Paxful co-founder agrees to plea deal, faces up to 5 years in prison

  • Paxful’s lack of AML led to regulatory violations, forcing a management shakeup.
  • Artur Schaback pleaded guilty to failing to implement AML and KYC programs at Paxful.
  • Schaback faces up to five years in prison and a $5 million fine, payable in installments.

Artur Schaback, co-founder and former CTO of cryptocurrency exchange Paxful, has reached a deal with U.S. prosecutors. The deal could result in up to five years in prison for Schaback.

The charges against Schaback stem from failures to implement necessary anti-money laundering (AML) programs and KYC (Know Your Customer) rules, which are crucial to preventing illegal activities on financial platforms.

Details of Schaback’s settlement

On July 8, 2024, the U.S. Department of Justice announced that Schaback had pleaded guilty to one count of conspiring to fail to implement an effective AML program at Paxful.

As part of the settlement, Schaback agreed to pay a $5 million fine, to be paid in three installments: $1 million upon his guilty plea, $3 million by his sentencing date of November 4, 2024, and a final installment of $1 million over the next two years.

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

According to court documents, Schaback and an unnamed associate, referred to as Paxful’s “president and CEO,” failed to implement effective AML and KYC programs within 90 days of launching operations, a requirement of the Bank Secrecy Act.

This outage allowed users to create accounts and make transactions on the Paxful platform without providing sufficient identifying information, making the platform a conduit for a variety of illegal activities, including money laundering, sanctions violations, fraud, marriage scams, extortion, and prostitution.

Consequences of non-compliance

Paxful’s lack of proper AML and KYC protocols led to serious regulatory violations. Undercover law enforcement officers were able to conduct transactions on the platform without undergoing KYC verification.

When third parties inquired about Paxful’s AML policy, Schaback and his associate allegedly submitted a policy plagiarized from another institution, knowing that it had not been implemented or enforced.

They also reportedly allowed exceptions to AML and KYC rules based on trading volume and personal relationships of some customers.

Paxful internal disputes and management changes

Paxful’s management’s legal woes have been compounded by internal disputes. In March 2023, Schaback sued his co-founder, Mohamad (Ray) Youssef, for control of the exchange, accusing him of misappropriating company funds, money laundering, and evading sanctions.

As a result, Srinivas Raju, a director at law firm Richards, Layton, and Finger, was appointed depositary of the exchange.

Then in May 2023, Paxful appointed Roshan Dharia as interim CEO to lead the company through a challenging period.

The guilty plea settlement and upcoming sentencing in the Artur Schaback case underscore the critical importance of robust AML and KYC programs in the cryptocurrency industry.

The Paxful case serves as a cautionary tale of the serious consequences of non-compliance, both for individuals and the companies they represent.