USA v Robert M. Faiella & Charlie Shrem - Sealed Complaint

8/12/2019 USA v Robert M. Faiella & Charlie Shrem - Sealed Complaint

http://slidepdf.com/reader/full/usa-v-robert-m-faiella-charlie-shrem-sealed-complaint 1/27

Approved:ORIGIN L

Ass is tan t United Sta tes Attorney

Before: HONORABLE MICHAEL H. DOLINGER

United Sta tes Magis t ra te JudgeSouthern D i s t r i c t of New York

-------------------------------------------------------------,

UNITED STATES OF AMERICA

- v . -

ROBERT M. FAIELLA,

a / k / a BTCKing, and

CHARLIE SHREM

Defendants .

SOUTHERN DISTRICT OF NEW YORK s s . :

SEALED COMPLAINT

Viola t ions of

18 u.s.c. §§ 1960 1956;

31 u.s.c. §§ 5318{g)

5322 {a)

COUNTY OF OFFENSE:

NEW YORK

Gary L. Alford, being duly sworn, deposes and says t ha t he

i s a Specia l Agent with I n t e r n a l Revenue Service-Criminal

Inves t iga t ion , ass igned to the New York Organized Crime Drug

Enforcement St r ike Force, and charges as fo l lows:

COUNT ONE

(Operat ing an Unl icensed Money Transmit t ing Business)

1. From in o r about December 2011, up to and including in

o r about October 2013, in the Southern Di s t r i c t of New York and

e lsewhere , ROBERT M. FAIELLA, a / k / a BTCKing, the defendant ,

knowingly conducted, cont ro l led , managed, supervised, di rec t ed ,

and owned a l l and p a r t of a money t r ansmi t t ing bus iness

a f f ec t i n g i n t e r s t a t e and fo re ign commerce, to wit , a Bitcoin

exchange se rv ice FAIELLA operated on the Si lk Road websi te

under the username BTCKing, which (i) f a i l e d to comply with

the money t r ansmi t t ing business r e g i s t r a t i on requirements se t

fo r th in Ti t l e 31, United Sta tes Code, Sect ion 5330, and theregu la t ions p re sc r ibed thereunder , and ( i i ) otherwise involved

the t r an s p o r t a t i o n and t ransmiss ion o f funds known to FAIELLA to

have been in tended to be used to promote and suppor t unlawful

a c t iv i t y , to wit , narco t ics t r a f f i c k i n g on the Si lk Road

websi te , i n v i o l a t i o n of Ti t l e 21, United S ta t e s Code, Sect ions

812, 841, and 846.

(T i t l e 18, United Sta tes Code, Sect ion 1960.)



COUNT TWO

(Operat ing an Unl icensed Money Transmit t ing Business)


o r about October 2012, in the Southern Di s t r i c t of New York and

elsewhere ,CHARLIE SHREM the

defendant ,knowingly conducted,

con t ro l l ed , managed, superv ised , di rec t ed , and owned a l l and

par t of a money t r ansmi t t ing bus iness a f fec t ing i n t e r s t a t e and

fo re ign commerce, to wit , a Bitcoin exchange se rv ice as to which

SHREM was the Chief Executive Officer , which involved the

t r anspor ta t ion and t ransmiss ion of funds known to SHREM to have

been in tended to be used to promote and suppor t unlawful

a c t iv i t y , to wit , the opera t ion of an unl icensed money

t r ansmi t t i ng bus iness on Si lk Road i n v i o l a t i o n o f Ti t l e 18,

United Sta tes Code, Sect ion 1960, and, u l t imate ly , na rco t ics

t r a f f i c k i n g on the Si lk Road websi te , in v i o l a t i o n of Ti t l e

21, United Sta tes Code, Sect ions 812, 841, and 846.

(T i t l e 18, United Sta tes Code, Sect ion 1960. )

COUNT THREE

(Money Laundering Conspiracy)


o r about October 2012, in the Southern D i s t r i c t of New York and

e lsewhere , ROBERT M. FAIELLA a / k / a BTCKing, and CHARLIE

SHREM the defendan ts , and othe rs known and unknown, w i l l fu l l y

and knowingly did combine, consp i re , confedera te , and agree

toge ther and with each othe r to commit money laundering.

4. t was a p a r t and an objec t of the conspiracy t ha t

ROBERT M. FAIELLA a / k / a BTCKing, and CHARLIE SHREM the

defendants , and othe rs known and unknown, would and did

t r anspor t , t ransmi t , and t rans fe r , and at tempt to t r anspor t ,

t ransmi t , and t r a n s fe r , monetary ins t ruments and funds from

places in the United Sta tes to and through places outs ide the

United Sta tes , with the i n t en t to promote the carry ing on of

spec i f i ed unlawful a c t iv i t y , to wit , opera t ing an unl icensed

money t r ansmi t t ing business and na rco t i c s t r a f f i c k i n g , in

v io la t ion of Ti t l e 18, United Sta tes Code, Sect ion 1960, andTi t l e 21, United Sta tes Code, Sect ion 812, 841, and 846,

re spec t ive ly , a l l i n v io la t ion of Ti t l e 18, United Sta tes Code,

Sect ion 1956 (a) (2) (A).

Overt Acts

5. In fu r therance of sa id consp i racy and to e f f e c t the

i l l e g a l objec t t he reof , the following ove r t ac t s , among others ,

2



were committed in the Southern D is t r i c t of New York and

e lsewhere :

a . On o r about January 17, 2012, ROBERT M. FAIELLA

a / k / a BTCKing, the defendant , while opera t ing a Bitcoin

exchange se rv ice on the Si lk Road websi te , rece ived mul t ip leorders for Bi tcoins from users of the s i t e .

b. On o r about January 17, 2012, CHARLIE SHREM the

defendant , f i l l e d the orders by causing funds to be t r ans fe r red

to an account t h a t FAIELLA con t ro l l ed a t a t h i rd -p a r t y Bi tco in

exchange se rv ice based in Japan.

(T i t l e 18, United Sta tes Code, Sect ion 1956(h) .)

COUNT FOUR

(Wil l fu l Fa i lu re to Fi le Suspicious A ct iv i t y Report)


o r about October 2012, in the Southern D i s t r i c t of New York and

e lsewhere , CHARLIE SHREM the defendant , w i l l f u l l y f a i l e d to

repor t susp ic ious t r ansac t ions re levant to poss ib l e v io la t ions

of laws and regu la t ions , as requ i red by the Secre ta ry of

Treasury , to wit , SHREM f a i l e d to f i l e any Susp ic ious Act iv i ty

Report with re spec t t o numerous Bitcoin purchases conducted by

ROBERT M. FAIELLA a / k / a BTCKing, through a Bi tco in exchange

se rvice operated by SHREM.

(T i t l e 31, United Sta tes Code, Sect ions 5318(g) and 5322(a); andTi t l e 31, Code of Federal Regulat ions , Sect ion 1022.320)

The bases fo r my knowledge and fo r the foregoing charges

are as fo l lows:

7. I have been persona l ly involved in the inves t iga t ion

of t h i s mat te r . This a f f ida v i t i s based upon my inves t iga t ion ,

my conversat ions with othe r law enforcement agents , and my

examinat ion of r epor t s and records . Because t h i s a f f i da v i t i sbeing submit ted fo r the l imi t ed purpose of es t ab l i s h in g probable

cause , t does not include a l l the f ac t s l ea rned through my

inves t iga t ion . Where the con ten t s of documents and the ac t ions ,

statements, and conversations of others are reported herein,they are repor ted in substance and in par t , except where

o therwise indica ted .

3



OV RVI W

8. From in o r about December 2011 up to and including in

o r about October 2013, ROBERT M. FAIELLA, a / k / a BTCKing, thedefendant , ran an underground Bi tco in exchange on an i l l e g a l

websi te known as Si lk Road, an anonymous marketplace forilli it drugs . Operat ing under the username BTCKing, FAIELLA

so ld Bi tco ins - the only form of payment accep ted on S i lk Road -

to users seeking to make drug buys on the s i t e .

9. Upon rece iv ing orders fo r Bi tcoins from S i lk Road

users , FAIELLA f i l l e d the orders through a company based in New

York, New York ( the Company ). The Company enabled customers

to exchange cash fo r Bi tco ins anonymously, t h a t i s , withoutprov id ing any persona l iden t i fy ing in fo rmat ion , charg ing a fee

fo r i t s se rv ice . FAIELLA obtained Bi tco ins with the Company's

ass i s tance , and then so ld the Bi tco ins to S i lk Road users a t a

markup.

