Three Men Indicted On District’s First Bitcoin-Related Case
CONTACT: Barbara Burns
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BUFFALO, N.Y.-U.S. Attorney William J. Hochul Jr. announced today that a federal grand jury has returned an indictment charging Richard Petix, 30, of Rochester, NY, with operating an unlicensed money transmitting business and making material false statements, and a separate indictment charging Zhe Wang, 20, and Kevin Szura, 20, both of Queens, NY, with conspiracy to distribute controlled substances, money laundering conspiracy, money laundering, and conducting a monetary transaction in criminally derived property. Petix faces five years in prison on each of his charges. Wang and Szura face up to 20 years in prison.
“This case demonstrates the ever-growing ways in which the virtual world is intersecting with, and being exploited by, real life crime and criminals,” said U.S. Attorney Hochul. “Those involved in such illicit activities should know that law enforcement is prepared to track them into the deep and dark portions of the web in order to bring criminals to justice.”
"Dismantling the fraudulent financial operations of transnational criminal organizations is critical because these groups can succeed only so long as they can funnel their illicit proceeds freely and without detection,” said J. Michael Kennedy, Acting Special Agent in Charge of Homeland Security Investigations. "HSI will continue to aggressively target illegally functioning new alternatives to traditional financial institutions that deliberately enable businesses and individuals to further their criminal schemes."
Assistant U.S. Attorney Wei Xiang, who is handling the cases, stated that according to the indictment against Petix and a previously filed criminal complaint, the defendant lied to federal probation officers and law enforcement agents about his ownership and use of a laptop computer and a smartphone. Petix is on supervised release for a 2009 federal child pornography conviction and must notify probation of any computers he uses. The defendant must also allow law enforcement to examine any computer if suspicious activity is suspected. On October 20, 2015, Petix told his probation officer that he did not use any computers or the Internet.
However, on December 3, 2015, Petix conducted a bitcoin sale with an undercover federal agent. Using his laptop computer and smartphone, the defendant transferred 37 bitcoins worth approximately $13,000 to the agent. But when confronted by federal probation officers at the scene, Petix claimed that the laptop and smartphone were not his. Between August 2014 and December 3, 2015, Petix is accused of unlawfully operating a bitcoin-exchange business that sold approximately $200,000 in bitcoins.
According to the indictment of Wang and Szura and a previously filed criminal complaint, between March 2015 and March 7, 2016, the defendants did and conspired to purchase and attempt to purchase approximately $74,000 in bitcoins. Wang and Szura used proceeds of drug sales to buy the bitcoins, and then used the bitcoins to buy bulk quantities of drugs off the dark web for further distribution. Wang and Szura mainly dealt with Xanax bars, which contain the controlled substance alprazolam, that they allegedly imported from Canada, but also conspired to distribute mollies (MDMA).
According to the complaint, in October 2015, defendant Wang was one of four individuals arrested by the Erie County Sheriff’s Office on state controlled substance charges. During the execution of a search warrant at 72 Winspear Avenue in Buffalo, officers seized approximately 2,500 bars of Xanax.
When Wang and Szura were arrested on March 7, 2016 by federal agents, they were attempting to purchase approximately $8,000 in bitcoins to buy more Xanax. The defendants had a total of over $30,000 in their possession. Defendant Szura had also brought some Xanax pills for an undercover agent to sample.
Bitcoin is a “virtual” currency, that is, a medium of exchange that operates like a currency in some primarily Internet-based environments, but does not have all the attributes of real currency, such as legal tender status. Bitcoin is a “convertible” virtual currency in that it has an equivalent value in real currency and acts as a substitute for real currency. This equivalent value is not determined by any authority or entity; rather, it floats on the open market, with its price subject to variations in global supply and demand. Between August 2014 and March 2016, the trading value of a bitcoin fluctuated between approximately $200 and $600 in United States dollars.
In order for a user to acquire bitcoins, they must be sent to the user’s Bitcoin address. This address is an alphanumeric string whose use is somewhat analogous to a bank account number. The user can then conduct transactions with other Bitcoin users, by transferring bitcoins to their Bitcoin addresses, via the Internet. Little to no personally identifiable information about the payer or payee is transmitted in a Bitcoin transaction. Only the Bitcoin addresses of the parties are needed for the transaction, which by themselves do not reveal any identifying information.
Bitcoin is not inherently illegal. However, its anonymity has popularized it as a payment form of choice in black markets for illegal goods and services. Virtual currencies such as Bitcoin have created a shadow banking system for criminals who use Internet-based black markets. Bitcoin has been a preferred method of payment for leading dark web markets such as Silk Road. In the same way that the Internet revolutionized consumer commerce (for lawful purposes), an anonymized global payment system on an anonymized global black market has paved the way for people to access with ease a world’s array of contraband with the click of a button, rather than having to find and go to a drug dealer on a street corner.
Defendant Petix will be arraigned before U.S. Magistrate Judge Hugh B. Scott on March 15, 2016 at 10:00 a.m. Defendants Wang and Szura were arraigned before U.S. Magistrate Judge Michael J. Roemer on March 10, 2016.
The indictments are the result of an investigation by Immigration and Customs Enforcement, Homeland Security Investigations, under the direction of Special Agent in Charge James C. Spero, and the United States Postal Inspection Service, under the direction of Inspector in Charge Shelly Binkowski.
The fact that a defendant has been charged with a crime is merely an accusation and the defendant is presumed innocent until and unless proven guilty.