Former Paxful Co-Founder Pleads Guilty to BSA/AML Violations

Artur Schaback of Estonia pleaded guilty in the U.S. District Court for the Eastern District of California to one count of conspiring to “willfully fail to establish, develop, implement and maintain an effective (AML) program required by the Bank Secrecy Act,” the Justice Department said in a news release Monday.

Details:From 2015 to 2019, Schaback operated Paxful, a virtual currency platform and money transfer company that allowed customers to negotiate and exchange virtual currency for items such as fiat money, prepaid cards, and gift cards.

Schaback advertised Paxful as a platform that had no KYC (Know Your Customer) requirements and presented third parties with false AML policies that he plagiarized from other institutions that he “knew were not, in fact, implemented or enforced at Paxful,” the Justice Department alleges.

“As a result of his failure to implement AML and KYC programs, Schaback exposed Paxful as a vehicle for money laundering, sanctions violations, and other criminal activities, including fraud, marriage scams, extortion schemes, and prostitution,” the Justice Department said in a statement.

At a hearing scheduled for November 4, Schaback faces up to five years in prison and a fine of up to $250,000.

Compatibility Considerations:According to the DOJ complaint, Schaback and the company’s unnamed CEO registered Paxful as a money transmission business (MSB) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in 2015. Registering with FinCEN as an MSB meant that Paxful was a financial institution required to comply with the BSA.

Under the BSA Act, registered entities are obliged to:

Development of an AML program including internal policies, procedures and controls;

Appoint a compliance officer to oversee the program;

Providing ongoing training to employees on their anti-money laundering obligations;

Install an independent audit feature to test the effectiveness of the program.

Prosecutors alleged that Schaback failed to establish policies and procedures to monitor transactions for money laundering, terrorism financing and other criminal activities, facilitated the transfer of funds to other institutions without conducting KYC processes and failed to file a single SAR report with FinCEN despite knowing about suspicious and criminal activity occurring on his platform.

Schaback did not appoint a BSA compliance officer for Paxful until November 2018 or provide training to Paxful employees until June 2019, the complaint alleges. The company never established an audit function to test the effectiveness of its AML program, the complaint added.

According to the complaint, Paxful’s registration expired between 2017 and 2019, but the company has continued to operate since then.

The company did not immediately respond to a request for comment.