10. From in o r about August 2011 u n t i l in o r about Ju ly

2013, when the Company ceased opera t ing , CHARLIE SHREM the

defendant , was the Chief Execut ive Off i ce r of the Company.

SHREM was a l so the Company's Compliance Off i ce r , in charge ofensur ing i t s compliance with ant i -money l aunder ing ( AML ) laws.

Beyond these ro les a t the Company, SHREM was and i s the Vice

Chairman of a foundat ion ded ica ted to promoting the Bitcoin

v i r t u a l currency system.

11. As s e t fo r th below, notwi ths tand ing t h a t SHREM wasaware t ha t S i lk Road was a drug- t r a f f i ck ing webs i te , and t ha t

FAIELLA was running a Bitcoin exchange se rv ice the re , SHREM

knowingly he lped FAIELLA conduct his opera t ion through the

Company in l i g h t of the s u b s t an t i a l income the Company received

from h is bus iness . Not only did SHREM knowingly al low FAIELLA

to use the Company's se rv ice s to buy Bi tco ins fo r h i s Si lk Road

customers, he pe rsona l ly processed FAIELLA's t r ansac t ions , gave

FAIELLA discoun ts on h is high-volume orders , w i l l f u l l y f a i l e d to

f i l e susp ic ious a c t i v i t y repor t s about FAIELLA, and d e l ib e r a t e ly

helped FAIELLA ci rcumvent the Company's AML r e s t r i c t i o n s , even

though it was SHREM's job to enforce them. Working toge ther ,SHREM and FAIELLA exchanged over $1 mil l ion in cash fo r Bitcoins

fo r the b en e f i t of S i lk Road users , so t h a t they could, in tu rn ,

make illi it purchases on Si lk Road.

12. SHREM and FAIELLA even tua l ly pa r t ed ways a f t e r the

Company s topped accep t ing cash payments for Bi tcoins in l a t e

2012. FAIELLA t emporar i ly shu t down his i l l e g a l Bitcoin

exchange se rvice on S i lk Road as a r e s u l t . However, FAIELLA

4



resumed opera t ing on S i lk Road in Apri l 2013, without the

Company's ass i s tance , and cont inued to exchange t ens of

thousands of do l l a rs a week un t i l the S i lk Road websi te was shutdown by law enforcement in October 2013.

B CKGROUND

The Si lk Road Website

and I t s Bitcoin-Based Payment System

13. The Si lk Road websi te was es tab l i shed in January 2011

and opera ted un t i l October 2, 2013, when it was se ized by law

enforcement. Through undercover ac t i v i t y on the s i t e by myself

and othe r law enforcement agents , I l ea rned the fo l lowing:

a . The S i lk Road websi te hosted an onl ine black

market bazaar , a l lowing vendors and buyers to conduct illi it

t r ansac t ions over the In te rne t .

b. S i lk Road was only access ib le through the Tor

network, a spec ia l network on the In te rne t designed to conceal

the t rue IP addresses of the computers on the network, and,

thereby, the i den t i t i e s of the network ' s users .

c. The i l l ega l natu re of the commerce hosted on Si lk

Road was r ead i l y apparent to anyone v i s i t i ng the s i t e . The vas t

major i ty of the goods for sa le cons is ted of i l l e g a l drugs of

near ly every var i e ty , openly adve r t i sed on the s i t e as such and

prominent ly v i s ib l e on the home page.

d. The only form of payment accepted on Si lk Road

was Bitcoins .

14. Based on y exper ience in t h i s inves t iga t ion , I know

the fo l lowing about Bitcoins :

a . Bitcoins a re a form of v i r t ua l currency , ex i s t i n g

e n t i r e ly on the In te rne t and not in any physica l form. The

currency i s not i ssued by any government, bank, o r company, but

ra the r i s generated and con t ro l l ed automat ica l ly throughcomputer sof tware opera t ing on a decent ra l ized , peer - to -peer

network.

b. To acqu i re Bi tco ins in the f i r s t ins tance , a user

t yp ica l ly must purchase them from a Bitcoin exchanger . In

r e tu rn fo r a commission, Bitcoin exchangers accept payments of

convent ional currency, which they exchange for a corresponding

number of Bitcoins based on a f luc tua t ing exchange ra te .



c. When a use r acqu i res Bitcoins , the Bitcoins are

sent to the us e r ' s Bitcoin address , analogous to a bank

account number, which i s designated by a complex s t r i ng of

l e t t e r s and numbers. The user can then conduct t r ansac t ions

with othe r B i t co in use rs , by t rans fe r r ing Bitcoins to t he i rBitcoin addresses , v ia the In te rne t .

d. No iden t i fy ing in format ion about the payor o r

payee i s t r ansmi t t ed in a Bitcoin t r ansac t ion . Only the Bi tco in

addresses of the pa r t i e s are needed for the t r ansac t ion , which

by themselves do not r e f l ec t any iden t i fy ing informat ion.

e . Bitcoins a re not i nhe ren t ly i l l e g a l and have

known l eg i t imate uses , but they are a l so known to be used to

f a c i l i t a t e illi it t r ansac t ions and to launder cr imina l

proceeds, g iven the ease wi th which they can be used to move

money anonymously.

f . Every S i lk Road user had a Bi tco in address

assoc ia t ed with the us e r ' s Si lk Road account . To make purchases

on the s i t e , the use r f i r s t had to obta in Bi tcoins ~ , from

an exchanger) and have them sent to the us e r ' s S i lk Road Bi tco in

address . After thus funding h is account, the use r could make

purchases from S i lk Road vendors.

Regula t ion of Bitcoin Exchangers

15. Based on my t ra in ing and exper ience , know the

fo l lowing about r egu la t ion of Bitcoin exchangers:

a . Exchangers of v i r tua l currency, inc lud ing Bi tco in

exchangers, are cons ide red money t r ansmi t te r s under federa l law

and are subjec t to federa l ML regu la t ions i f they do

subs tan t i a l bus iness in the United Sta tes . See 31 C.F.R. §

1010.100(ff) (5) ; see a l so Department of the Treasury Financ ia l

Crimes Enforcement Network, Guidance on the Appl ica t ion ofFinCEN's Regula t ions to Persons Adminis ter ing , Exchanging, o r

Using Vir tual Currencies , March 18, 2013, FIN-2013-G001,

ava i lab le a t h t tp : // f incen .gov /s ta tu tes_ regs /gu idance /h tml /F IN-2013-G001.html.

b. Spec i f i ca l ly , federa l regula t ions requ i re a

vir tual currency exchanger to register with the Department ofTreasury ' s F inanc ia l Crimes Enforcement Network ( FinCEN ) as a

money se rv ice s bus iness and to develop and maintain an e f fec t ive

ML program. See 31 C.F.R. §§ 1022.210, 1022.380.



c . Maintaining an e f fec t ive AML program requ i re s

f i l i ng Suspicious Act iv i ty Reports with FinCEN when appropr ia te ,

including repor t ing subs tan t i a l t r ansac t ions o r p a t t e r n s oft r ansac t ions involving the use of the money se rv ices business to

f a c i l i t a t e cr imina l a c t iv i t y . See 31 C.F.R. § 1022.320.

d. Maintaining an e f fec t ive AML program a l so

requi res implementing e f fec t ive means of ver i fy ing customer

i den t i t i e s . See 31 C.F.R. § 1022.210 (d) (i) (A). In par t icu la r ,

money se rv ice s bus inesses must, a t a minimum, v e r i fy and keep a

r ecord of the i de n t i t y of any customer involved in a

t ransmiss ion of funds of $3,000 o r more. See 31 C.F.R.

§§ 1010.410, 1022.400.

Background on the Company

16. The Company i s a New York corpora t ion with i t s

pr inc ipa l place of business in New York, New York.

