Ex-Paxful co-founder pleads guilty to violating BSA/AML regulations

Artur Schaback, of Estonia, pled guilty to one count of conspiring “to willfully fail to establish, develop, implement, and maintain an effective [AML] program as required by the Bank Secrecy Act,” the Department of Justice announced Monday in a press release.

The details: From 2015-19, Schaback operated Paxful, a virtual currency platform and money transmitting business that allowed its customers to negotiate and trade virtual currency for items including fiat currency, prepaid cards, and gift cards.

Schaback marketed Paxful as a platform that did not have know your customer (KYC) requirements and presented plagiarized AML policies to third parties that he “knew were not, in fact, implemented or enforced,” the DOJ alleged.

“As a result of his failure to implement AML and KYC programs, Schaback made Paxful available as a vehicle for money laundering, sanctions violations, and other criminal activity, including fraud, romance scams, extortion schemes, and prostitution,” the DOJ said.

Schaback faces up to five years in prison and a fine of up to $250,000 at his sentencing hearing, scheduled for Nov. 4.

Compliance considerations: According to the DOJ’s complaint, filed in U.S. District Court for the Eastern District of California, Schaback and the company’s unnamed chief executive registered Paxful as a money-transmitting business (MSB) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in 2015. Being registered with FinCEN as an MSB meant that Paxful was a financial institution obligated to comply with the BSA.

Under the BSA, registered entities are required to:

• Develop an AML program with internal policies, procedures, and controls;
• Designate a compliance officer to oversee the program;
• Conduct ongoing employee training on their AML responsibilities; and
• Install an independent audit function to test the program’s effectiveness.

Prosecutors alleged Schaback failed to establish policies and procedures to monitor transactions for money laundering, terrorism funding, and other criminal activities; facilitated the transfer of funds to other institutions without conducting KYC processes; and failed to file a single SAR with FinCEN despite knowledge of suspicious and criminal activity occurring on its platform.

Schaback did not designate a BSA compliance officer for Paxful until November 2018 or conduct training for Paxful employees until June 2019, the complaint alleged. The company never established an audit function to test the AML program’s effectiveness, the complaint added.

Paxful allowed its registration to lapse from 2017-19, per the complaint, but has continued to operate since.

Company response: In a statement on its website, Paxful said that it is operated by a new management team and employees.

“… Over the last year, Paxful has made significant strides to improve compliance processes and procedures, including KYC, monitoring, reporting, and sanctions screening, to meet and exceed industry standards and regulatory expectations,” the statement read. “The company is committed to continuously enhancing these areas to ensure a secure and compliant trading environment for all its users.”