2 Estonian citizens arrested in USD 575 mln cryptocurrency fraud, money laundering scheme

  • 2022-11-21
  • BNS/TBT Staff

TALLINN - The Estonian police and the US Federal Bureau of Investigation apprehended on Sunday two Estonian citizens in Tallinn on an 18-count indictment for their alleged involvement in a 575-million-dollar cryptocurrency fraud and money laundering conspiracy.

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

According to court documents, Sergei Potapenko and Ivan Turogin, 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 called HashFlare.

They also caused victims to invest in a virtual currency bank called Polybius Bank. In reality, Polybius was never actually a bank, and never paid out the promised dividends. Victims paid more than 575 million US dollars to Potapenko and Turogin's companies. Potapenko and Turogin then used shell companies to launder the fraud proceeds and to purchase real estate and luxury cars.

"New technology has made it easier for bad actors to take advantage of innocent victims -- both in the United States and abroad -- in increasingly complex scams," said Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department's Criminal Division. "The department is committed to preventing the public from losing more of their hard-earned money to these scams and will not allow these defendants, or others like them, to keep the fruits of their crimes."

"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 US Attorney Nick Brown for the Western District of Washington. "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. US and Estonian authorities are working to seize and restrain these assets and take the profit out of these crimes."

"The FBI is committed to pursuing subjects across international boundaries who are utilizing increasingly complex schemes to defraud investors," said Assistant Director Luis Quesada of the FBI's Criminal Investigative Division. "Victims in the US and abroad invested into what they believed were sophisticated virtual asset ventures, but it was all part of a fraudulent scheme and thousands of victims were harmed as a result. The FBI thanks our national and international partners for their efforts throughout the investigation to help bring justice for the victims."

According to the indictment, Potapenko and Turogin claimed that HashFlare was a massive cryptocurrency mining operation. Cryptocurrency mining is the process of using computers to generate cryptocurrency, such as Bitcoin, for profit. Potapenk and Turogin offered contracts which, 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. HashFlare's website enabled customers to see the amount of virtual currency their mining activity had supposedly generated. Customers from around the world, including western Washington, entered into more than 550 million dollars' 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 Turogin were not able to 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 Turogin 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' profits. The men raised at least 25 million dollars 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 Turogin with conspiring to launder their criminal proceeds by using shell companies and 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 Turogin are both charged with conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering. If convicted, Potapenko and Turogin each face a maximum penalty of 20 years in prison. A federal district court judge will determine any sentence after considering the US Sentencing Guidelines and other statutory factors.

The United States thanks the Cybercrime Bureau of the Central Criminal Police of the Estonian Police and Border Guard for its support with this investigation. The US Department of Justice's Office of International Affairs provided extensive assistance to the investigation.

This investigation and Sunday's arrests demonstrate the great coordination and cooperation between US and Estonian law enforcement agencies. Estonia has been a crucial ally to disrupt this cyber-enabled crime, and the United States thanks the Estonians for their continued assistance and coordination.

Head of the Cybercrime Bureau of the Estonian Central Criminal Police Oskar Gross said that the investigation conducted in cooperation between the two states has been long and sizeable.

"The scope of this investigation is illustrated by this being a fraud investigation with one of the biggest damages in Estonia. Enough evidence has now been collected to apprehend the suspects. International cooperation has had a very important role in this investigation -- we've been engaged in cooperation with our US colleagues from the very beginning," he said.

Gross noted that the attention of the police is aimed at cryptocurrencies, for example, at the start of October, the Central Criminal Police apprehended suspects in investment fraud linked to the Dagcoin virtual currency.

"Cryptocurrency investigations are complicated and take a long time but law enforcement agencies are doing everything they can to solve these crimes. There are many legal ways for engaging in entrepreneurship with cryptocurrencies and fraud had no place in it," he added.

State prosecutor Vahur Verte said that crime must not pay off and that law enforcement agencies are working to ensure that victims of crime get their assets back as a result of proceedings.

"Technological opportunities have broadened the way fraudsters are able to fulfill their criminal goals, which is why thorough groundwork must be done before trusting anybody with one's assets because there may be people with similar experiences all over the world. Estonia is an internationally valued cooperation partner and we engage in close cooperation with the authorities of many states; however, safeguarding one's assets is easier than getting them back through criminal proceedings and court procedures," Verte said.

In Estonia, the arrests and searches were conducted in the course of the criminal proceedings that are underway in the United States. Over 100 police officers were involved in the operation, including close to 15 US federal agents.

The US authorities are seeking for the two suspects to be placed into custody for the duration of preliminary investigation and their extradition to the United States.

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

Individuals who believe they may have been a victim in this case should visit www.fbi.gov/hashflare for more information.