17. From v i s i t i n g the Company's websi te 1 I have l ea rned

the fol lowing:

a . The Company was founded by CHARLIE SHREM the

defendant , and another indiv idua l not named he re in ( the Co

Founder ) . The webs i te l i s t e d SHREM as the CEO of the Company

and the Co-Founder as the Chief Technology Off ice r .

b. The Company's websi te enabled customers to

purchase Bitcoins in exchange for cash, al though the Company didnot s e l l Bitcoins to customers d i r e c t ly . Ins tead , the Company

t r ans fe r red funds to i t s customers a t accounts they had a t

c e r t a i n t h i rd -p a r t y Bitcoin exchange serv ices , where they couldthen conver t the funds in to Bitcoins . The websi te explained:

You pay us an amount equal to whatever you wish to be

deposi ted i n to your exchange account plus a smal l

commission and a t the same t ime we make a d i r e c t

t rans fe r a t the exchange s ide from our account to yours .

c. The Company claimed t ha t i t s system enabledcustomers to t r a ns f e r funds in to t he i r exchange accounts fa s te r

than the methods used by the t h i rd -pa r ty exchangers themselves,such as wire t r ans fe r s .

1The websi te opera ted from in o r about August 2011 u n t i l in or

about July 2013, when an announcement was pos ted t ha t the

Company had decided to temporar i ly c lose shop to redes ign i t s

serv ices . The websi te has not resumed opera t ion s ince .

7



d. Moreover, the Company's system enabled customers

to move money to t h e i r exchange accounts anonymously, s ince, in

order to place an order on the Company's webs i te , users were

gene ra l ly not requi red to provide any iden t i fy ing in format ionother than an e-mai l address .

e . Customers paid cash to the Company by

depos i t ing t in person in to a bank account of a c e r t a in

t h i rd -pa r ty se rv ice the Company used to process these

payments ( the Cash Processor ) .

18. Based on undercover t r ansac t ions conducted in t h i s

inves t iga t ion , and reviews of e-mail accounts maintained by theCompany and the Cash Processor , I know t h a t a t yp ica l Bitcoin

purchase made through the Company worked as fol lows:

a . The customer placed an order on the Company'swebsi te fo r a c e r t a in d o l l a r amount 's worth of Bitcoins ,

spec i fy ing the account number a t the t h i rd -p a r t y Bitcoin

exchange where he wanted to obta in the Bitcoins . The customera l so provided an e-mai l address where he could be con tac ted

about the order .

b. At the Company's d i rec t ion , the Cash Processor

would then e-mai l the customer an invo ice wi th i n s t ruc t ions on

how to depos i t the cash payment for the order . The invo icewould spec i fy an exact amount of cash needed for the depos i t ,

which would include both the value of the cus tomer ' s o rder aswell as a nominal handl ing fee , used merely to keep t r a ck of

the t r ansac t ion . For example, fo r an order of $200 worth ofBitcoins , the invoice might i n s t ru c t the customer to depos i t

$200.32, with the ex t r a 32 cents used by the Company and theCash Processor to match the depos i t , when t came through, to

the otherwise anonymous customer. (Thus, no two t r ansac t ions on

a given day would be assessed the same handl ing fee . )

c. The invoice would a l so spec i fy a pa r t i c u l a r bank,

and a bank account t he re con t ro l l ed by the Cash Processor , where

the cash would need to be deposi ted . The customer would make

the depos i t in person by v i s i t i ng a loca l branch of the bank.

d. Once the depos i t was confirmed by the bank, theCash Processor would n o t i f y the Company, a t which poin t the

Company would t r a ns f e r funds from i t s account a t the t h i rd -pa r ty

Bitcoin exchange se lec ted by the customer, to the customer 's own

account a t the exchange. The Company's commission (ranging from

to 10 percen t ) would be subt rac ted from the t r ans fe r .

8



e . The cus tomer could t hen v i s i t the websi t e of the

se l ec t ed t h i rd -p a r t y exchange, log in to h i s account the re , and

conver t the funds r ece iv ed from the Company i n to Bi tco ins .

The Company's St a t ed Anti-Money Laundering Pol i c i e s

19. From reviewing in fo rmat ion o b ta in ed from FinCEN, I

have l ea rn ed t ha t , on March 26, 2012, the Company r eg i s t e r ed

with FinCEN as a money s e rv i ces bus iness . As s e t fo r th above,

money se rv ice s b u s in es ses a re o b l i g a t ed under fede ra l law to

develop and implement an e f f ec t i v e AML program.

20. From the Company's websi te , I have l ea rned tha t , as

p a r t of i t s AML program, the Company l imi t ed cash depos i t s to

under $1,000 p e r cus tomer p er day. The websi t e exp la ined :

[W]e a re s imply not al lowed by law to handle ext remely

l a rge amounts of money fo r a s ing le use r without conduct inga l o t of background checks and having paperwork on f i l e .

VERY l a rg e t r ansac t ions would even requ i re us to f i l e

n o t i ce s fo r the use of law enforcement in t r a ck ing money

l aunder ing or o the r c r imin a l a c t iv i t y .

Q But I want to l aunder a huge p i l e of funds Why are

you t u rn i n g me away?

Because we w i l l not have cr imina l s as c l i e n t s and wil l not

a s s i s t money l aunder ing opera t ions . Please see our AML

(Anti Money Laundering) p o l i cy fo r more in fo rmat ion .

21. The Company's AML pol icy , which was se t fo r th on i t s

websi t e , fu r the r exp la ined :

a . "[T]he Company opposes money l aunder ing ,

f inancing t e r ro r i sm, and a l l o t h e r i l l e g a l uses of the Bi tco in

network."

b. SHREM was the Company's AML Program Compliance

Off i ce r , wi th f u l l r e s p o n s ib i l i t y fo r t h e Company's AML

Program," because he had the most comprehensive unders t and ing

of the cus tomer f low through the Company's system" and "accessto a l l p a r t s of the approval process fo r cus tomer t r ansac t ions .

c . As Compliance O ff i ce r , SHREM was respons ib le fo r

moni tor ing t r a n s a c t i o n s fo r red f lags and repor t [ ing]

susp ic ious a c t i v i t i e s to the appropr ia te a u t h o r i t i e s . Examples

of red f lags t h a t SHREM was to look fo r inc luded any reason to

bel i eve a cus tomer was in tend ing to "move illi it cash out of

the government ' s reach , "engage in money l aunder ing , o r



"otherwise engage in i l l ega l a c t iv i t y . " Other red f lags

inc luded at tempts by a cus tomer to "conduct f requent o r l a rge

t ransac t ions" or to obta in "exemptions from [ the Company's] AML

Program o r o the r re l evan t p o l i c i e s . "

d. Customers were requ i red to v e r i fy t he i r

i d e n t i t i e s before plac ing any order o r " s e r i e s of orders" of

$3,000 o r more. Further , " [ i ] f the Company ha[d] knowledge t ha t

the person plac ing such a payment order [was] not the paying

pa r ty himself" - t ha t i s , i f the Company knew someone was

plac ing a $3,000 order o r se r i e s of orders on beha l f of someone

e l se - then the Company would "ob ta in and r e t a in a record of the

paying p a r t y ' s t axpayer i de n t i f i c a t i on number." 2

THE SILK RO D BITCOIN EXCH NGER

KNOWN S BTCKING

22. From undercover law enforcement a c t i v i t y on Si lk Road,I have l ea rned t ha t , in o r about December 2011, a S i lk Road user

known as "BTCKing" began opera t ing a Bitcoin exchange se rvice on

the s i t e , s e l l i ng Bi tco ins t o S i lk Road users in exchange for

cash . "BTCKing" adve r t i sed his se rvice d i r e c t l y on Si lk Road,

as in the fo l lowing pos t ing from March 2012:

FOR THE

one of ouryou want

Fast

FASTEST SERVICE place an order by ge t t ing

" l i s t i n g s" below, include AMOUNT of Bitcoin

Don' t go fa r , our response i s Very

-We w i l l rep ly with our bank name and account number

fo r you to make a "cash depos i t . " Your name i s

NOT needed and no s l i p s to ill out i f you don 1 t want

You could even go to the Drive-Thru

-Send us a message t ha t you have made the depos i t and

you w i l l rece ive your Bi tco in a t the bes t poss ib l e

pr ice . . . to your SR account INSTANTLY... Most t imes

the Bitcoin i s in your SR account by the t ime you ge t

back from the bank.

