American Justice Notebook

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Two Estonian Citizens Arrested in $575 Million Cryptocurrency Fraud, Money Laundering

WASHINGTON

Two Estonian citizens were arrested in Tallinn, Estonia,  Monday on an 18-count indictment for their alleged involvement in a $575 million cryptocurrency fraud and money laundering conspiracy, officials stated.

The indictment was returned by a grand jury in the Western District of Washington on Oct. 27 and unsealed Tuesday.

According to court documents, Sergei Potapenko and Ivan Turõgin, both 37, allegedly defrauded hundreds of thousands of victims through a multi-faceted scheme.

They induced victims to enter into fraudulent equipment rental contracts with the defendants’ cryptocurrency mining service, HashFlare.

They also caused victims to invest in a virtual currency bank called Polybius Bank.

In reality, Polybius was never a bank and never paid out the promised dividends. Victims paid more than $575 million to Potapenko and Turõgin’s companies. Potapenko and Turõgin then used shell companies to launder the fraud proceeds and to purchase real estate and luxury cars.

“The size and scope of the alleged scheme is truly astounding. These defendants capitalized on both the allure of cryptocurrency and the mystery surrounding cryptocurrency mining to commit an enormous Ponzi scheme,” said U.S. Attorney Nick Brown for the Western District of Washington.

Adding,“they lured investors with false representations and then paid early investors off with money from those who invested later. They tried to hide their ill-gotten gain in Estonian properties, luxury cars, and bank accounts and virtual currency wallets around the world. U.S. and Estonian authorities are working to seize and restrain these assets and take the profit out of these crimes.”

According to the indictment, Potapenko and Turõgin claimed that HashFlare was a massive cryptocurrency mining operation.

Cryptocurrency mining uses computers to generate cryptocurrency, such as Bitcoin, for profit.

Potapenk and Turõgin offered contracts that, for a fee, purported to allow customers to rent a percentage of HashFlare’s mining operations in exchange for the virtual currency produced by their portion of the operation.

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HashFlare’s website enabled customers to see the amount of virtual currency their mining activity had supposedly generated. Customers worldwide, including western Washington, entered more than $550 million worth of HashFlare contracts between 2015 and 2019.

According to the indictment, these contracts were fraudulent. HashFlare allegedly did not have the virtual currency mining equipment it claimed to have.

HashFlare’s equipment allegedly performed Bitcoin mining at a rate of less than one percent of the computing power it purported to have.

When investors asked to withdraw their mining proceeds, Potapenko and Turõgin could not pay the mined currency as promised.

Instead, they either resisted making the payments or paid off the investors using virtual currency the defendants had purchased on the open market—not currency they had mined.

HashFlare closed its operations in 2019.

In May 2017, Potapenko and Turõgin offered investments in a company called Polybius, which they promised would form a bank specializing in virtual currency. They promised to pay investors dividends from Polybius’s profits.

The men raised at least $25 million in this scheme and transferred most of the money to other bank accounts and virtual currency wallets they controlled. Polybius never formed a bank or paid any dividends.

The indictment also charges Potapenko and Turõgin conspiring to launder their criminal proceeds by using shell companies, phony contracts, and invoices.

The money laundering conspiracy allegedly involved at least 75 real properties, six luxury vehicles, cryptocurrency wallets, and thousands of cryptocurrency mining machines.

Potapenko and Turõgin are both charged with conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering.

Potapenko and Turõgin face up to 20 years in prison if convicted.

The FBI is investigating the case.

Trial Attorneys Adrienne E. Rosen and Olivia Zhu of the Criminal Division’s Money Laundering and Asset Recovery Section and Assistant U.S. Attorneys Seth Wilkinson and Jehiel I. Baer for the Western District of Washington are prosecuting the case.

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