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Former Ceo Of Bitcoin Exchange Company Sentenced In Manhattan Federal Court To Two Years In Prison For Helping To Sell Nearly $1 Million In Bitcoins For Drug Buys On Silk Road

Friday, December 19, 2014

Preet Bharara, the United States Attorney for the Southern District of New York, announced today that CHARLIE SHREM, the former Chief Executive Officer and Compliance Officer of BitInstant, a Bitcoin exchange company, and the former Vice Chairman of the Bitcoin Foundation, was sentenced today to two years in prison for his role in knowingly transmitting nearly $1 million in Bitcoins intended to facilitate drug trafficking on “Silk Road,” a black-market website designed to enable users to buy and sell illegal drugs anonymously and beyond the reach of law enforcement. SHREM pled guilty in September 2014 before U.S. District Judge Jed S. Rakoff, who also imposed today’s sentence.

Manhattan U.S. Attorney Preet Bharara said: “Charlie Shrem knowingly facilitated the purchase and use of Bitcoins by others to buy illegal drugs on the Silk Road site. He willfully abdicated his duties as compliance officer of BitInstant, putting illegal profit ahead of legal and ethical responsibility. Now Shrem has been made to answer for his crimes.”

According to the allegations contained in the Complaint, the Indictment, the Superseding Information, and statements made in other documents filed in Manhattan federal court and related court proceedings:

From about December 2011 to October 2013, SHREM’s co-defendant, Robert M. Faiella, ran an underground Bitcoin exchange on the Silk Road website, a website that served as a sprawling and anonymous black market bazaar where illegal drugs of virtually every variety were bought and sold regularly by the site’s users. Operating under the username “BTCKing,” Faiella sold Bitcoins – the only form of payment accepted on Silk Road – to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he filled the orders through BitInstant, a company based in New York, New York. BitInstant was designed to enable customers to exchange cash for Bitcoins anonymously, that is, without providing any personal identifying information, and charged a fee for its service. Faiella obtained Bitcoins with BitInstant’s assistance, and then sold the Bitcoins to Silk Road users at a markup.

SHREM was the Chief Executive Officer of BitInstant, and from about August 2011 until about July 2013, when BitInstant ceased operating, he was also its Compliance Officer, in charge of ensuring BitInstant’s compliance with federal and other anti-money laundering (“AML”) laws. SHREM was also the Vice Chairman of the Bitcoin Foundation, a foundation dedicated to promoting the Bitcoin virtual currency system.

SHREM, who allegedly bought drugs on Silk Road himself, was fully aware that Silk Road was a drug-trafficking website, and through his communications with Faiella, SHREM also knew that Faiella was operating a Bitcoin exchange service for Silk Road users. Nevertheless, SHREM knowingly facilitated Faiella’s business with BitInstant in order to maintain Faiella’s business as a lucrative source of revenue. SHREM knowingly allowed Faiella to use BitInstant’s services to buy Bitcoins for his Silk Road customers; personally processed Faiella’s orders; gave Faiella discounts on his high-volume transactions; failed to file a single suspicious activity report with the United States Treasury Department about Faiella’s illicit activity, as he was otherwise required to do in his role as BitInstant’s Compliance Officer; and deliberately helped Faiella circumvent BitInstant’s AML restrictions, even though it was SHREM’s job to enforce them and even though BitInstant had registered with the Treasury Department as a money services business.

Working together, SHREM and Faiella exchanged nearly $1 million in cash for Bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road.

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In imposing the sentence, Judge Rakoff remarked: "There's no question that Mr. Shrem, over a period of many months, was knowingly, willfully, and to some extent excitedly, even passionately involved in activity that he knew was a serious violation of the law and that was promoting the evil business of trafficking in drugs."

In addition to the prison sentence, SHREM, 24, of New York, New York, was sentenced to three years of supervised release and was ordered to forfeit $950,000, representing the amount of funds involved in the offense that were intended to promote illegal activity.

Mr. Bharara praised the outstanding investigative work of the DEA’s New York Organized Crime Drug Enforcement Strike Force, which is comprised of agents and officers of the U. S. Drug Enforcement Administration, the New York City Police Department, Immigration and Customs Enforcement - Homeland Security Investigations, the New York State Police, the U. S. Internal Revenue Service Criminal Investigation Division, the Federal Bureau of Investigation, the Bureau of Alcohol, Tobacco, Firearms and Explosives, U.S. Secret Service, the U.S. Marshal Service, New York National Guard, Office of Foreign Assets Control and the New York Department of Taxation and Finance. Mr. Bharara also thanked the FBI’s New York Field Office.

The prosecution of this case is being handled by the Office’s Complex Frauds and Cybercrime Unit. Assistant United States Attorney Serrin Turner is in charge of the prosecution, and Assistant United States Attorney Andrew Adams of the Money Laundering and Asset Forfeiture Unit is in charge of the forfeiture aspects of the case.

SHREM’s co-defendant, Faiella, pled guilty in September 2014, along with SHREM, and is scheduled to be sentenced before Judge Rakoff on January 20, 2015.




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