BitInstant CEO arrested for alleged money laundering

Charlie Shrem allegedly worked with Robert Faiella, known as BTCKing in the Bitcoin community, to exchange more than $1 million in bitcoins for users to make illegal purchases on Silk Road.

Two prominent figures in the Bitcoin arena were arrested on suspicion of money laundering.

Bitcoin exchangers Robert Faiella, known as BTCKing in the Bitcoin community, and Charlie Shrem, CEO of Bitcoin exchange company BitInstant, were charged on Monday as part of a multi-agency crackdown led by the US Attorney's office, the Drug Enforcement Administration, and the Internal Revenue Service.

According to the agencies, the men engaged in a scheme to sell over $1 million in bitcoins for use on the recently shuttered underground drug e-commerce service Silk Road. Both men are changed with "conspiring to commit money laundering, and operating an unlicensed money transmitting business." Shrem is also changed with failing to report suspicious activity in violation of the Bank Secrecy Act.

Shrem was arrested on Sunday at John F. Kennedy Airport in New York, and Faiella was arrested on Monday at his home in Cape Coral, Florida, said the agencies.

"Truly innovative business models don't need to resort to old-fashioned law-breaking, and when Bitcoins, like any traditional currency, are laundered and used to fuel criminal activity, law enforcement has no choice but to act," Manhattan US Attorney Preet Bharara said in a statement on Monday. "We will aggressively pursue those who would coopt new forms of currency for illicit purposes."

According to the agencies, from December 2011 to October 2013, Faiella was in charge of a Bitcoin exchange on Silk Road, in which he took users cash, funneled it through Shrem's company, and gave the users Bitcoins in return. He allegedly sold the Bitcoins "at a markup," according to the agencies.

Shrem, who is just 24, is alleged to have bought drugs on Silk Road and set up a system with Faiella in which they would exchange the Bitcoins.

Here's what the agencies say about Shrem's alleged activities:

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.

Faiella could face a maximum sentence of 25 years in prison for his alleged activities. Shrem could face 30 years.

The investigation into the Silk Road and ostensibly participants is still ongoing, according to the agencies.

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About the author

Don Reisinger is a technology columnist who has covered everything from HDTVs to computers to Flowbee Haircut Systems. Besides his work with CNET, Don's work has been featured in a variety of other publications including PC World and a host of Ziff-Davis publications.

 

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