Bitcoin Bust: 2 Face Conspiracy Charges

Tuesday, January 28, 2014 @ 06:01 PM gHale

Two men, one a Bitcoin exchanger and the other the chief executive of a Bitcoin exchange company, are now facing charges of engaging in a scheme to sell over $1 million in Bitcoins to users of “Silk Road,” federal officials said.

Police arrested Charlie Shrem, the chief executive and compliance officer of a Bitcoin exchange company, Sunday at John F. Kennedy International Airport in New York. Police arrested Robert Faiella (also known as “BTCKing”), an underground Bitcoin exchanger, Monday at his home in Cape Coral, FL.

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Shrem and Faiella face charges of conspiring to commit money laundering, and operating an unlicensed money transmitting business. Shrem also faces charges of willfully failing to file any suspicious activity report regarding Faiella’s illegal transactions through the company, in violation of the Bank Secrecy Act.

According to the indictment complaint unsealed in Manhattan federal court, from about December 2011 to October 2013, Faiella ran an underground Bitcoin exchange on the Silk Road website, which served as a sprawling and anonymous black market where illegal drugs were bought and sold regularly by the site’s users.

Operating under the username “BTCKing,” Faiella sold Bitcoins – the only form of payment accepted on Silk Road – to users seeking to buy drugs on the site, according to the U.S. Department of Justice. Upon receiving orders for Bitcoins from Silk Road users, he filled the orders through a company based in New York. The company enabled customers to exchange cash for Bitcoins anonymously without providing any personal identifying information, and it charged a fee for its service, according to the U.S. Department of Justice. Faiella obtained Bitcoins with the company’s assistance, and then sold the Bitcoins to Silk Road users at a markup.

Shrem is the chief executive of the company, and from August 2011 until July 2013, when the company ceased operating, he was also its compliance officer, in charge of ensuring the company’s compliance with federal and other anti-money laundering (“AML”) laws. Shrem is also the vice chairman the Bitcoin Foundation, which promotes the Bitcoin virtual currency system.

Shrem, who personally bought drugs on Silk Road, was fully aware Silk Road was a drug-trafficking website, and through his communications with Faiella, Shrem also knew Faiella was operating a Bitcoin exchange service for Silk Road users, according to the Department of Justice.

Shrem facilitated Faiella’s business with the company in order to maintain Faiella’s business as a lucrative source of company revenue. Shrem knowingly allowed Faiella to use the company’s services to buy Bitcoins for his Silk Road customers; personally processed Faiella’s orders; gave Faiella discounts on his high-volume transactions; failed to file a single suspicious activity report with the United States Treasury Department about Faiella’s illicit activity, as he was otherwise required to do in his role as the company’s compliance officer; and deliberately helped Faiella circumvent the company’s AML restrictions, even though it was Shrem’s job to enforce them and even though the Company had registered with the Treasury Department as a money services business, according to the Department of Justice.

Working together, Shrem and Faiella exchanged over $1 million in cash for Bitcoins for the benefit of Silk Road users, so the users could, in turn, make illegal purchases on Silk Road, according to the Department of Justice.

In late 2012, when the company stopped accepting cash payments, Faiella ceased doing business with the company and temporarily shut down his illegal Bitcoin exchange service on Silk Road. Faiella resumed operating on Silk Road in April 2013 without the company’s assistance, and continued to exchange tens of thousands of dollars a week in Bitcoins until law enforcement officials shut down the Silk Road website in October 2013.



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