THAT s IT EASY CHEAP FAST 3

2As i nd ica t ed in paragraph 20, the Company l imi ted cash depos i t s

to $1,000 per day to avoid ever t r igger ing such requirements .3 Unless otherwise noted, quotat ions from e lec t ron ic

communications contained here in are reproduced as they appear in

the or ig ina l . Errors in spe l l ing and punctua t ion have not been

correc ted . El l ipses appear ing in the or ig ina l are r e f l e c t e d as

10



23. On August 15, 2012, an undercover agen t pos ing as a

Si lk Road user ( UC-1 ) executed a purchase of Bitcoins from

BTCKing, as fol lows:

a . Through Si lk Road's pr iva te message system, 4 UC-1

placed an order with BTCKing fo r $500 worth of Bitcoins .

b. BTCKing r ep l ied with i n s t ruc t ions to UC-1 to

deposi t EXACTLY $500.11 CASH in to a spec i f i c account a t a

p a r t i c u l a r bank.

c . Later t h a t day, UC-1 t r ave led to the des ignated

bank and depos i t ed $500.11 cash in to the des igna ted account .

d. Later t h a t same day, UC-1 logged i n to UC-l ' s

account on Si lk Road and observed t ha t approximate ly $444 worth

of Bi tco ins had been sent to UC-l 's S i lk Road Bi tco in address .

UC-1 a l so saw t ha t BTCKing had sent UC-1 a message s t a t i n g

tha t he had charged a $56 fee fo r the t r ansac t ion .

24. On October 10, 2012, UC-1 executed a second purchase

from BTCKing in a s imi la r manner. On t h i s occas ion , BTCKing

in s t ruc ted UC-1 to depos i t exac t ly $507.10 i n to a d i f f e r e n t bank

account , which UC-1 did . La te r t ha t day, approximate ly $444 in

Bi tco ins was sen t to UC-l ' s Si lk Road Bi tco in address , and UC-1

rece ived a message from BTCKing exp la in ing t h a t the r e s t ofUC-l 's depos i t had been app l ied toward BTCKing's commission.

25. I have reviewed bank records fo r the two accountswhere BTCKing i n s t r u c t ed UC-1 to make the depos i t s involved in

these undercover t r ansac t ions . The records revea l t h a t theaccounts were con t ro l l ed by the Cash Processor t h a t the Company

used to rece ive i t s cash depos i t s .

26. On o r about February 27, 2013, the Government obta ined

a search warrant fo r an e-mai l account used by the Cash

Processor ( the Cash Processor E-mail Account ) . From reviewing

the account , was ab le to i den t i fy invoices cor responding to

the depos i t s UC-1 made in the undercover t r ansac t ions . The

f i r s t invo ice was sen t t o the e-mail address 56btc@safemai l .ne t , whi le the second was sen t to 12btc®safe-mai l .net .

UC-1 did not supply any e-mail address as p a r t of the undercover

dots without spaces ( .. ) , whi le e l l i p s e s r e f l e c t i ng omiss ions

from the or ig ina l are r e f l e c t e d as dots with spaces ( . . ) .

4Si lk Road had a pr iva te-messag ing system t h a t enabled users to

send pr iva te messages to one ano ther (akin to e-mai l s ) .

11



t r ansac t ions , nor did UC-1 in te rac t with the Cash Processor in

any way. Accordingly, I be l ieve the two e-mai l addressesbelonged to BTCKing.

27. I have found approximately 350 invo ices in the Cash

Processor E-mail Accountassoc ia t ed

withthe

56btc®safemai l .ne t address , and approximately 124 invo ices assoc ia t ed

with the 12btc®safe-mail .ne t e-mail address . In t o t a l , I have

found approximately 3,000 invoices in the Cash Processor E-mail

Account assoc ia t ed with various sa fe -mai l .ne t addresses , many

of which have btc in the username ( including BTCKing®safe

mai l .ne t ) . I have a l so found various e-mai l s sen t from these

e-mail accounts to the Cash Processor E-mail Account, which are

of ten signed the same way, simply with the i n i t i a l B -

sugges t ing t h a t the same user operated a l l of the accounts .

28. Based on these invoices , and othe r evidence d e t a i l ed

fu r the r below, I be l ieve t ha t BTCKing used the Company to

obta in his supply of Bitcoins . Spec i f i ca l ly :

a . For every Bitcoin order t h a t BTCKing received

from a Si lk Road customer, BTCKing would submit a

corresponding order for Bi tco ins through the Company's websi te .

b. BTCKing would provide h i s own account a t a

pa r t i c u l a r t h i rd -p a r t y exchange se rvice ( the Third Par ty

Exchange ) as the des t ina t ion for each order , and would provide

one of h is sa fe -mai l .ne t accounts as the e-mai l address where

the Company could contac t him about the order .

c . Once each order was placed, the Cash Processor

would send BTCKing an invoice with depos i t i n s t ruc t ions .

BTCKing would pass along these i n s t ruc t ions to h is S i lk Road

customer through S i lk Road's messaging system.

d. Once the customer made the cash depos i t , the

Company would t r a ns f e r an equ iva len t amount of funds (minus the

Company's fee) to BTCKing's account a t the Third Par ty

Exchange, where BTCKing would redeem the funds for Bitcoins .

e. Final ly , BTCKing would send the Bitcoins (minush is own fee) to h i s customer 's Bitcoin address on S i lk Road, for

the customer to use in making buys from S i lk Road vendors.

BTCKING'S P RTNERSHIP IN 2 12 WITH CH RLIE SHREM

29. I have reviewed the contents of c e r t a in e-mai l

accounts belonging to SHREM obtained pursuant to a search

warrant ( the Shrem E-mail Accounts ) . As descr ibed below, the

12



Shrem E-mail Accounts r e f l e c t t ha t BTCKingn not only obta ined

h is supply of Bi tco ins through the Company, but did so with

extens ive support from SHREM. Even though SHREM quickly

r ea l i zed t ha t BTCKingn was r e se l l i n g Bitcoins on S i lk Road,

which SHREM knew to be a marketplace fo r illi it drugs, SHREM

went out of h is way to f a c i l i t a t e BTCKing'sn bus iness . Amongothe r th ings , SHREM: permi t t ed BTCKingn to con t inue doing

bus iness with the Company, desp i t e i n i t i a l l y t h rea t en ing to

bann him based on h is i l l e g a l a c t iv i t y ; pe rsona l ly ensured t h a t

BTCKing'sn orders with the Company were f i l l e d everyday; gave

BTCKingn discoun ts based on h is l a rge order volume; sought to

conceal BTCKing'sn ac t i v i t y from the Co-Founder and the Cash

Processor to preven t BTCKing'sn orders from being blocked;

advised BTCKingn how to evade the t r ansac t ion l i m i t s imposed by

the Company's own AML pol icy; l e t BTCKingn conduct l a rge

t r ansac t ions without ever ve r i fy ing h is i d e n t i t y , i n v io l a t i o n

of federa l AML laws; and fa i l ed to f i l e a s ing le Suspicious

Act iv i ty Report about BTCKing,n despi te the obvious red f lagsn

r a i sed by BTCKing'sn dea l ings with the Company.

SHREM s Knowledge and F a c i l i t a t i o n

of BTCKing'sn I l l e ga l Business

30. BTCKingn f i r s t came to SHREM s a t t e n t ion in December

2011. Spec i f i ca l ly , on December 28, 2011, SHREM e-mai led

BTCKing@safe-mail .net about two depos i t s the Company had

rece ived , t i e d to orders placed with t h a t e-mai l address . SHREM

asked why youn had made one of the depos i t s by check i ns t ead of

cash (as the Company required) and had depos i t ed the wrongamount fo r the othe r . BTCKing r ep l ied t h a t our customer

thought it would be OKn to use a check fo r the f i r s t depos i t ,

and apologized fo r the wrong amount of the othe r depos i t ,

explain ing, we are a new company still working out the Kinks.n

Based on my exper ience in t h i s inves t iga t ion , I be l ieve tha t ,

before t h i s exchange, SHREM was unfami l ia r with BTCKing'sn

bus iness and did not ye t know t ha t BTCKingn was plac ing orders

on behalf of o ther s .

