• Paxful’s lack of AML led to regulatory breaches, prompting leadership changes.
• Artur Schaback pled guilty to failing to maintain AML and KYC programs at Paxful.
• Schaback faces up to 5 years in jail and a $5 million fine, payable in installments.

Artur Schaback, co-founder and former Chief Technology Officer of the cryptocurrency exchange Paxful, has entered into a plea agreement with US prosecutors. This plea deal could result in Schaback serving up to five years in prison.

The charges against Schaback stem from failures to implement essential Anti-Money Laundering (AML) and Know Your Customer (KYC) programs, which are crucial for preventing illegal activities within financial platforms.

Details of Schaback’s plea agreement

On July 8, 2024, the United States Justice Department announced that Schaback had pled guilty to conspiring to neglect the implementation of an effective AML program at Paxful.

As part of his plea deal, Schaback has agreed to pay a $5 million fine, which will be paid in three installments: $1 million upon his guilty plea, $3 million by his sentencing date on November 4, 2024, and the final $1 million within the subsequent two years.

In addition to the financial penalty, Schaback will resign from Paxful’s board.

According to court filings, Schaback and an unnamed co-conspirator, referred to as Paxful’s “President and Chief Executive Officer,” failed to establish effective AML and KYC programs within 90 days of starting the business, as required by the Bank Secrecy Act.

This failure allowed users to create accounts and trade on Paxful without providing sufficient identifying information, making the platform a conduit for various illegal activities, including money laundering, sanctions violations, fraud, romance scams, extortion schemes, and prostitution.

The consequences of non-compliance

The lack of proper AML and KYC protocols at Paxful led to significant regulatory breaches. Undercover law enforcement officers were able to conduct trades on the platform without undergoing KYC verification.

When third parties inquired about Paxful’s AML policies, Schaback and his co-conspirator allegedly presented a policy plagiarized from another institution, knowing it was neither implemented nor enforced.

They also reportedly made exceptions to AML and KYC policies based on the trading volumes and personal relationships of certain customers.

Paxful internal disputes and leadership changes

The legal troubles of Paxful’s leadership have been compounded by internal disputes. In March 2023, Schaback sued his co-founder, Mohamad (Ray) Youssef, over control of the exchange, accusing him of misappropriation of company funds, money laundering, and sanctions evasions.

As a result, Srinivas Raju, a director at the law firm Richards, Layton, and Finger, was appointed as the exchange’s custodian.

Subsequently, in May 2023, Paxful appointed Roshan Dharia as Interim CEO to steer the company through its turbulent period.

The plea deal and impending sentencing of Artur Schaback underscore the critical importance of robust AML and KYC programs in the cryptocurrency industry.

Paxful’s case serves as a cautionary tale about the severe consequences of regulatory non-compliance, both for individuals and the companies they represent.