Following their indictment in the United States, two Estonian nationals were arrested in Estonia for running a crypto Ponzi scheme amounting to more than $575 million in losses. Four other accomplices residing in Estonia, Belarus and Switzerland allegedly helped the two Estonians con hundreds of thousands of people between December 2013 and August 2019.
The funds were allegedly put through a network of shell companies, virtual asset services, crypto wallets and bank accounts, all owned and controlled by them, directly or indirectly. The two defendants had also created fraudulent documents provided to financial institutions to explain the unlawful money movement and conceal the nature, source, location, ownership and control of the funds, states the indictment.
The two Estonians ran a company called HashCoins OÜ starting in December 2013, which imported and assembled crypto mining hardware bought from other companies instead of manufacturing their own. The company also required customers to pay the full amount upfront when buying mining hardware from them.
However, after failing to deliver the hardware, the company informed users that their equipment was being replaced for remote mining contracts through a crypto mining service they called HashFlare in February 2015.
Those who agreed were supposed to receive “rights under mining contracts entitling the customer to a percentage of the profits” from a pooled remote mining operation. Instead, the two defendants turned HashFlare into a Ponzi scheme with fraudulent currency returns and balances.
To avoid being caught, when the customers requested to withdraw their mining profits, HashFlare either refused to pay or paid off using crypto that the customers had already purchased on the open market instead of the crypto generated by actual mining operations.
The two also started a company in Estonia called Polybius Foundation OÜ or Polybius Bank, which invited investors to fund the project through an initial coin offering in exchange for virtual tokens called Polybius tokens. This was marketed as a revolution in the world of digital crypto-banking.
Two weeks later, the company claimed to have raised nearly $17 million from over 14,250 participants hence meeting the requirements to receive a European banking license. An FBI investigation into HashFlare later revealed they had raised more than $31 million from third-party investments. The indictment, however, puts this number at $25 million.
Instead of using the funds to pay dividends to investors or form a bank, the money went to the accused men’s bank accounts and crypto wallets. This money was later used to buy at least 75 real estate properties, luxury vehicles, investments in crypto mining machines, and to fill their own crypto wallets.
Overall, the two defendants have been charged with 16 counts of wire fraud, one count of conspiracy to commit money laundering, and another conspiracy to commit wire fraud. If convicted, they face a maximum of 20 years in prison.
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