31. Within a few days, however, SHREM rea l i zed tha t

BTCKing was buying Bi tco ins through the Company and r e se l l i n gthem. On January 1, 2012, BTCKing (using the address

1btck@safe-mai l .ne t ) wrote to SHREM s t a t i ng he was having

problems rece iv ing invoicesn from the Cash Processor a f t e r

plac ing o rders on the Company's websi te . SHREM forwarded the

message to the CEO of the Cash Processor ( the Cash Processor

CEOn). The Cash Processor CEO r ep l ied t ha t t h i s use r was

crea t ing mul t ip le invoices dai lyn and asked SHREM to explain

13



h is a c t iv i t y . " SHREM responded, "I th ink h e ' s some s o r t ofr e s e l l e r . "

32. By January 17, 2012, SHREM knew t h a t BTCKing was

rese l l ing Bi tco ins on Si lk Road. In a l eng thy exchange of e

mai ls on t ha t date , a f t e r t e l l i ng BTCKing t ha t he knewBTCKing was opera t ing on Si lk Road, SHREM f i r s t purported to

ban BTCKing from doing bus iness with the Company, copying the

Cash Processor and SHREM's bus iness par tne r , the Co-Founder, on

t ha t message. However, SHREM t h e re a f t e r wrote to BTCKing

pr iva te ly , with a d i f f e r e n t message, adv is ing him how to

cont inue using the Company's se rvices su r r e p t i t i o u s l y . The

exchange went as fol lows:

a . SHREM sent BTCKing the fol lowing e-mai l ,

copying the Cash Processor CEO and the Co-Founder:

We j u s t rece ived not ice t ha t you depos i t ed $4,000today a t a bank for a [Company] t r a n s fe r .

We have warned you in the pas t you CANNOT depos i t more

than $1,000 pe r person per day accord ing to our

l imi t s . You have v io l a t ed our Terms of Service and we

know you are r e se l l i n g your se rvices on The S i lk Road.

This i s i l l e g a l . [emphasis in o r ig ina l ]

You are hereby banned from our se rv ice s

We have a l l of your depos i t s on record , your p ic tu r efrom bank secur i ty cameras, and branch loca t ions . Any

at tempt a t a new t r a n s fe r w i l l r e s u l t in cr imina l

p rosecu t ion . [emphasis in or ig ina l ]

b. BTCKing r ep l ied t ha t h is impress ion was

t ha t the Company's depos i t l imi t was $4,000 r a t h e r than$1,000. BTCKing added: Are you taking t h i s money, i f so

I am ca l l ing the federa l Government as I have broken no

laws and you are i l l e g a l l y t ak ing my money am j u s t

r e se l l i n g BTC, please r ep ly "

c . SHREM r ep l ied , again copying the Cash ProcessorCEO and the Co-Founder, t e l l i ng BTCKing he was wrong about the

Company's depos i t l imi t , and fu r the r s t a t i n g , Do not t h rea t en

me, as you cur ren t ly s e l l your se rvices on the i l l e g a l Si lk

Road. We are a l i c ensed MSB [money se rv ice s business] so your

in fo rmat ion i s a l ready being given to the Federa l Financ ia l

Crimes Enforcement Network. In f ac t , I have checked FinCEN

records and the Company did not submit any r epor t to FinCEN a t

th i s t ime, o r a t any othe r t ime.

14



d. BTCKing responded, I am not a f r a i d of the law

as am j u s t s e l l i ng BTC, j u s t l i ke you. . . Don' t take t h i s

poor guys money as t i s not mine, he i s unknowing of yourl imi t s and j u s t buying BTC.

e . SHREM r ep l ied , again copying the Cash ProcessorCEO and the Co-Founder: We're not t ak ing anyone ' s money, t

w i l l be re l ea sed with in 24 hours - those are the l ega l ru les .

f . At t h i s poin t in the exchange, the Co-Founder e

mai led BTCKing as well , copying SHREM and the Cash ProcessorCEO: To c l a r i f y : As you have broken our TOS [terms of serv ice]

and ac ted in an i l l e g a l manner, we are unwi l l ing to do fu r the r

bus iness with you. . [A]ny a t tempts to make fu r the r

depos i t s using decept ion wil l be t rea ted as cr imina l a c t iv i t y .

g. SHREM fo l lowed up, again copying the Co-Founderand the Cash Processor CEO, t e l l i ng BTCKing t h a t h is three

pending cash depos i t s would be c leared , but t h a t [ i ] n the

fu ture , your emai l address i s banned.

h. BTCKing wrote back to SHREM, thanking him fo r

re l ea s ing the pending depos i t s , and adding, I do not wish to

cause you problems and can respec t your wishes .

i . SHREM r ep l ied , but t h i s t ime he wrote BTCKing

pr iva te ly , without copying the Co-Founder o r the Cash Processor

CEO; and h is message considerably changed. SHREM s ta ted : Noproblem, in the fu tu re please have your customers respec t our$1,000 l imi t . Your e-mai l address i s banned, but you can use a

d i f f e r e n t one. Based on my exper ience in t h i s inves t iga t ion ,

be l ieve SHREM meant t ha t the Company would be plac ing a block on

the e-mai l address BTCKing had used fo r the prob lemat ic

t r ansac t ions , so t h a t BTCKing could no longer use t h i s same e

mai l address to place o rders on the Company's webs i te , bu t t h a t

BTCKing could ci rcumvent t h i s r e s t r i c t i o n by s imply using a

d i f f e r e n t e-mai l address for fu tu re orders .

33 . BTCKing fol lowed SHREM s advice and cont inued doingbus iness with the Company using d i f f e r e n t e-mai l addresses . For

example, on January 25, 2012, BTCKing (now us ing the address

12btc@safe-mai l .net ) sent a customer support i nqu i ry to the

Company, which was routed to an e-mail account monitored bySHREM and the Co-Founder. SHREM, copying the Co-Founder,

rep l i ed , OK, we w i l l look in to i t . The fo l lowing exchange

then occurred between SHREM and the Co-Founder:

15



Co-Founder:

SHREM

Co-Founder:

SHREM

Co-Founder:

SHREM

DO NOT reply to a l l doesn ' t t h i s guy seem a

littl too s imi la r to the one we banned a

while back? I suspect the depos i t was not by

him but by one of h is s i l k road c l i e n t s .

I t probably i s , but as long as the persondepos i t ing has done l e s s then $1,000 were in

the c l e a r

Shouldn ' t we s t i c k to bans we impose ra the r

than j u s t l e t t i ng it s l i p a f t e r threa tening

cr imina l prosecu t ion? Makes us look a b i t

s tupid to say the l e a s t .

We never imposed a ban. I threa tened a ban to

himself depos i t ing more than $1000. I t o ld

him t ha t he has to respec t the[] Limits and he

i s not al lowed t o pe rsona l ly depos i t s anymore

The guy still s t r i ke s me as p r e t t y decept ivein using a l t e-mai l addresses e tc we need to

keep a very t i gh t watch on t h i s one

You got it boss

34. On January 28, 2012, BTCKing ( th i s t ime using the

address 34btc®safe-mail .net ) sent another customer suppor t

inqui ry to the Company, prompting the fol lowing exchange:

a . SHREM wrote to BTCKing as fol lows, copying theCo-Founder and the Cash Processor CEO

You are causing us a l o t of i s sues . I have asked you

many t ime, make sure your customers depos i t the EXACT

amount. Now your causing us to look i n to these i ssues

on a weekend.

I f your customers don ' t depos i t the EXACT amount nextt ime we wi l l NOT c re d i t you on the exchange and t h i s

t ime ban you fo r good, not j u s t your e-mai l address .

b. The Co-Founder then wrote separa te ly to SHREM

Let ' s j u s t ban the guy a l ready.

c. SHREM r ep l ied : Le t ' s focus on resolv ing t h i s

i ssue the[n] worry about banning him[.] He br ings us a l o t of

bus iness and we won' t be able to ban him anyways, he can change

a l l his de t a i l s .

16



d. The Co-Founder responded: You sa id you found him

on s i l k road, he ' s obviously t ry ing to be a meta l ayer over us

and s e l l i ng TC t he re and poss ib ly even not t e l l i n g h is

customers t ha t it s our se rv ice moving the funds. Adver t i se us

on s i l k road, and then ban him..

This waywe still

ge t thesame l eve l of business . , poss ib ly even i nc rea s ing it and

get l e ss fuss .

e . SHREM r ep l ied t ha t banning someone because he i s

an inconvenience i s bad business , adding: He has not broken

a law and s i l k road i t s e l f i s not i l l ega l . We a l so don ' t have

any ru les aga ins t r e se l l e r s . We make good p r o f i t from him.

f . The Co-Founder responded: I t ' s not because I

don ' t l i ke him o r he ' s an inconvenience . , it s because so

many of h is t r ansac t ions smell l i ke f raud o r money laundering.

g. SHREM repl ied , simply, Cool.

