The peer-to-peer cryptocurrency exchange Paxful has faced severe legal repercussions, ordered to pay a significant fine after admitting to knowingly profiting from criminal activities facilitated by its platform's blatant lack of anti-money laundering (AML) controls. This landmark case underscores the critical responsibility of crypto platforms in preventing financial crimes and adhering to regulatory standards.
DOJ's Findings and Financial Penalties
The U.S. Department of Justice (DOJ) announced that Paxful was sentenced to pay $4 million following its December guilty plea to charges including conspiring to promote illegal prostitution, knowingly transmitting crime-derived funds, and violating AML requirements. Prosecutors detailed how Paxful actively benefited from illicit funds, attracting criminals by promoting its lax controls, despite knowing their involvement in fraud, extortion, prostitution, and commercial sex trafficking. From January 2017 to September 2019, the platform processed over 26 million operations valued at nearly $3 billion, generating more than $29.7 million in revenue. While Paxful initially agreed to an appropriate criminal penalty of $112.5 million, the DOJ determined the company could not afford to pay more than $4 million.
Intentional Lapses and the 'Backpage Effect'
A key aspect of the charges revealed Paxful's deliberate strategy to attract illegal activities. The company promoted itself as a platform requiring minimal customer information and maintained deceptive AML policies that it knew were neither implemented nor enforced. Prosecutors highlighted Paxful's connection to Backpage, a classifieds site shut down for hosting illegal prostitution ads. Paxful's founders reportedly boasted about the "Backpage Effect," acknowledging how their collaboration with Backpage and similar sites between 2015 and 2022 generated $2.7 million in profits, significantly contributing to the platform's growth. Paxful ceased operations in November, attributing the closure to "historical misconduct" by former co-founders Ray Youssef and Artur Schaback, alongside unsustainable operating costs. Artur Schaback, former CTO, pleaded guilty in July 2024 to conspiring to not maintain an effective AML program and is currently cooperating with the government's ongoing investigation.
