Two Estonian individuals have been charged by federal prosecutors in Washington state with operating a string of cryptocurrency fraud schemes that they are accused of defrauding hundreds of thousands of investors worldwide out of a total of $575 million.
The indictment, which was made public on Monday, claims that Tallinn, Estonia residents Sergei Potapenko and Ivan Turogin, both 37, were partners in a network of connected bitcoin fraud schemes. The two defendants are accused of laundering the proceeds of their schemes through a number of shell companies while spending investor money on expensive cars and real estate in Estonia.
Their initial business, HashCoins, which debuted in December 2013, claimed to be a producer of cryptocurrency mining hardware and accepted orders (along with full payment from consumers) for miners. However, the indictment claims that HashCoins never produced anything; rather, it resold mining equipment that was bought on the open market and looked for excuses to put off the shipment of the vast bulk of its sales.
A second business, HashFlare, is said to have been founded by Potapenko and Turogin in May 2015 in response to a growing number of irate clients. Prosecutors claim that they informed their clients that orders for mining equipment would instead be fulfilled as “remote mining services” and that, rather than the tangible goods they had been promised, those sending money would instead receive a cut of the service’s earnings.
However, according to the prosecution, Potapenko and Turogin operated HashFlare more like a Ponzi scheme than a mining business, with less than 1% of the hashrate sold to customers actually coming from mining.
Customers of HashFlare allegedly saw statements with fictitious crypto balances. Customers who attempted to cash out, according to the prosecution, were given the runaround by Potapenko and Turogin, who allegedly made them jump through legal hoops like meeting know-your-customer (KYC) requirements before they could be paid.
Potapenko and Turogin allegedly launched Polybius Bank, which was marketed as a cryptocurrency bank with headquarters in Estonia, while HashFlare continued to run. The two publicized an initial coin offering (ICO) for the business in June 2017, the indictment claims, and garnered $25 million from investors all across the world as a result. The endeavor failed shortly after that.
Despite the fact that prosecutors claim Potapenko and Turogin continued to mine for bitcoin for themselves using miners they’d bought with stolen customer funds, HashFlare announced in 2018 that it was closing down due to rising energy costs and the fact that it was no longer profitable to do so.
Prosecutors claim that by the time HashFlare was formally shut down in August 2019, it had raised $550 million in total.
One case of conspiracy to commit wire fraud, 16 counts of wire fraud, and one count of conspiracy to commit money laundering are the charges against Potapenko and Turogin, respectively.
Both men are still at large, and Estonia is currently thought to be where they are. In the Western District of Washington, an arrest warrant has been issued for them, and a jury trial has been requested.
