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Financial Crimes
07/26/2017

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Russian national and bitcoin exchange indicted in multi-billion dollar money laundering scheme

SAN FRANCISCO – A Russian national and a bitcoin exchange he allegedly ran have been indicted by a Bay Area federal grand jury on a battery of charges, including money laundering and operating an unlicensed money service business, following a multi-agency probe that included U.S. Immigration and Customs Enforcement’s (ICE) Homeland Security Investigations (HSI).

Alexander Vinnik, 37, served as the owner and operator of a business known as BTC-e and was also the primary owner of BTC-e’s managing shell company, Canton Business Corporation. According to court documents, numerous withdrawals from BTC-e accounts went directly to Vinnik’s personal bank accounts. The indictment further alleges that proceeds from well-known hacks and thefts from bitcoin exchanges were funded through a BTC-e administrator account associated with Vinnik. He was arrested in Greece July 25.  

According to the indictment unsealed Wednesday, BTC-e, founded in 2011, was one of the world’s largest and most widely used digital currency exchanges. The indictment alleges that BTC-e allowed its users to trade in the digital currency “bitcoin” with high levels of anonymity. The indictment alleges that although bitcoin has legitimate uses, the virtual currency, like cash, can be used to facilitate illicit transactions and to launder criminal proceeds. According to the indictment, since its inception, Vinnik and others developed a customer base for BTC-e that was highly attractive to criminals because it did not require users to validate their identity, allowing them to obscure and anonymize transactions and the source of funds.

The indictment alleges BTC-e was operated to facilitate transactions for cybercriminals worldwide and received the criminal proceeds derived from computer intrusions and hacking incidents, ransomware scams, identity theft schemes, corrupt public officials, and narcotics distribution rings. Accordingly, the indictment alleges BTC-e was used to facilitate a variety of crimes, including computer hacking, fraud, identity theft, tax refund fraud schemes, public corruption, and drug trafficking. The investigation has revealed that BTC-e received more than $4 billion worth of bitcoin over the course of its operation.

“As this case demonstrates, the Department of Justice’s Criminal Division employs a multi-faceted approach to dismantling criminal enterprises, by prosecuting the criminal actors themselves, and by shutting down their ability to monetize their crimes through entities that facilitate money laundering,” said Acting Assistant Attorney General Blanco. “The Criminal Division will work tirelessly to identify those who use technology to conduct and obscure their criminal activity, as we ensure there are no safe havens from U.S. justice for those who seek to victimize Americans.”

The indictment alleges Vinnik received funds from the infamous computer intrusion or “hack” of Mt. Gox – an earlier digital currency exchange that eventually failed, in part due to losses attributable to hacking. Vinnik is accused of obtaining funds from that hack and laundering them  through various online exchanges, including his own BTC-e and a now defunct digital currency exchange, Tradehill, based in San Francisco. The indictment alleges that by moving funds through BTC-e, Vinnik sought to conceal his connection with the proceeds from the hacking of Mt. Gox and the resulting investigation.

“HSI is strongly committed to tracking down criminals who seek to strike at the foundations of global financial security through complex money laundering schemes,” said HSI Acting Executive Associate Director Derek Benner. “The resulting indictment is a clear representation of why our close law enforcement partnerships are vital to our shared missions. HSI will continue to aggressively target those who deliberately seek to exploit financial systems for personal gain.”

With regard to BTC-e, the indictment alleges that, despite doing substantial business in the U.S., BTC-e was not registered as a money services business with the U.S. Department of the Treasury, had no anti-money laundering program as required by federal law. According to the company’s website, BTC-e is located in Bulgaria but is organized or otherwise subject to the laws of Cyprus. The exchange allegedly maintains a base of operations in the Seychelles Islands and its web domains are registered to shell companies in Singapore, the British Virgin Islands, France, and New Zealand. 

“Cryptocurrencies such as bitcoin provide people around the world new and innovative ways of engaging in legitimate commerce. As this case demonstrates, however, just as new computer technologies continue to change the way we engage each other and experience the world, so too will criminals subvert these new technologies to serve their own nefarious purposes,” said U.S. Attorney Brian Stretch. “This office will continue to devote the necessary resources to ensure that money launderers and cyber-criminals are detected, apprehended, and brought to justice wherever and however they use the internet to commit their crimes.”

“The arrest of Alexander Vinnik is the result of a multi-national effort and clearly displays the benefits of global cooperation among US and international law enforcement,” said Amy Hess, FBI special agent in charge of the Louisville Division. “This investigation demonstrates the long-term commitment given to identifying and pursuing criminals worldwide with a whole of government approach. This was a highly complex investigation that has only reached this stage due to the persistent and dedicated efforts of all the parties involved.  We must continue to impose real costs on criminals, no matter who they are or where they attempt to hide.”

BTC-e and Vinnik are charged with one count of operating an unlicensed money service business, and one count of conspiracy to commit money laundering. In addition, the indictment charges Vinnik with 17 counts of money laundering and two counts of engaging in unlawful monetary transactions.

“Mr. Vinnik is alleged to have committed and facilitated a wide range of crimes that go far beyond the lack of regulation of the bitcoin exchange he operated. Through his actions, it is alleged that he stole identities, facilitated drug trafficking, and helped to launder criminal proceeds from syndicates around the world,” said Chief Don Fort, IRS Criminal Investigation. “Exchanges like this are not only illegal, but they are a breeding ground for stolen identity refund fraud schemes and other types of tax fraud. When there is no regulation and criminals are left unchecked, this scenario is all too common. The takedown of this large virtual currency exchange should send a strong message to cyber-criminals and other unregulated exchanges across the globe.”

FinCEN assessed a $110 million civil monetary penalty against BTC-e for willfully violating U.S. anti-money laundering (AML) laws. Alexander Vinnik was assessed a $12 million penalty for his role in the scheme.

“We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate U.S. AML laws,” said Acting FinCEN Director Jamal El-Hindi. “Today’s action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency. Treasury’s FinCEN team and our law enforcement partners will work with foreign counterparts across the globe to appropriately oversee virtual currency exchangers and administrators who attempt to subvert U.S. law and avoid complying with U.S. AML safeguards.”  

“BTC-e was noted for its role in numerous ransomware and other cyber-criminal activity; its take-down is a significant accomplishment, and should serve as a reminder of our global reach in combating transnational cybercrime,” said Special Agent in Charge of the USSS Criminal Investigative Division Michael D’Ambrosio. “We are grateful for the efforts of our law enforcement partners in achieving this significant result.”

 “The Federal Deposit Insurance Corporation Office of Inspector General works to ensure the integrity of the financial service sector and is committed to holding accountable those involved in criminal activity that undermine its integrity,” said Inspector General Jay N. Lerner.  “This investigation demonstrates what can be achieved among the cooperative partnerships in the domestic and international law enforcement community.”

In addition to HSI, other agencies involved in the investigation include the Internal Revenue Service; the FBI; the U.S. Secret Service (USSS) Criminal Investigative Division; the Federal Deposit Insurance Corporation (FDIC); and the Office of the Inspector General. The case is being prosecuted by the U.S. Attorney’s Office for the Northern District of California and the Department of Justice Criminal Division’s Computer Crime and Intellectual Property Section. The Criminal Division’s Office of International Affairs provided substantial assistance on the case.

An indictment merely alleges that crimes have been committed. The defendants are presumed innocent until proven guilty beyond a reasonable doubt. 

To report suspicious activity, call ICE’s 24-hour, toll-free hotline at: 1-866-DHS-2-ICE or visit www.ice.gov/tips

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Last Reviewed/Updated: 08/02/2017