35. Notwiths tanding SHREM's remark to the Co-Founder t ha t

s i l k road i t s e l f i s not i l l ega l , othe r evidence r e f l ec t s t ha t

SHREM well unders tood Si lk Road's i l l ega l na ture . Indeed, as

descr ibed in paragraph 32 above, j u s t days e a r l i e r SHREM had

t o ld BTCKing t ha t the Company knew he was opera t ing on the

i l l e ga l Si lk Road websi te and threa tened to r epor t BTCKing

to law enforcement on t ha t bas i s . Moreover, SHREM's e-mai ls

with others r e f l e c t t h a t he was persona l ly f ami l i a r with Si lk

Road and unders tood it was a drug- t r a f f i ck ing websi te . Forexample:

a . SHREM's e-mai ls con ta in a record of an onl ine

chat with an i nd iv idua l not named here in on o r about February 1,

2012, in which SHREM wrote, wow, Si lk Road ac tua l ly works,

explain ing t ha t he had j u s t received a shipment of mari juana

Brownies.

b. On Apri l 1, 2012, another i nd iv idua l not named

here in sent SHREM an e-mai l , s t a t ing : You of ten pra i se Bi tco in

qui t e e a s i l y but my f r i end was t e l l i ng me . . . about the DarkWeb being used by drug dea le rs in the UK. SHREM r ep l ied : Yes,

i t s t rue . S i lk Road which can only be viewed through Tor se l l s

any type of drug ava i lab le . I t funds a decent percentage of the

overa l l Bitcoin economy.

36. Other e-mai l s show t ha t SHREM l ikewise unders tood t ha t

BTCKing's Bi tco in exchange business on S i lk Road was i l l e g a l

17



and t ha t BTCKing was seeking to evade de tec t ion by law

enforcement . For example:

a . On February 22, 2012, a f t e r SHREM had resolved a

problem with one of BTCKing's orders , the fol lowing exchange

occurred between them:

i . SHREM t o ld BTCKing, I j u s t want to l e t

you know, I t ake care of you bro .

ii BTCKing repl ied , I 'm probably old enough

to be your fa the r , to which SHREM quipped in response, The a r t

of hiding, i s making people th ink you are someone e lse . Based

on the inves t iga t ion , I be l ieve t ha t SHREM was r e f e r r i n g to the

f ac t t ha t BTCKing was opera t ing anonymously in doing bus inesswith the Company and t ha t , as a r e s u l t , SHREM did not know

BTCKing's t rue i den t i ty , including h is age.

1 1 1 . BTCKing repl ied , You must unders tand t ha t

the people t h a t we pay taxes to have a long reach and I l i ke to

s tay away from t ha t . Based on my exper ience in the

inves t iga t ion , I be l ieve BTCKing meant t ha t he was opera t ing

anonymously to avoid apprehens ion by law enforcement .

b. On Ju ly 30 and 31, 2013, SHREM rece ived severa l

e-mai l s from the Cash Processor EO not ing $13,000 in

t r ansac t ions in a s ing le day by someone using the e-mai l address111a®safe-mail .net , and asking SHREM what he knew about the

user . Rather than t e l l the Cash Processor EO the t r u th t ha t

the address belonged to BTCKing, who was r e s e l l i ng Bi tco ins on

Si lk Road SHREM in s tead promptly took s teps to keep the Cash

Processor EO from discovering BTCKing's i l l e g a l a c t iv i t y :

i . On August 1, 2013, SHREM wrote to BTCKing

to warn him t ha t h is 111a email address was f lagged by [the

Cash Processor] and t ha t he needed to s top using it

1 1 . BTCKing asked SHREM why the account had

been f lagged.

iii SHREM responded: [The Cash Processor] i s

the one who i s making a big deal over t h i s . They don ' t l i ke

tha t you do so many t r ansac t ions s ince they have no idea where

you se l l , and I can t t e l l them SR [Si lk Road]. You should use a

few d i f f e r e n t emails i f you can, t h a t ' s what they m[o]n[ i ] to r .

37. SHREM not only knowingly permi t t ed BTCKing to

opera te h is i l l ega l business using the Company's serv ices , he

18



a l so af f i rmat ive ly f a c i l i t a t e d "BTCKing's" bus iness , by, among

other th ings , working c lose ly with "BTCKing" to make sure

"BTCKing's" orders were e f f e c t i v e l y processed everyday. E-mail

communications r e f l ec t SHREM persona l ly in te rvening on a regula r

bas i s t o reso lve g l i t ches with "BTCKing's" orde rs . As SHREM

assured "BTCKing" in a February 27, 2012 e-mai l : I always takecare of you, we even know which orders are yours .

38. SHREM even gave "BTCKing" discoun ts based on the high

volume of h is t r ansac t ions with the Company. For example:

a . On May 21, 2012, "BTCKing" wrote to SHREM,

s t a t ing : How about giving me discount trades. . . A l o t of cash to

BTC goes through my hands as you know, bes t day ye t was 20K to

BTC .....i f you drop your ra t es , then I wil l drop mine and the re

would then be more volume and more income .. On May 30, 2012,

SHREM t o ld "BTCKing" he was wi l l ing to give him a "0.50%

discount on a l l orders , and 1 i f you h i t a c e r t a in l im i t , fo r

them to decide on l a t e r .

b. On June 18, 2012, "BTCKing" wrote SHREM, s t a t i n g

tha t he had a Poss ib le BIG day" coming up Wednesday - "BIG " -

and wanted to conf i rm t ha t he would rece ive a discount on h is

orders . SHREM r ep l ied , I l l gladly give you a kickback as

promised, no problem. How much do you pro jec t ? "BTCKing"

s ta ted , "Should be $20-$30k approx."

c . On October 12, 2012, SHREM sent "BTCKing" a

spreadshee t summarizing "BTCKing's" orders in August andSeptember 2012, r e f l e c t i n g orders averaging approximate ly

$40,000 per week. SHREM s ta ted , Do you th ink you can increase

your numbers? I ' d be happy to t a l k about a higher reba te i f you

can."

SHREM's Wil l fu l Fai lure to Enforce

AML Requirements as to "BTCKing"

39. In add i t ion to genera l ly f a c i l i t a t i n g "BTCKing's"

i l l e g a l business , SHREM sp e c i f i c a l l y enabled "BTCKing" to evade

AML r e s t r i c t i ons imposed by the Company's own AML pol i cy as wel las federa l law, desp i t e t ha t SHREM himself was respons ib le fo r

enforc ing those r e s t r i c t i ons . As exp la ined below, SHREM:

r egu la r ly permi t t ed "BTCKing" to exceed the Company's AML

t r ansac t ion l imi t s ; permi t t ed "BTCKing" to move l a rge amounts ofmoney through the Company without ever iden t i fy ing himsel f o r

his customers , in v i o l a t i o n of federa l law; and never f i l e d a

Suspic ious Act iv i ty Report concerning "BTCKing," even though he

19



knew BTCKing was opera t ing an underground Bi tco in exchangese rv i ce on a drug- t r a f f i ck ing websi te .

40. To begin with, SHREM rou t ine ly al lowed BTCKing to

exceed the Company's $1,000 l imi t on cash depos i t s pe r day,

imposed pursuant to i t s AML po l i cy as desc r ibed in paragraph 20

above, by r egu la r ly l e t t i n g BTCKing place mul t ip l e orders on a

da i ly bas i s t ha t , cumulat ively , would fa r exceed $1,000.

41. Even where t was c lea r t ha t BTCKing was submit t ing

orders exceeding $1,000 on beha l f of a s ing le customer, SHREM

not only condoned these t r ansac t ions but advised BTCKing on

how to s t ruc ture the depos i t s in order to prevent them from

being blocked by the Cash Processor , which checked for depos i t s

exceeding the $1,000 AML l imi t . For example:

a . On May 12, 2012, BTCKing wrote to SHREM to ask

whether t was unacceptable to make depos i t s of more than$1,000 a t the same bank in as many depos i t s as needed,

e l abora t i ng : For example i f I want to make a $5000 depos i t then

I genera te 5 depos i t s on your websi te and I can go to one bank

branch and depos i t a l l the 5 depos i t s a t the same t ime ?

