TL;DR
- Paxful co-founder Artur Schaback pleads guilty to failing to implement effective AML and KYC programs.
- Schaback faces up to five years in prison and a $5 million fine.
- Lack of regulatory compliance enabled illegal activities.
Artur Schaback, co-founder and former CTO of cryptocurrency exchange Paxful, has reached a plea deal with US prosecutors that could see him spend up to five years in prison.
This settlement stems from their admission of failing to implement essential Anti-Money Laundering (AML) and Know Your Customer (KYC) programs at Paxful, which allowed the platform to become a conduit for various illegal activities including money laundering, sanctions violations, fraud, romance scams, extortion schemes, and prostitution.
The U.S. Department of Justice announced on July 8, 2024 that Schaback pleaded guilty to conspiring to fail to implement an effective AML program at Paxful.
As part of his plea agreement, Schaback agreed to pay a $5 million fine, to be paid in three installments: $1 million upon his guilty plea, $3 million prior to his sentencing on Nov. 4, 2024, and the final $1 million within two years.
In addition to the financial penalty, Schaback will also resign from the company board of directors.
From July 2015 through June 2019, Schaback and a co-conspirator, identified as Paxful’s “President and CEO,” failed to establish AML and KYC programs within 90 days of starting business, as required by the Bank Secrecy Act.
This allowed users to open accounts and trade on Paxful without providing the necessary identifying information, making the platform susceptible to criminal activities.
Prosecutors said Schaback and his co-conspirator submitted plagiarized AML policies from other institutions when requested, knowing that these policies were not implemented or enforced.
Paxful ‘s lack of compliance did not go unnoticed.
Undercover law enforcement officers were able to conduct transactions on the platform without going through KYC verification, demonstrating serious deficiencies in the company’s security and regulations.
Schaback and his accomplice also made exceptions to AML and KYC policies based on trading volumes and personal relationships with certain clients, further exacerbating risks and regulatory violations.
Internal disputes and leadership changes at Paxful
Schaback‘s legal troubles were compounded by internal disputes at Paxful.
In March 2023, Schaback sued its co-founder, Mohamad (Ray) Youssef, for control of the exchange, accusing him of misappropriation of funds, money laundering, and sanctions evasion.
This internal dispute led to the appointment of Srinivas Raju, director of the law firm Richards, Layton, and Finger, as custodian of the exchange.
Additionally, in May 2023, the company appointed Roshan Dharia as interim CEO to guide the company through this turbulent period.
These leadership changes reflect Paxful’s efforts to overcome legal and regulatory challenges and restore trust in the platform.
The Schaback and Paxful case highlights the critical importance of implementing robust AML and KYC programs in the cryptocurrency industry.
The lack of such programs not only exposes companies to significant legal risks, but also undermines the integrity of the financial system at large.
The Paxful situation serves as a warning to other players in the cryptocurrency space about the serious consequences of regulatory non-compliance, both at the individual and corporate level.
As Schaback awaits sentencing, Paxful’s future remains uncertain, and the company will need to work to rebuild its reputation and strictly adhere to regulations to avoid future controversies and secure its place in the cryptocurrency market.
