The DoJ’s report stated that Schaback operated Paxful from July 2015 to June 2019, during which time he allowed customers to open accounts without sufficient Know Your Customer (KYC) information. Authorities accused Schaback of marketing Paxful as a platform that did not require KYC verification and presenting fake AML policies to third parties, without actual implementation. Paxful also failed to report suspicious activity despite evidence of wrongdoing by its users.

The DoJ’s filing highlighted that Schaback made Paxful available for money laundering, sanctions violations, and other criminal activities, including fraud, romance scams, extortion schemes, and prostitution. Furthermore, the filing indicated that Schaback and his co-conspirator created exemptions to AML and KYC policies based on Paxful customers’ trading volumes and their relationships.

Schaback’s guilty plea and the subsequent legal actions underscore the importance of robust AML and KYC practices in the cryptocurrency industry. The case serves as a warning to other crypto platforms about the severe consequences of failing to comply with regulatory requirements and facilitating illegal activities.

Schaback’s sentencing later this year will likely determine the extent of the legal repercussions he will face, potentially including a significant jail term. This development also signals increased scrutiny and enforcement actions by regulatory bodies against crypto platforms that do not adhere to established legal and ethical standards.

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Guilty Plea and Sentencing Date

On July 8, the United States Justice Department indicated that the former chief technical officer of the exchange, Schaback, was due to be sentenced on November 4 and would thus resign from Paxful’s board.

Filed the same day in a California District Court, a plea agreement reveals government prosecutors agreed to pay 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 sentence, and the last $1 million within the next two years.

AML and KYC Failures

An information file from late March outlining his accusations alleged Schaback and a co-conspirator—identified only as Paxful’s “President and Chief Executive Officer”—failed to build an effective AML policy within 90 days of launching the company as mandated under the Bank Securrency Act.

The prosecution said he also neglected to create a Know Your Customer (KYC) program to check individuals before they utilized the exchange, which must gather at least the name, birth date, address, and “other identifying information.”

Consequences of Neglect

The Justice Department said in a statement, “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.”

Between July 2015 and June 2019, Schaback and the “co-conspirator” let users open Paxful accounts and trade without providing “sufficient identifying information or documentation” that could validate them.

The complaint added that Paxful also sold itself to consumers “as a platform that did not require KYC and/or that allowed buying without ID.”

Schaback and the “co-conspirator” submitted one “plagiarized from another institution” they knew wasn’t “implemented or enforced” when third parties sought an AML policy.

With Schaback, or the “co-conspirator,” the two also “made exceptions to AML and KYC policies based on Paxful customers’ trading volumes and their relationships.”

Internal Conflicts

Schaback sued his co-founder Peer and former CEO Mohamad (Ray) Youssef in March 2023, locking them into a conflict over control of the exchange with accusations of theft of corporate finances, money laundering, and sanctions evasions, among others.

Paxful agreed to a court order assigning Srinivas Raju, director at the legal firm Richards, Layton, and Finger, Youssef stated in an April 2022 blog post.

Paxful reported late May 2023 that Roshan Dharia was hired as Interim CEO.

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