On 8 July, 2024, Artur Schaback, co-founder and former chief technology officer of Paxful Inc., pleaded guilty to conspiracy to operate a crypto exchange platform without effective anti-money laundering (AML) policies. Schaback, 36, from Tallinn, Estonia, admitted to the charges in a California federal court and faces up to five years in prison. His sentencing is set for November 4, 2024.
According to the U.S. Department of Justice (DOJ), Schaback managed Paxful between July 2015 and June 2019, during which he allowed customers to open accounts and trade on Paxful without proper identification checks. He marketed the platform as not requiring Know Your Customer (KYC) protocols, presented fake AML policies, and ignored suspicious activities by users. This lax oversight turned Paxful into a haven for money laundering, sanctions violations, and other criminal activities, including fraud, romance scams, extortion, and prostitution.
Schaback’s plea acknowledges his conspiracy to willfully avoid establishing, developing, implementing, and maintaining an effective AML program as mandated under the Bank Secrecy Act. He will also resign from Paxful Inc.’s Board of Directors.
The case against Schaback has been a focal point for the DOJ, highlighting the department’s rigorous approach to combating financial crimes in the cryptocurrency sector. The investigation, led by Homeland Security Investigations (HSI) and IRS Criminal Investigation (IRS-CI), has been part of an Organized Crime Drug Enforcement Task Forces (OCDETF) initiative. This multi-agency approach aims to dismantle high-level drug traffickers, money launderers, gangs, and transnational criminal organizations.
Principal Deputy Assistant Attorney General Nicole M. Argentieri, U.S. Attorney Phillip A. Talbert for the Eastern District of California, Special Agent in Charge Tatum King of HSI San Francisco, and Acting Special Agent in Charge Michael Mosley of IRS-CI Oakland Field Office jointly announced Schaback’s guilty plea. The prosecution team includes Bank Integrity Unit Deputy Chief and National Cryptocurrency Enforcement Team Deputy Director Kevin Mosley, Trial Attorneys Emily Cohen, Victor Salgado, and Caylee Campbell of the DOJ’s Money Laundering and Asset Recovery Section (MLARS), and Assistant U.S. Attorney Matthew Thuesen for the Eastern District of California.
This case is pivotal for the future of the cryptocurrency sphere, underscoring the need for robust AML and KYC measures to prevent misuse of digital asset platforms. Schaback’s failure to maintain these safeguards allowed Paxful to become a conduit for illegal activities, highlighting vulnerabilities in the current regulatory landscape.
The DOJ’s efficiency in identifying and prosecuting such malicious activities sets a precedent for stricter enforcement and regulatory oversight in the crypto industry. This ensures that platforms adhering to legal standards can foster a safer and more transparent digital financial ecosystem.
Paxful’s operational challenges have been compounded by legal battles and internal disputes. In April 2023, the platform suspended operations due to uncertainties about key staff departures and safety concerns regarding customer funds, raised by CEO Ray Youssef following a lawsuit from Schaback. Despite these issues, Paxful resumed operations a month later. Youssef has since collaborated with Jack Dorsey’s crypto firm TBD to launch Civilization Kit (Civ Kit), a decentralized peer-to-peer trading platform, and leads Noones, a financial communication app.
As the crypto industry evolves, the lessons from Paxful’s regulatory failures and the DOJ’s actions against Schaback will likely influence future compliance standards and enforcement practices, shaping a more secure and accountable financial landscape.
