Two Estonian Crypto Fraudsters Earned $575 Million in Ponzi Scheme
The U.S. Department of Justice has announced the arrest of two Estonian nationals who convinced hundreds of thousands of people to invest in the cloud mining service HashFlare and a fake virtual currency bank called Polybius. In reality, the fraudsters had no bank, and their mining capacity was less than 1% of what they claimed.
According to court documents, Sergei Potapenko and Ivan Turõgin were arrested in Tallinn and are currently awaiting extradition to the United States. Investigators say the fraudsters collected a total of $575 million from their victims and used shell companies to launder the money, purchase real estate, and buy luxury cars.
How the Scheme Worked
The indictment states that Potapenko and Turõgin claimed HashFlare was a large-scale cloud cryptocurrency mining service, supposedly allowing users to rent computing power from the company and keep a share of the mined cryptocurrency. Law enforcement explains that HashFlare did not actually have the mining equipment it claimed.
“HashFlare’s equipment mined Bitcoin at less than 1-3% of the computing power it supposedly had,” the Department of Justice reports. “When investors tried to withdraw their mining profits, the defendants could not pay them with the mined cryptocurrency as promised. Instead, the defendants either resisted making payments or paid investors using virtual currency purchased on the open market, not the currency that was supposedly mined.”
HashFlare operated from 2015 to 2018 before shutting down, allegedly due to market instability and high equipment and electricity costs. Authorities say Potapenko and Turõgin actually built a classic financial pyramid, or Ponzi scheme, and took various measures to make it difficult for clients to withdraw their funds. For example, they required users to provide identity documents before withdrawing funds, supposedly as part of a Know-Your-Customer policy.
The Polybius Bank Scam
Potapenko and Turõgin are also accused of offering victims the chance to invest in the virtual currency bank Polybius. According to investigators, the fraudsters collected over $25 million from users this way, even though they never created a bank or planned to pay any dividends.
Money Laundering and Additional Charges
They are also accused of using shell companies and fake contracts to launder their proceeds, conspiring to launder money involving “at least 75 real estate properties, six luxury cars, cryptocurrency wallets, and thousands of cryptocurrency mining machines.”
The FBI has already set up a special page for victims to contact authorities.
In total, Potapenko and Turõgin face 17 charges, including wire fraud and conspiracy to commit money laundering. Each charge carries a potential sentence of up to 20 years in prison.