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Estonia’s Finance Industry Plagued by Cybercrime: DOJ Alleges $575 Million Scheme

A pair of Estonian men has been charged with running a massive cryptocurrency mining operation that defrauded investors out of $575 million, according to the US Department of Justice.

The Scam Unfolds

Sergei Potapenko and Ivan Turõgin, both 39, were arrested in Tallinn, Estonia, and face an 18-count indictment filed in the Western District of Washington. They allegedly claimed to offer virtual currency mining rights to customers for a fee, but instead used sham invoices, fabricated documents, and a crypto mining capacity of less than 1% of what they told customers.

The Money Trail

The money raised was spent on real estate properties in Estonia, luxury cars, and lavish gifts, authorities said. “This is truly astounding,” said US Attorney Nick Brown. “These defendants capitalized on the allure of cryptocurrency and the mystery surrounding cryptocurrency mining to commit an enormous Ponzi scheme.”

The Scheme’s Origins

The alleged scheme began in 2013 when Potapenko and Turõgin started a company called HashCoins in Estonia, marketing its mining equipment for Bitcoin and other digital assets. In reality, HashCoins didn’t manufacture the equipment but was buying, building, and reselling parts manufactured by other companies.

The Deception Continues

In 2015, HashCoins told some clients that their undelivered currency mining equipment would be operated remotely instead of giving actual machines to customers who paid for them. The duo then created a new company called HashFlare, which allowed customers to buy virtual currency mining capacity using credit cards, bank wires, and virtual currency transfers.

The Fraud Exposed

However, authorities allege that HashFlare’s mining activity was estimated to be less than 1% of the hashrate it sold to customers for Bitcoin mining and less than 3% of the hashrate sold for mining other coins. When investors tried to withdraw their supposed returns on the crypto-mining operations, they were either blocked from withdrawing or could only take out small amounts.

More Deception

The duo also created another company called Polybius, which raised $25 million in an initial coin offering from outside investors. The bulk of the funds were transferred to accounts controlled by Potapenko and Turõgin, who never built a digital bank and have never paid dividends to investors.

The Aftermath

The two were arrested in 2022 but weren’t extradited until April 2024 after they appealed the initial decision. Estonian authorities described the case as one of the largest fraud cases ever investigated in Estonia.

Ongoing Investigation

The FBI is also investigating the fraud and actively seeking victims in the probe. US and Estonian authorities are working to seize and restrain assets, including real estate properties, luxury cars, bank accounts, and virtual currency wallets around the world.