According to a court document filed on July 25 in the Northern District of California, BTC-e and its executive Alexander Vinnik have been indicted for the alleged crimes of conspiracy, money laundering, unlawful monetary transactions, and operating an unlicensed exchange. The now-defunct exchange and Vinnik face civil penalties of $88.6 million and $12 million, plus interest and costs, respectively, amounts initially determined by the Financial Crimes Enforcement Network (FinCEN) in July 2017.
In all, Vinnik has been indicted for 17 counts of money laundering and two counts of engaging in unlawful monetary transactions. While BTC-e and Vinnik were also charged with one count of operating an unlawful money services business and one count of conspiracy to commit money laundering.
Brought on behalf of the U.S. Department of the Treasury, the action paints a story of a firm’s blatant disregard for the law. The government alleges BTC-e and Vinnik were more than willing to launder and hold funds for some of the most nefarious organizations involved in the cryptocurrency industry, so long as its owners profited.
This includes funds received from the computer ‘hack’ that brought down prominent exchange Mt. Gox.
Unlike many legitimate crypto exchanges, the Cyprus and Seychelles-based BTC-e billed itself as an anonymous way to buy, sell, and transact in bitcoin and other digital currencies. Anyone, anywhere was allowed to operate on its platform without “even the most basic identifying information.”
Attorneys David Anderson, Sara Winslow, and Kirsten Ault allege this willfully substandard record keeping “contributed to its customers’ willingness to accept BTC-e’s unfavorable exchange rates compared to other legitimate” exchanges.
Over its 6 year history, BTC-e served approximately 700,000 users who traded over $296 million over more than 21,000 bitcoin transactions, not to mention the other coins. While not all of BTC-e’s clients were criminals, the investigators write:
“A significant portion of BTC-e’s business was derived from suspected criminal activity.”
Indeed, the firm’s lax approach to collecting user information, hosting of unmonitored open forums where users discussed ways to purchase illicit goods, and refusal to implicate the known criminals on its platform had attracted some of the industry’s worst players, and eventually the government’s attention.
Cultivated crime
The firm allegedly cultivated its identity as a safe-haven for the criminal element.
In its chatroom, people “under monikers suggestive of criminality, including user names such as ‘ISIS,’ ‘CocaineCowboys,’ ‘blackhathackers,’ ‘dzkillerhacker,’ and ‘hacker4hire,’” would publicly discuss buying or accessing illicit materials on the dark-web.
Furthermore, the attorneys allege:
“On some occasions, customers contacted BTCe’s administration directly with questions regarding how to process and access proceeds obtained from the sale of illegal drugs and from transactions on known “darknet” illegal markets, including Silk Road.”
At no point did BTC-e ring the alarm, and money kept flowing in.
The attorneys singled out the business relationship forged between BTC-e and Costa Rica-based Liberty Reserve. Allegedly, the firms shared customers and even had a program were “BTC-e code” was redeemable for Liberty’s digital currency.
After Liberty Reserve was shuttered for laundering $6 billion in illicit funds – in an action where U.S. authorities seized the firm’s website and arrested its six principal operators – BTC-e failed to disclose the alliance and smuggled fund’s concealed on its platform.
That case was not an outlier. According to the attorneys, another unregistered and now-shuttered crypto exchange, Coin.MX, performed nearly 1,000 transactions on BTC-e’s platform. Coin.MX, too, was closed on money laundering and conspiracy charges following a Federal investigation. Yet, again, BTC-e failed to disclose this relationship in a Suspicious Activity Report mandated under the Bank Secrecy Act.
While all possible criminal connections cannot be listed here, according to the attorneys the firm harbored funds earned by malicious botnets, scams, and computer hijackings. They took money from identity thieves, and public officials who embezzled funds. And yet, “despite the rampant evidence of illegal activity on its platform, BTC-e did not file a single SAR.”
SAR silence
Instead of speaking out, BTC-e allegedly concealed this sort of illicit activity by instructing their clients to wire money to “front” companies, nominally distinct from the exchange. Furthermore, it is said, BTC-e never recorded or asked for identifying information when receiving wires.
BTC-e would further obscure and anonymize the funds by processing transactions through a layer of temporary addresses called a bitcoin “mixer,” a way to protect both sides of the deal.
What ultimately brought the firm down was its failure to register as a money transmitter.
In May 2016, a grand jury in California’s Northern District “returned a two-count indictment charging BTC-e and Vinnik with operation of an Unlicensed Money Services Business.”
Six months later, a grand jury pushed forward a twenty-one count superseding indictment against Vinnik and his firm. They alleged at no point had anti-money laundering policies set in place, “let alone an effective program for detecting and preventing suspicious transactions.”
Among the suspicious transactions were those from operator Vinnik, who allegedly skimmed money from clients and used the platform as a personal bank.
While Vinnik has denied the charges against him, even denying he was an executive of the firm, the attorney’s office is attempting to prove he “operated several administrative, financial, operational, and support accounts at BTC-e.”
Vinnik, a Russian national arrested while vacationing in Greece in July 2017, has previously asked for extradition to Russia. He faces a maximum 55 years in prison.
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US vs BTC-e/Vinnik by CoinDesk on Scribd