosystem, is not exploited.”
“For years, Paxful disregarded its Bank Secrecy Act obligations and facilitated transactions associated with illicit activity and high-risk jurisdictions, such as Iran and North Korea,” said Financial Crimes Enforcement Network (FinCEN) Director Andrea Gacki. “FinCEN is committed to mitigating risks to the U.S. financial system while fostering responsible innovation in the virtual asset ecosystem.”
“Paxful Holdings, Inc. knowingly enabled its platform to serve as a conduit for criminal activity — including fraud and illegal prostitution,” said Special Agent in Charge Linda Nguyen of the IRS Criminal Investigation (IRS-CI) Oakland Field Office. “By willfully disregarding anti-money laundering laws and failing to report suspicious activity, Paxful profited in illicit trades while facilitating crimes with serious harm and consequences. IRS-CI remains steadfast in its mission to hold virtual currency platforms accountable when they are used to conceal and enable criminal conduct.”
According to court documents, Paxful Inc., and later, Paxful Holdings Inc. (collectively Paxful), owned and operated an online peer-to-peer virtual currency platform and money transmitting business (MTB) where customers negotiated for and traded virtual currency for a variety of other items, including fiat currency, pre-paid cards and gift cards. Paxful knew that its customers transmitted funds from criminal offenses, including fraud schemes and illegal prostitution. From Jan. 1, 2017, to Sept. 2, 2019, Paxful facilitated more than 26.7 million trades, totaling nearly $3 billion in value, and collected more than $29.7 million in revenue.
Paxful knowingly transferred virtual currency on behalf of its customers, including Backpage, an online advertising platform for illicit prostitution and similar sites. In various criminal proceedings, Backpage and its owners and operators admitted that Backpage advertised and profited from illegal prostitution, including illegal sex work depicting minors. Paxful’s founders boasted about the “Backpage Effect,” which enabled Paxful’s business to grow. Between December 2015 and December 2022, Paxful’s collaboration with Backpage and a similar site caused nearly $17 million worth of bitcoin to be transferred from the Paxful wallet to Backpage and the copycat site from which Paxful obtained at least $2.7 million in profits.
As described in the plea agreement, from July 2015 to June 2019, Paxful and its founders marketed Paxful as a platform that did not require know-your-customer (KYC) information; allowed customers to open accounts and trade on the Paxful platform without gathering sufficient KYC information; presented to third parties fake anti money-laundering (AML) policies that they knew were not implemented or enforced; and failed to file suspicious activity reports, despite knowing that Paxful users were engaged in suspicious and criminal activity. As a result, Paxful knew it was used as a vehicle for prostitution, fraud, romance scams and extortion schemes.
Paxful agreed to plead guilty to conspiring to violate the Travel Act by promoting illegal prostitution through interstate commerce; conspiring to operate an unlicensed MTB by knowingly transmitting funds derived from criminal offenses or supporting unlawful activity, including illegal prostitution and fraud schemes; and conspiring to violate the Bank Secrecy Act’s (BSA) AML program requirement. As a result of its illegal conduct, the virtual currency platform was used to transfer the proceeds of fraud schemes, illegal prostitution, hacks by malign state actors and distribution of child sexual abuse material.
The Justice Department reached its resolution with Paxful based on several factors, including the nature and seriousness of the offenses, which involved Paxful’s processing of millions of dollars of illicit transactions. Paxful did not make a timely and voluntary disclosure of wrongdoing, but it received credit for its cooperation with the department’s investigation, including among other things, collecting, analyzing and producing voluminous information, providing timely updates on facts learned during its internal investigation and engaging in extensive and timely remedial measures. Accordingly, Paxful received a 25% reduction off the bottom of the applicable U.S. sentencing guidelines fine range. According to court documents, Paxful agreed that the appropriate criminal penalty based on the law and the facts in its case is $112,500,000. Based on the Justice Department’s independent analysis, it determined that Paxful did not have the ability to pay a criminal penalty greater than $4 million. The court will sentence Paxful on Feb.10, 2025.
On July 8, 2024, Paxful’s co-founder and former chief technology officer, Artur Schaback, pleaded guilty to conspiracy to fail to maintain an effective AML program in relation to the same scheme.
Paxful’s guilty plea is part of a coordinated resolution with FinCEN.
Immigrations and Customs Enforcement Homeland Security Investigations (ICE HSI) and IRS-CI are investigating the case.
Bank Integrity Unit Deputy Chief Kevin Mosley and Trial Attorneys Emily Cohen, Caylee Campbell and Katherine Nielsen of the Criminal Division’s Money Laundering, Narcotics and Forfeiture Section and Assistant U.S. Attorney Matthew Thuesen for the Eastern District of California are prosecuting the case.
The Money Laundering, Narcotics and Forfeiture Section’s Bank Integrity Unit investigates and prosecutes banks and other financial institutions, including their officers, managers and employees whose actions threaten the integrity of the individual institution or the wider financial system.
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