Based on my exper ience in t h i s inves t iga t ion , BTCKing was

asking whether , i f a cus tomer wanted to order $5,000 in Bitcoins

from him, BTCKing could place f ive $1,000 orders with the

Company and have the cus tomer depos i t the money in f ive

corresponding depos i t s a t a s ing le bank branch.

b. SHREM approved of BTCKing's proposa l , r ep ly ingt ha t , al though the Cash Processor would block any depos i t over

$1,000 by a s ing le customer a t the same bank, the Cash Processor

would assum[e] , b a s e d on the f ive d i f f e r en t orders , t ha t i t s

5 people making the depos i t a t one bank branch. SHREM fu r the r

advised BTCKing :

I f I were you, I ' d spread t out over 2-3 branches to

play t safe . I t should process f ine , but be t t e r be

sa fe th[an] sorry . Feel me?

42. As noted in paragraph 20, the reason for the Company's$1,000 cash depos i t l i m i t was, in par t , so t ha t the Company

could avoid ever having to ask i t s customers for i den t i f i ca t i on .

As expla ined in paragraphs 15.d and 21.d above, pursuant to

federa l law and the Company's own AML pol icy , the Company was

requi red to ve r i fy the i den t i t y of any customer involved in any

order o r se r i e s of orders of $3,000 o r m o r e - inc luding

obta in ing the t ax i den t i f i ca t i on number of the paying par ty

for any order placed on someone e l s e ' s beha l f . By l imi t ing

20



depos i t s to $1,000 per day, the Company sought to avoid

t r ansac t ions t ha t would t r i g g e r t h i s $3,000 threshold . Yet, asre f l ec ted in the prev ious paragraph, SHREM never asked BTCKing

for the taxpayer i de n t i f i c a t i on numbers of BTCKing's

customers, even where it was c lea r tha t BTCKing was plac ing

orders in excess of $3,000 fo r the same customer . SHREM therebyal lowed BTCKing to evade not only the Company's d a i ly

t r ansac t ion l imi t but a l so i t s customer ve r i f i c a t i on

requirements .

43. SHREM not only permi t t ed BTCKing's customers to

remain anonymous, but also permi t t ed BTCKing himsel f to do

bus iness with the Company anonymously dur ing the e n t i r e t ime

they worked toge ther , even though BTCKing's orders r egu la r ly

exceeded $3,000 per day. (Indeed, as ind ica ted in paragraph 38,

they sometimes exceeded $20,000 per day.) Again, federa l law

and the Company's own ML pol icy requi red ver i fy ing the i d e n t i t y

of anyone seeking to t ransmi t more than $3,000 through the

Company; ye t , as r e f l e c t e d in the exchange below, SHREM

de l ibe ra te ly fa i l ed to obta in i de n t i t y documents from BTCKing :

a . In l a t e Ju ly 2013, the Cash Processor CEO sent

SHREM severa l e-mai l s asking i f SHREM had obta ined i de n t i t y

documentat ion for the use r 111a®safe-mail .net , based on his

high volume of t r ansac t ions . As descr ibed in paragraph 36.b,

above, SHREM knew t ha t e-mail address was being used by

BTCKing a t the t ime, while the Cash Processor did not . )

b. SHREM r ep l i ed to the Cash Processor t ha t he wasget t ing a l l the in fo .

c . Subsequent ly , on August 1, 2013, the fol lowing

exchange occurred between SHREM and BTCKing :

1 SHREM wrote to BTCKing ask ing him i f he

would be wil l ing to supply his ID and u t i l i t y b i l l .

want t ha t .

anyth ing .

ii BTCKing wrote back: Charl ie , why do you

I would ra the r not have you know anything about

iii SHREM repl ied , I f you send it to me, I can

r a i s e your [ t ransac t ion] l imi t s , promising BTCKing t ha t he

would then never have problems.

iv . BTCKing cont inued to demur, wri t ing: C,

I 'm 52 years old . I am an [e]x business man who was once worth

millions.. . My anonymity i s crucial . . . That i s why I pay your fee

21



otherwise I could s e t up my own accounts but I f ee l we have

something good going here and I don ' t want t h a t to change and I

don ' t th ink you do e i the r . Based on the inves t iga t ion , I

be l ieve BTCKing meant tha t , i f t were not fo r the need to

avoid exposing h is i den t i ty , he would simply have h is customers

depos i t cash i n to h i s personal bank accounts , i ns t ead offunne l ing t he i r t r ansac t ions through the Company and paying the

Company's fees as a r e s u l t .

v. SHREM accepted BTCKing's r e f u s a l to

i den t i fy himself , rep ly ing , simply, Ok.

44. Fina l ly , I have checked law enforcement databases to

determine whether the Company ever f i l e d any Susp ic ious Act iv i ty

Report concerning BTCKing. Despi te BTCKing's opera t ion ofan underground money t r ansmi t t i ng business on an i l l e g a l

websi te , h is f requent l a rge t ransac t ions exceeding the Company's

da i ly depos i t l imi t , and h is r e fusa l to v a l id a t e h i s i d e n t i t y

a l l c lea r s igns of suspicious a c t i v i t y and red f l ags under the

Company's own AML p o l i c i e s - a t no t ime did SHREM ever f i l e any

Suspic ious Act iv i ty Report with FinCEN concerning BTCKing.

45. I have reviewed records from the Thi rd Par ty Exchange

fo r the accounts BTCKing used in doing bus iness with theCompany, as r e f l e c t e d in various e-mai ls between BTCKing and

SHREM The records show tha t , dur ing the per iod from in o r

about December 2011 through in o r about October 2012,

approximate ly $1,050,788 in t o t a l was depos i t ed i n to the

accounts , and approximate ly the same amount was used to purchaseBi tco ins . Moreover, I have reviewed bank records fo r the

Company fo r t h i s t ime period, which show mil l ions of do l la r s

being wired by the Company to the Third Par ty Exchange, which

would have been used in par t to fund the Company's t rans fe rs to

BTCKing's exchange account . 5

46. Thus, the records i nd ica t e t ha t , desp i te being the

Company's AML Compliance Officer , SHREM al lowed BTCKing to

move over $1 mil l ion through the Company's system, knowing t h a t

the funds would be used to promote BTCKing's unlawful Bi tco in

exchange se rv ice on S i lk Road and, ul t ima te ly , the drugt r a f f i c k i n g on S i lk Road t ha t BTCKing's bus iness suppor ted .

5The wires were sent i n t e r n a t i o n a l l y , from the Company's U.S.

bank account to fo re ign bank accounts main ta ined by the Third

Party Exchange in Japan and Poland.

22



BTCKING'S CONTINUED OPERATION IN 2 13

AFTER PARTING W YS WITH SHREM

47. Based on con ten t s of the Shrem E-mail Accounts , I know

tha t , on October 27, 2012, the Cash Processor ceased doing

bus iness with the Company - in par t because, as the CashProcessor CEO t o ld SHREM in an e-mai l , SHREM had not providedan acceptable response to our numerous reques ts fo r informat ion

about the Company's re se l le r s and t h e i r c l i en t s . As a resu l t ,

the Company was no longer able to accep t cash depos i t s fo r

Bi tcoins . BTCKing in t u rn ceased doing bus iness through the

Company a t t ha t t ime.

48. From undercover a c t i v i t y on S i lk Road, I know t ha t

BTCKing t emporar i ly ceased opera t ing on S i lk Road a f t e r

October 2012, presumably due to the l os s of the Company's

se rv ice s . BTCKing did not resume h is opera t ion on Si lk Road

u n t i l Apri l 2013.

