Two Estonian citizens arrested in $575 million cryptocurrency fraud and money laundering scheme
Sold fraudulent cryptocurrency mining contracts to hundreds of thousands of investors worldwide
Seattle – Two Estonian citizens were arrested in Tallinn, Estonia November 20, 2022, on an 18-count indictment charging conspiracy, wire fraud, and conspiracy to commit money laundering. The indictment was returned by a grand jury sitting in the Western District of Washington on October 27 and unsealed today following the arrests.
According to the indictment, Sergei Potapenko and Ivan Turõgin, both 37, are alleged to have induced hundreds of thousands of victims to purchase contracts in a cryptocurrency mining service called HashFlare and to invest in a virtual currency bank called Polybius Bank. Victims paid more than $575 million to the defendants’ companies. The defendants then used shell companies to launder the fraud proceeds and to purchase real estate and luxury cars.
“New technology has made it easier for bad actors to take advantage of innocent victims—both in the U.S. and abroad—in increasingly complex scams,” said Assistant Attorney General Kenneth A. Polite, Jr. of the Justice Department’s Criminal Division. “The department is committed to preventing the public from losing more of their hard-earned money to these scams and will not allow these defendants, or others like them, to keep the fruits of their crimes.”
“The size and scope of the alleged scheme is truly astounding. These defendants capitalized on both the allure of cryptocurrency, and the mystery surrounding cryptocurrency mining, to commit an enormous Ponzi scheme,” said U.S. Attorney Nick Brown of the Western District of Washington. “They lured investors with false representations and then paid early investors off with money from those who invested later. They tried to hide their ill-gotten gain in Estonian properties, luxury cars, and bank accounts and virtual currency wallets around the world. U.S. and Estonian authorities are working to seize and restrain these assets and take the profit out of these crimes.”
“Mr. Potapenko and Mr. Turõgin are charged with defrauding investors out of more than half a billion dollars” said Richard A. Collodi, Special Agent in Charge of the FBI’s Seattle field office. “Ultimately, their elaborate Ponzi scheme fell apart and they conspired to conceal and launder the money which they took from the victims of their scheme. Thanks to our partnership with the Estonian authorities, the two defendants will answer for the massive fraud they are accused of perpetrating.”
According to the indictment, Potapenko and Turõgin claimed that their business, HashFlare, operated a massive cryptocurrency mining operation. Cryptocurrency mining is the process of using computers to generate cryptocurrency, such as Bitcoin, for profit. The defendants offered contracts under which customers could pay a fee to rent a percentage of HashFlare’s mining operations in exchange for the virtual currency produced by their portion of the operation. HashFlare’s website enabled customers to see the amount of virtual currency their mining activity had supposedly generated. Customers from around the world, including from western Washington, bought more than $550 million worth of HashFlare contracts between 2015 and 2019.
HashFlare allegedly did not have the virtual currency mining equipment it claimed to have. In fact, according to the indictment, HashFlare’s equipment performed Bitcoin mining at a rate of less than one percent of the computing power it purported to have. When investors asked to withdraw their mining proceeds, the defendants were not able to pay with the mined currency as promised. Instead, the defendants either resisted making the payments, or paid off the investors using virtual currency the defendants had purchased on the open market—not currency they had mined. HashFlare closed its operations in 2019.
In May 2017, Potapenko and Turõgin offered investments in a company called Polybius, which they said would form a bank specializing in virtual currency. The defendants promised to pay investors dividends from Polybius’ profits. The men raised at least $25 million in this scheme and transferred most of the money to other bank accounts and virtual currency wallets they controlled. Polybius never formed a bank or paid any dividends.
The indictment also charges the defendants with conspiring to launder their criminal proceeds by using shell companies and phony contracts and invoices. The indictment alleges that the money laundering conspiracy involved at least 75 real properties, six luxury vehicles, cryptocurrency wallets, and thousands of cryptocurrency mining machines.
Both defendants appeared in court in Tallin, and are being held pending extradition to the U.S.
The men are charged with conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering. Each of these crimes is punishable by up to 20 years in prison.
The charges contained in the indictment are only allegations. A person is presumed innocent unless and until he or she is proven guilty beyond a reasonable doubt in a court of law.
The FBI is investigating the case.
The United States thanks the Cybercrime Bureau of the National Criminal Police of the Estonian Police and Border Guard for its support with this investigation. The U.S. Department of Justice’s Office of International Affairs (OIA) provided extensive assistance to the investigation.
This investigation and arrests demonstrate the great coordination and cooperation between U.S. and Estonian law enforcement. Estonia has been a crucial ally to disrupt this cyber-enabled crime, and the United States thanks the Estonians for their continued assistance and coordination.
Assistant United States Attorneys Seth Wilkinson and Jehiel I. Baer of the Western District of Washington, and Trial Attorneys Adrienne E. Rosen and Olivia Zhu of DOJ’s Money Laundering and Asset Recovery Section are prosecuting the case.
Individuals who believe they may have been a victim in this case should visit www.fbi.gov/hashflare for more information.