The US Department of Justice has announced the arrest of and the unsealing of criminal charges in Manhattan federal court against Robert Faiella (also known as “BTCKing”), an underground Bitcoin exchanger, and Charlie Shrem, the Chief Executive Officer and Compliance Officer of a Bitcoin exchange company, for engaging in a scheme to sell over $1 million in Bitcoins to users of “Silk Road.”
Shrem was arrested on Sunday at John F. Kennedy International Airport in New York. Faiella was arrested on Monday at his residence in Cape Coral, Florida.
According to the allegations contained in the Criminal Complaint unsealed today in Manhattan federal court:
From about December 2011 to October 2013, Faiella ran an underground Bitcoin exchange on the Silk Road website, a website that served as a sprawling and anonymous black market bazaar where illegal drugs of virtually every variety were bought and sold regularly by the site’s users.
Operating under the username “BTCKing,” Faiella sold Bitcoins – the only form of payment accepted on Silk Road – to users seeking to buy illegal drugs on the site. Upon receiving orders for Bitcoins from Silk Road users, he filled the orders through a company based in New York. The company was designed to enable customers to exchange cash for Bitcoins anonymously, that is, without providing any personal identifying information, and it charged a fee for its service. Faiella obtained Bitcoins with the Company’s assistance, and then sold the Bitcoins to Silk Road users at a markup.
Shrem is the Chief Executive Officer of the company, and from about August 2011 until about July 2013, when the company ceased operating, he was also its Compliance Officer, in charge of ensuring the company’s compliance with federal and other anti-money laundering (“AML”) laws. Shrem is also the Vice Chairman the Bitcoin Foundation, which is dedicated to promoting the Bitcoin virtual currency system.
Shrem, who personally bought drugs on Silk Road, was fully aware that Silk Road was a drug-trafficking website, and through his communications with Faiella, Shrem also knew that Faiella was operating a Bitcoin exchange service for Silk Road users.
Nevertheless, Shrem knowingly facilitated Faiella’s business with the company in order to maintain Faiella’s business as a lucrative source of company revenue. Shrem knowingly allowed Faiella to use the company’s services to buy Bitcoins for his Silk Road customers; personally processed Faiella’s orders; gave Faiella discounts on his high-volume transactions; failed to file a single suspicious activity report with the United States Treasury Department about Faiella’s illicit activity, as he was otherwise required to do in his role as the company’s Compliance Officer; and deliberately helped Faiella circumvent the company’s AML restrictions, even though it was Shrem’s job to enforce them and even though the Company had registered with the Treasury Department as a money services business.
Working together, Shrem and Faiella exchanged over $1 million in cash for Bitcoins for the benefit of Silk Road users, so that the users could, in turn, make illegal purchases on Silk Road.
In late 2012, when the company stopped accepting cash payments, Faiella ceased doing business with the company and temporarily shut down his illegal Bitcoin exchange service on Silk Road. Faiella resumed operating on Silk Road in April 2013 without the company’s assistance, and continued to exchange tens of thousands of dollars a week in Bitcoins until the Silk Road website was shut down by law enforcement in October 2013.
Each defendant is charged with conspiring to commit money laundering, and operating an unlicensed money transmitting business. Shrem is also charged with willfully failing to file any suspicious activity report regarding Faiella’s illegal transactions through the Company, in violation of the Bank Secrecy Act.