One of bitcoin’s earliest enthusiasts, Charlie Shrem who ran BitInstant, a New York based bitcoin exchange, was arrested today and charged with money laundering conspiracy, operating an unlicensed money transmitting business and failure to file suspicious activity reports to FinCEN.
The Criminal Complaint was filed by U.S. Attorney for the Southern District of New York, Preet Bharara, on Friday and unsealed today. It also charges a Miami man, Robert Faiella, aka “BTCKing,” with similar offenses in connection with the sale of bitcoin on the Silk Road website. More than $1 million in bitcoin sales are alleged to have been transacted between Mr. Shrem’s company and BTCKing.
The arrest of Mr. Shrem and the BTCKing is part of what will be the global take-down of persons and entities who did business on the Silk Road website.
Marijuana brownies on Silk Road
Thousands of emails and bank records from the bitcoin exchange (and other sources) and the payment processor it used were obtained by investigators and reviewed for the purposes of the investigation. Some of the emails are quite damaging.Â The U.S. Attorney usually has voluminous more damaging evidence but criminal complaints typically contain just enough evidence to demonstrate to the accused the strength of the case against him.
In one email, the business partner of Mr. Shrem expressed concerns about transactions with BTCKing and wrote: “many of his transactions smell like fraud or money laundering” and shortly after declaring that the Silk Road website was illegal in an email, Mr. Shrem emailed an individual that the site “actually works” and he had just received a shipment of marijuana brownies.
The criminal charges
According to the Criminal Complaint, with respect to the charges it is alleged that:
- BTCKing operated a bitcoin exchange on the Silk Road website (an anonymous website that accepted just bitcoin for payment for a wide range of services that has since been shut down) without registering pursuant to the Bank Secrecy Act,Â 31 U.S. Code Â§5330;
- BTCKing transmitted funds known to be used for the trafficking of drugs contrary to theÂ Controlled Substances Act;
- Mr. Shrem operated a bitcoin exchange service that transmitted funds that were used to promote and support illegal activity, namely the operation of an unlicensed money transmitting business on Silk Road;
- Mr. Schrem and BTCKing conspired to commit money laundering by transmitting and transferring monetary instruments and funds to promote illegal activity, namely the operation of an unlicensed money transmitting business and drug trafficking in violation of theÂ Bank Secrecy Act,Â 18 U.S. Code Â§1956;
- The BTCKing received orders to purchase bitcoin on Silk Road which were fulfilled by Shrem though an exchange service in Japan; and
- Mr. Shrem failed to file suspicious activity reports to FinCEN as required by the Bank Secrecy Act RegulationsÂ 31 CFR 1022.320.
Summary of alleged facts
According to the Criminal Complaint, BTCKing ran an underground exchange on Silk Road selling bitcoin for drug trafficking through a company operated by Mr. Shrem, the latter who is alleged to have known that Silk Road was a drug trafficking website. Mr. Shrem was the company’s compliance officer in charge of anti-money laundering (“AML“) compliance and notwithstanding that, is alleged to have assisted BTCKing circumvent AML controls.
The evidence obtained by law enforcement contains numerous emails from Mr. Shrem in which he allegedly threatened to report BTCKing to law enforcement for illegal activity. In other email evidence, BTCKing agreed to sell bitcoin to undercover law enforcement agents so that they could purchase cocaine on Silk Road and admitted to falsely informing banks concerned about money laundering activities that he operated an investment group.