In a joint operation, the Cybercrime Bureau of Estonia’s National Criminal Police and the American Federal Bureau of Investigation (FBI) arrested two Estonian citizens – Sergei Potapenko and Ivan Turygin – who are suspected of fraud and money laundering and having caused USD575 million in damages.
The suspects, arrested on 20 November, allegedly defrauded hundreds of thousands of victims through a multi-faceted scheme.
They induced victims to enter fraudulent equipment rental contracts with the defendants’ cryptocurrency mining service called HashFlare. They also caused victims to invest in a virtual currency bank called Polybius Bank. In reality, Polybius was never actually a bank, and never paid out the promised dividends.
The victims paid more than USD575 million to Potapenko and Turygin’s companies. Potapenko and Turygin then used shell companies to launder the fraud proceeds and to purchase real estate and luxury cars.
“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,” Nick Brown, the US Attorney for the Western District of Washington, said in a statement.
“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. US and Estonian authorities are working to seize and restrain these assets and take the profit out of these crimes,” Brown added.
According to the indictment, Potapenko and Turygin claimed that HashFlare was a massive cryptocurrency mining operation. Cryptocurrency mining is the process of using computers to generate cryptocurrency, such as Bitcoin, for profit. Potapenk and Turygin offered contracts which, for a fee, purported to allow customers 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 entered into more than USD550 million worth of HashFlare contracts between 2015 and 2019.
According to the indictment, these contracts were fraudulent. HashFlare allegedly did not have the virtual currency mining equipment it claimed to have. HashFlare’s equipment allegedly 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, Potapenko and Turygin were not able to pay the mined currency as promised. Instead, they 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 Turygin offered investments in a company called Polybius, which they promised would form a bank specialising in virtual currency. They promised to pay investors dividends from Polybius’s profits. The men raised at least USD25 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.
Money laundering conspiracy involved 75 properties
The indictment also charges Potapenko and Turygin with conspiring to launder their criminal proceeds by using shell companies and phony contracts and invoices. The money laundering conspiracy allegedly involved at least 75 real properties, six luxury vehicles, cryptocurrency wallets, and thousands of cryptocurrency mining machines.
Oskar Gross, Head of the Cybercrime Bureau of the Estonian Criminal Police said it had been a long and vast investigation. “The sheer volume of this investigation is described by the fact that this is one of the largest fraud cases we’ve ever had in Estonia. At this point, we have reached the phase in the investigation, where enough evidence has been collected to detain the suspects. This investigation is founded on close cooperation between the FBI and Estonian police and we have been able to coordinate our action from the very beginning of the investigation.”
The joint operation involved more than 100 police officers, including around 15 federal agents from the US.
The US agencies seek the arrest and extradition of the suspects to the USA. If convicted, Potapenko and Turygin each face a maximum penalty of 20 years in prison.