Paxful admitted to participating in criminal schemes and violating AML requirements

Key pounts:

• Paxful pleaded guilty to participating in criminal schemes, violating AML rules, and operating without proper customer controls.
• The investigation found that the platform was used for transfers related to fraud, prostitution, and other serious crimes.
• The company agreed to a fine of up to $4 million and received a reduction for cooperating with the US Department of Justice.

Paxful Holdings Inc., a virtual currency exchange company, pleaded guilty to three counts in the Eastern District of California court. The company agreed to pay up to $4 million in fines, with the exact amount depending on its financial capabilities.

According to IRS-CI representative Linda Nguyen, the Paxful platform had long been used for criminal schemes. She emphasized that the company openly ignored anti-money laundering (AML) rules and did not report suspicious transactions, profiting from such deals.

How Paxful ended up at the center of a criminal case

According to court documents, Paxful operated an online platform where users exchanged cryptocurrency with each other or for other goods, ranging from cash to gift cards. The company was aware that some of its customers were transferring money obtained through criminal activity.

From 2017 to 2019, more than 26,7 million transactions worth nearly $3 billion passed through the platform. Paxful’s revenue during this period exceeded $29 million.

The investigation found that Paxful also transferred cryptocurrency to Backpage, a well-known human trafficking website. Paxful’s founders even called the growth of the business the “Backpage Effect.” From 2015 to 2022, nearly $17 million in bitcoins was sent through Paxful to Backpage and its clone, and the company itself earned more than $2,7 million from this.

The court specifies that Paxful and its founders advertised the platform for many years as a service without mandatory identity verification (KYC). Customers could open accounts without providing any data, and the AML policy was effectively non-existent.

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As a result, Paxful pleaded guilty to three counts of conspiracy:

• facilitating prostitution through interstate commerce,
• operating an unlicensed currency exchange system,
• violating anti-money laundering laws.

Because of these violations, the platform was used by criminals to launder money from fraudulent schemes, distribute child pornography, and even carry out operations related to hacks organized by state-sponsored hackers.

The Department of Justice took into account the scale of the violations but noted that Paxful assisted the investigation by analyzing data, providing documents, and correcting internal processes. Thanks to its cooperation, the company received a 25% reduction in the potential fine.