Two Estonian Suspects Arrested for $575 Million Cryptocurrency Fraud and Money Laundering Allegations

Two Estonian citizens, Sergei Potapenko and Ivan Turõgin, aged 37, were arrested in Tallinn, Estonia, on October 27, 2021, on 18 counts of accusation for their alleged involvement in a securities fraud and money laundering scheme worth $575 million.

Background

The indictment was returned by a grand jury in the Western District of Washington and was unsealed recently. According to the court records, Potapenko and Turõgin are accused of defrauding hundreds of thousands of victims through a multifaceted scheme. The victims were lured into signing fraudulent contracts for renting informatics hardware for mining cryptocurrencies with HashFlare, a cloud mining service, and for investing in a non-existent bank called Polybius Bank. No dividends promised by Polybius were ever paid. Instead, the victims collectively invested over $575 million in Potapenko and Turõgin’s companies.

The pair then used ghost companies to launder the ill-gotten gains and bought luxury real estate and automobiles.

Statements from Law Enforcement Officials

Kenneth A. Polite, Jr., the Assistant Attorney General of the Criminal Division at the U.S. Department of Justice, commented on the advanced nature of such scams, saying:

Technology has made it easier for bad actors to take advantage of innocent victims – in the United States and abroad – with increasingly sophisticated fraud schemes. The department is committed to preventing further losses to the public from these schemes and will not allow these defendants, or others like them, to keep the proceeds of their crimes.

Nick Brown, the U.S. Attorney for the Western District of Washington, stated:

The sheer size and scope of this alleged scheme are truly impressive. These defendants capitalized on the interest in cryptocurrency, as well as the mystery and allure of mining cryptocurrencies, to create a massive Ponzi scheme. They lured investors by representing themselves falsely and paid earlier investors with funds from later investors. They hid their illicit gains in Estonian real estate, luxury cars, bank and virtual wallet accounts around the world. The Estonian and American authorities are working to seize and regulate these assets and strip the profitability from these offenses.

Luis Quesada, the Associate Deputy Director of the Criminal Investigative Division at the Federal Bureau of Investigation (FBI), noted:

The FBI is engaged in pursuing subjects across international borders who use increasingly complex schemes to defraud investors. Victims in the U.S. and abroad invested in virtual capital sales, believing they were investing in sophisticated mining digital currency enterprises, but in reality, it was just a scam. Thousands of victims were affected in total. The FBI thanks our national and international partners for their assistance in bringing justice to the victims.

HashFlare Mining Contracts

According to the accusations, Potapenko and Turõgin advertised HashFlare as a major cryptocurrency mining operation. Mining cryptocurrencies involves using computers to generate coins like Bitcoin at a profit. Potapenko and Turõgin sold contracts with a subscription fee that supposedly granted clients a percentage of HashFlare’s mining capacity and the corresponding Bitcoin mined in exchange for the virtual currency produced by their portion of the machine. The HashFlare website allowed clients to monitor the supposed quantities of virtual currency generated through their mining activity. Clients from all corners of the world, including the West of Washington, signed mining contracts worth over $550 million between 2015 and 2019.

However, these contracts were fraudulent. HashFlare didn’t possess the required mining equipment. The mining output of HashFlare allegedly produced Bitcoin at a significantly lower rate than claimed – less than 1%. When clients requested to withdraw their mining profits, Potapenko and Turõgin either refused or paid using virtual currency purchased instead of the mined Bitcoin.

Polybius Bank

In May 2017, Potapenko and Turõgin proposed investments in a company called Polybius, which they claimed would form a specialized virtual bank. They promised dividends to investors based on Polybius’ profits. The duo collected at least $25 million in this scheme and transferred most of the funds to controlled bank accounts and virtual wallets. Polybius never materialized as a bank and didn’t pay any dividends.

Money Laundering Charges

The accusation also charges Potapenko and Turõgin with conspiring to launder the proceeds of their criminal activity through various ghost companies and contracts and false invoices/expenses. The alleged money laundering conspiracy targeted at least 75 real estate properties, six luxury cars, digital wallets, and over 7500 mining equipment units.

Potapenko and Turõgin are each charged with one count of conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to launder money. If convicted, they could each face a maximum sentence of 20 years in prison. A U.S. District Court judge would later determine any additional penalties based on U.S. sentencing guidelines and other relevant factors.

The FBI is leading the investigation.

The U.S. government thanks the Estonian Cyber Crime Police and Border Guard for their support in this case. The U.S. Department of Justice provided extensive assistance to the investigation.

This investigation and today’s arrests illustrate the significant coordination and cooperation between U.S. and Estonian law enforcement. Estonia was a key ally in stopping this crypto-enabled crime, and the U.S. thanks Estonia for its continued assistance and coordination.

Adrienne E. Rosen and Olivia Zhu from the Money Laundering and Asset Recovery Section of the Criminal Division, and Assistant U.S. Attorneys Seth Wilkinson and Jehiel I. Baer for the Western District of Washington, are prosecuting the case.

People who believe they might have been a victim in this case should visit www.fbi.gov/hashflare for more information.

An indictment is merely an accusation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in court.