Two Estonian citizens have been arrested and charged in connection with what US prosecutors described as a $575mn cryptocurrency fraud and money laundering scheme.
Sergei Potapenko and Ivan Turõgin are accused of defrauding hundreds of thousands of victims, according to the US Department of Justice, which on Monday unsealed an indictment against them.
The defendants allegedly induced victims to enter into rental contracts for fraudulent equipment with the men’s crypto mining service HashFlare. They also are accused of soliciting investments in a virtual currency bank called Polybius Bank, which, prosecutors said, was neither a bank nor paid dividends that were promised.
The arrests of both men, aged 37, are the latest indication that law enforcement agencies are becoming increasingly focused on illicit crypto activity across the globe. The arrests in Tallinn, Estonia, also come amid the collapse into bankruptcy of FTX, a once-marquee crypto platform controlled by Sam Bankman-Fried, who at his height of influence was considered one of the crypto industry’s flag bearers.
“New technology has made it easier for bad actors to take advantage of innocent victims — both in the US and abroad — in increasingly complex scams,” said assistant attorney-general Kenneth Polite.
Earlier this month, the US secured the conviction of James Zhong, who once held more than $3bn worth of bitcoin taken from Silk Road, an infamous dark net marketplace that accepted cryptocurrency in exchange for illicit goods.
The indictment against Potapenko and Turõgin claims both men portrayed HashFlare as a massive crypto mining operation. Between 2015 and 2019, more than $550mn worth of HashFlare contracts were established with customers from around the world. But those contracts were fraudulent, prosecutors have alleged.
HashFlare allegedly did not have the virtual currency mining equipment it was claimed to have, and when faced with investors seeking to withdraw funds both Potapenko and Turõgin resisted making payments, or paid off investors with crypto from the open market rather than crypto tokens that had been mined at HashFlare, according to the indictment.
The indictment charges both men with conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering. Their money laundering conspiracy allegedly involved at least 75 real properties, luxury vehicles, crypto wallets and mining machines, prosecutors said. If convicted both men face a potential maximum penalty of 20 years in prison.
Nick Brown, US attorney for the western district of Washington, where the case was brought, said the size and scope of the alleged scheme was “truly outstanding”, and added the defendants “capitalised on both the allure of cryptocurrency, and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme”.
The indictment was returned by a grand jury on October 27 and unsealed Monday.