Paxful co-founder Schaback faces 5 years jail, admits AML failure

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Paxful co-founder and former tech chief Artur Schaback is facing a maximum of five years in jail after pleading guilty on Monday to conspiring to fail to maintain an effective Anti-Money Laundering (AML) program at the crypto exchange.

The United States Justice Department said on July 8 that Schaback, the exchange’s former chief technology officer, was scheduled to be sentenced on Nov. 4 and would resign from Paxful’s board.

A plea agreement filed the same day in a California District Court shows government prosecutors agreed to pitch a $5 million fine, which Schaback would pay back in three installments — $1 million by the date of his guilty plea, $3 million by his sentencing and the final $1 million within the next two years.

An information filing from late March detailing his charges said Schaback and a co-conspirator — identified only as Paxful’s “President and Chief Executive Officer” — failed to establish an effective AML program within 90 days of starting the business as required under the Bank Secrecy Act.

He also failed to make a Know Your Customer (KYC) program to verify people before they used the exchange, which needed to collect at least the name, birth date, address and “other identifying information,” the prosecutors filing said.

“As a result of his failure to implement AML and KYC programs, Schaback made Paxful available as a vehicle for money laundering, sanctions violations, and other criminal activity, including fraud, romance scams, extortion schemes, and prostitution,” the Justice Department said in a statement.

The filing adds that between July 2015 and June 2019, Schaback and the “co-conspirator” allowed users to open Paxful accounts and trade without giving “sufficient identifying information or documents” that could verify them.

Paxful also marketed itself to customers “as a platform that did not require KYC and/or that allowed buying without ID,’” the filing said.

Undercover law enforcement officers said they made trades from Paxful accounts that required no KYC. Source: CourtListener

When third parties asked for an AML policy, Schaback and the “co-conspirator” presented one “plagiarized from another institution” that they knew wasn’t “implemented or enforced,” the filing stated.

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The pair also “made exceptions to AML and KYC policies based on Paxful customers’ trading volumes and their relationships” with Schaback or the “co-conspirator,” it adds.

Schaback sued his co-founder peer and Paxful’s former CEO Mohamad (Ray) Youssef in March 2023, which locked them into a dispute over control of the exchange with allegations of misappropriation of company funds, money laundering and sanctions evasions, among others.

Youssef said in an April 2022 blog post that Paxful agreed to a court order appointing Srinivas Raju, Director at the law firm Richards, Layton, and Finger as the exchange’s custodian.

In late May 2023, Paxful said it appointed Roshan Dharia to take over as Interim CEO.

Schaback did not immediately return requests for comment sent via email and a LinkedIn message.

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