On November 20, 2022, two Estonian citizens were arrested in Tallinn, Estonia on the basis of an indictment returned by a grand jury in the Western District of Washington. The indictment against Sergei Potapenko and Ivan Turõgin contains 18 criminal counts including: conspiracy, wire fraud, and conspiracy to commit money laundering. The two are alleged to have defrauded hundreds of thousands of would-be investors in a virtual currency bank as well as fraud in connection with a cryptocurrency mining operation.

Potapenko and Turõgin solicited funds for a company named Polybius, which they told investors would form a virtual currency bank and pay dividends from its profits. According to the U.S. Department of Justice, they raised at least USD 25 million. However, the bank was never formed and no dividends were ever paid to investors; the majority of the funds were moved to other accounts and virtual wallets  controlled by the accused.

Additionally, the pair sold rental contracts in their cryptocurrency mining operation, HashFlare. Pursuant to the contracts, users would pay a fee to rent a percentage of HashFlare’s cryptocurrency mining capacity and in return receive the applicable proportion of the cryptocurrency mined. According to the indictment, Potapenko and Turõgin had significantly misrepresented HashFlare’s mining abilities; it did not possess the advertised mining technology and the technology it did have mined at less than 1% of the power claimed. Further, when investors attempted to remove their mined proceeds from HashFlare, the pair attempted to resist paying or else utilized market-purchased currency as opposed to the currency the investors thought had been mined. It is estimated that the pair raised more than USD 550 million from users worldwide in this manner between 2015 and 2019.

Beyond the particulars of the alleged conduct, the arrest showcases US law enforcement’s continued focus on cryptocurrency-related crimes, and also the breadth of collaboration on an international level. In this instance, two Estonian citizens were arrested, in Estonia, on the basis of charges coming out of the state of Washington. The nature of the technology makes it easier for alleged bad actors to reach across borders and affect individuals worldwide. It is clear that we should expect that US law enforcement will similarly seek to utilize its international partners in prosecuting these crimes.

The full press alert may be read here.

Ryan Sciortino

Ryan is an associate in Baker McKenzie’s Tax and Global Wealth Management practice groups. Prior to joining Baker McKenzie, Ryan worked in the national tax departments of two of the world’s largest accounting firms.