Preet Bharara, the United States Attorney for the Southern District of New York, announced that ROBERT M. FAIELLA, a/k/a "BTCKing," an underground Bitcoin exchanger, and CHARLIE SHREM, formerly the Chief Executive Officer and Compliance Officer of a Bitcoin exchange company, both pled guilty today before U.S. District Judge Jed S. Rakoff to operating an unlicensed money transmitting business, through which they knowingly transmitted money intended to facilitate criminal activity - specifically, drug trafficking on "Silk Road," a black-market website designed to enable its users to buy and sell illegal drugs anonymously and beyond the reach of law enforcement.
Manhattan U.S. Attorney Preet Bharara said: "Robert Faiella and Charlie Shrem opted to travel down a crooked path – running an illegal money transmitting business that catered to criminals bent on trafficking narcotics on the dark web drug site, Silk Road. The approximately $1 million in Bitcoins Faiella and Shrem sold to these outlaws cost them a lot more than they bargained for and bought them today's convictions."
According to the Complaint, the Indictment, the Superseding Information unsealed today against SHREM, and statements made in related court proceedings:
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. FAIELLA never registered his business as a money transmitting business with the U.S. Treasury Department, as required under federal regulations, even though he knew that he was required to do so.
Upon receiving orders for Bitcoins from Silk Road users, FAIELLA filled the orders through a company based in New York, New York (the "Company"). The Company enabled 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 was 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 anti-money laundering ("AML") laws. SHREM was also the Vilso the Vi SHREM was also the Vice Chairman of a foundation dedicated to promoting the Bitcoin virtual currency system.
SHREM 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 revenue. SHREM knowingly allowed FAIELLA to use the Company's services to buy Bitcoins for his Silk Road customers; personally processed FAIELLA's orders; and gave FAIELLA discounts on his high-volume transactions. Even though it was SHREM's job to enforce the Company's AML restrictions and even though the Company had registered with the Treasury Department as a money services business, SHREM failed to file a single suspicious activity report with the U.S. Treasury Department about FAIELLA's illicit activity, as he was required to do in his role as the Company's Compliance Officer, and deliberately helped FAIELLA circumvent the Company's AML restrictions.
Working together, SHREM and FAIELLA exchanged nearly $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.
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FAIELLA, 54, of Cape Coral, Florida, pled guilty to one count of operating an unlicensed money transmitting business through which he knowingly transmitted funds intended to be used to promote or support unlawful activity, which carries a maximum sentence of five years in prison. SHREM, 24, of New York, New York, pled guilty to aiding and abetting FAIELLA in the operation of his unlicensed money transmitting business, which also carries a maximum sentence of five years in prison. FAIELLA and SHREM will be sentenced by Judge Rakoff on January 20, 2015, at 4:00 p.m. and 4:30 p.m., respectively. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendants will be determined by the judge.
Mr. Bharara praised the outstanding investigative work of the DEA's New York Organized Crime Drug Enforcement Strike Force, which comprises agents and officers of the U.S. Drug Enforcement Administration, the New York City Police Department, Immigration and Customs Enforcement - Homeland Security Investigations, the New York State Police, the U.S. Internal Revenue Service Criminal Investigation Division, the Federal Bureau of Investigation, the Bureau of Alcohol, Tobacco, Firearms and Explosives, U.S. Secret Service, the U.S. Marshal Service, New York National Guard, Office of Foreign Assets Control and the New York Department of Taxation and Finance. Mr. Bharara also thanked the FBI's New York Field Office.
The prosecution of this case is being handled by the Office's Complex Frauds and Cybercrime Unit. Assistant United States Attorney Serrin Turner is in charge of the prosecution, and Assistant United States Attorney Andrew Adams of the Money Laundering and Asset Forfeiture Unit is in charge of the forfeiture aspects of the case.