Estonian police have arrested two people suspected of involvement in a $575 million crypto fraud and money laundering conspiracy in Estonia’s capital, Tallinn, U.S. authorities said Monday.
The case was returned to the U.S. District Court in Seattle on 27 October and unsealed on Monday. Estonian citizens Sergey Potapenko and Ivan Turogin, both 37 years old, allegedly defrauded hundreds of thousands of victims between December 2013 and August 2019 through crypto Ponzi schemes.
Authorities said that the defendants used shell companies to launder the fraudulent proceeds and buy six luxury cars, 75 real estate, cryptocurrency wallets, and thousands of cryptocurrency mining machines.
Potapenk and Turogin led people to invest in a fake virtual bank called Polybius and a cryptocurrency mining service called HashFlare, the US Department of Justice (DoJ) said. They duped investors into thinking that HashFlare was a vast crypto-mining operation. Victims were asked to pay rent for computing power and receive a proportional share of mined cryptocurrencies.
Allegedly, HashFlare’s equipment has less than 1% of the computing power it claims to be capable of mining bitcoins. When investors demanded the return of mining revenues, the defendants resisted payment or, in some cases, compensated investors using virtual currency purchased on the open market and didn’t return mined currency.
HashFlare went out of business in 2019, but starting in May 2017, the duo began investing in a company called Polybius, which they said would build a bank specializing in virtual currencies. It is alleged that the defendants collected $25m in this way, but no bank was ever established.
According to charging documents, they operated with four unnamed co-conspirators residing in Belarus, Estonia, and Switzerland. Potapenko and Turogin are charged with conspiracy to commit wire fraud, one count of money laundering, and 16 counts of wire fraud. Both can be sentenced to more than 20 years in prison.
Nick Brown, Seattle U.S. Attorney, said in a news release:
“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.” He added, “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.”
Estonian police conducted the case investigation in cooperation with the FBI. Both were arrested in Tallinn on November 20, and U.S. authorities want the pair extradited for crypto fraud.