49. After BTCKing reopened fo r bus iness , UC-1 again

ef fec ted undercover t r ansac t ions with BTCKing. Those

t r ansac t ions r e f l e c t t ha t , upon reopening, BTCKing no longeropera ted h is se rv ice through the Company, but in s tead used a

personal bank account to rece ive cash depos i t s from customers ,

whi le imposing new requirements on them due to the resu l t ing

increased r i s k of de tec t ion by law enforcement . Spec i f i ca l ly :

a . On Apri l 25, 2013, UC-1 a t tempted to buy Bi tco ins

from BTCKing, contac t ing him through S i lk Road 's p r iv a t e

message system. However, BTCKing dec l ined the t r ansac t ion ,

s t a t ing tha t UC-1 had to have a t l e a s t 8 pr io r purchases on SR

to do business with him. Based on my exper ience in the

inves t iga t ion , I be l ieve BTCKing adopted t h i s ru le to he lpensure his customers were bona f ide Si lk Road users , as opposed

to undercover law enforcement agents .

b. On May 28, 2013, UC-1 again a t tempted to purchase

Bi tco ins from BTCKing, t h i s t ime using an undercover Si lk Road

account t ha t had previous ly been used to make more than e igh t

undercover purchases of drugs on Si lk Road (as r e f l e c t e d in thet r ansac t iona l h i s to ry for the account , v i s ib l e t o o the r S i lk

Road users such as BTCKing ). In plac ing the o rder , UC-1 to ld

BTCKing t ha t UC-1 needed about $3000 of b i t coins to cover

the cos t of some f ine imported coke I had my eye on.

c . BTCKing responded l a t e r t h a t day, t e l l i ng UC-1

to depos i t EXACTLY $3320.00 [C SH ONLY] in to a bank account

23



held in the name of R M Faie l l a , and providing the bank and

account number. UC-1 made the depos i t the next day.

d . UC-1 subsequent ly received a confi rmat ion message

from BTCKing ind ica t ing t h a t the depos i t had been rece ived and

t ha t UC-1 should soon rece ive $3320 in Bitcoins ( l e s sBTCKing's nine-percen t fee ) . UC-1 checked UC-l ' s S i lk Road

account seve ra l hours l a t e r and saw t ha t the Bitcoins had beencred i ted to UC-l ' s S i lk Road Bi tco in address .

50. Other evidence r e f l e c t s t ha t BTCKing was able to

resume a high volume of bus iness opera t ing in t h i s fashion.

Among other th ings , I have reviewed data from computer se rvers

used to host the S i lk Road websi te , which were imaged by law

enforcement in the course of inves t iga t ing S i lk Road. The

se rver data inc ludes the messages sent to and from BTCKing

through Si lk Road 's pr iva te message system, which r e f l ec t

numerous Bitcoin exchange t r ansac t ions consummated with othe r

S i lk Road use rs . From May 1, 2013 to June 30, 2013, fo r

example, BTCKing's pr iva te messages r e f l e c t exchange

t r ansac t ions averaging approximate ly $20,000 per week. By

September 2013, the messages r e f l e c t t ha t he was averaging

approximate ly $25,000 per week. As t o nea r ly a l l of the

t r ansac t ions r e f l e c t e d in his p r iva te messages, the messages

r e f l e c t t h a t BTCKing had his customers depos i t funds in to thebank account re fe renced in paragraph 49.b, held in the name of

R M Faie l l a . As to a handful of othe r o rde rs , BTCKing

in s t ruc ted h i s customers to send cash through the mail to RMFTrus t Co. a t a pos t o f f i c e box loca ted in Cape Coral , Flor ida .

51. BTCKing's pr iva te messages in 2013 f u r th e r r e f l e c t a

con t inu ing awareness of the i l l ega l natu re of h is business , and

a con t inu ing e f fo r t to evade de tec t ion by law enforcement . In

p a r t i c u l a r , on June 15, 2013, BTCKing announced to h is

customers t ha t he was now opera t ing in s t e a l t h mode in order

to keep[] the ou ts ide r s out . According to the S i lk Road

websi te , vendors on the s i t e who cons idered themselves a t

p a r t i c u l a r r i sk of becoming a t a rge t for law enforcement could

operate in s t e a l t h mode, meaning t ha t the vendor ' s l i s t i ngs

were not v i s ib l e to users search ing o r browsing the s i t e .Ins tead, only users who a l ready knew the spec i f i c address of the

vendor ' s homepage on Si lk Road were able to access the vendor ' s

of fe r ings . In t h i s way, the vendor was thought to be i nsu la t ed

from undercover law enforcement agents opera t ing on the s i t e .

52. BTCKing's pr iva te messages f u r th e r r e f l e c t t ha t

BTCKing was s pe c i f i c a l l y aware t h a t he was opera t ing an

unl icensed money t r ansmi t t ing business . In pa r t i c u l a r , from

24



Ju ly 30, 2013 to August 1, 2013, BTCKing had an extended

exchange with the owner and opera to r of the S i lk Road s i t e ,

known by the S i lk Road username Dread P i r a t e Rober t s , o r

DPR.6

In the exchange, in sum and subs tance , DPR s t a t ed t h a t

he was i n t e r e s t e d in es tab l i sh ing an Anonymous Bitcoin

Exchange, separa te from Si lk Road, where he wanted to move thebest exchangers cur ren t ly opera t ing on S i lk Road. DPR

exp la ined t h a t the new s i t e would be s pe c i f i c a l l y t a i l o re d to

Bi tco in exchange se rv ice s , and t h a t he would pe rsona l ly supply

l iqu id i ty to the exchangers on the s i t e . BTCKing's feedback

on DPR's proposa l revea ls t ha t he fu l ly unders tood h is

bus iness was i l l e g a l :

a . BTCKing t o ld DPR t h a t t h a t t he re would have

to be a way on the Anonymous Bi tco in Exchange fo r him to deal

only wi th ve te ran SR [Si lk Road] members given t ha t LE [law

enforcement] w i l l be a l l over t h i s a t f i r s t .

b. BTCKing e labora ted t h a t a Bi tco in exchange

bus iness was cons idered a MSB (money se rv ice s bus iness ) and

had to be l i c ensed .

c. BTCKing exp la ined to DPR, in sum and

substance, t ha t i f h is business was i nves t iga t ed , it would be

easy fo r law enforcement to i den t i fy him given t h a t he was using

personal bank accounts to conduct t r ansac t ions , s t a t ing :

All LE has to do i s go to the bank and ask who i s the

Trus tee of RMF Trust and BANG They wi l l se ize the

funds and me. These organ iza t ions are IRS, Treasury

Dept, FINCEN, Dept of Jus t i ce , Global illi it

Financ ia l Team, US Secre t Serv ice , Homeland secur i ty

All of these have se ized Liber ty Reserve7

d. BTCKing noted he was a l ready having t rouble

with a couple of banks t ha t l i ve and love the BSA [Bank Secrecy

Act ] , as he was having to convince the banks to a l low regula r

cash depos i t s in to h i s account and outgoing wires to the Third

6 A separa te compla int f i l e d in t h i s d i s t r i c t on September 27,

2013, charges t ha t the Dread Pi ra te Roberts username was

con t ro l l ed by ROSS WILLIAM ULBRICHT, a / k / a Si lk Road, a /k /a

Dread Pi ra te Rober t s , a /k /a DPR, who the complain t a l l eges

to have been the owner and opera tor of the s i t e .

7Liber ty Reserve was a v i r t u a l currency se rv ice se i zed by the

Government in May 2013 based on charges of money l aunder ing and

opera t ing an unl icensed money t r ansmi t t i ng bus iness .

25



Par ty Exchange. BTCKingu added t ha t he had t o l d the banks he

was opera t ing a pr iva te peer to peer inves tment group.u

e . In l i g h t of a l l of these concerns , BTCKingu t o ld

DPRu t ha t he did not want to p a r t i c i p a t e in the proposed

Anonymous Bitcoin Exchangeu and pre fe r red ins tead to cont inueopera t ing on S i lk Road in s t e a l t h mode.u

53. Based on undercover a c t i v i t y on S i lk Road, I know tha t

BTCKingu con t inued opera t ing on Si lk Road u n t i l the s i t e was

se ized by law enforcement a u t h o r i t i e s on October 2, 2013.

54. From reviewing FinCEN records , I know t h a t no bus iness

under the name of BTCKingu o r Robert M. Faie l lau has ever

r eg i s t e r ed as a money se rv ice s bus iness with FinCEN.

IDENTIFIC TION OF BTCKING AS ROBERT M. F IELL

55. As descr ibed above in paragraphs 49 .b and 50, a f t e r

reopening h is se rvice on Si lk Road in Apri l 2013, BTCKingu

cons i s ten t ly t o ld h is cus tomers to depos i t t h e i r funds in to a

bank account held by R M Faie l l a .u I have reviewed records fo r

the account in quest ion , which r e f l e c t t h a t ROBERT M. FAIELLA,

the defendant , i s the lone s igna tory on the account , and t ha t he

opened the account in October 2012 in Flor ida , around the same

t ime t ha t the Company ceased accep t ing cash depos i t s .

56. I have a l so reviewed records from the Thi rd Party

Exchange r e l a t i n g to the accounts the re t ha t BTCKingu used torece ive funds from the Company. The records r e f l e c t t ha t the

Third Par ty Exchange had requ i red the customer to submit

i d e n t i t y documents to main ta in the accounts , and t h a t the

i d e n t i t y documents submit ted were in the name of ROBERT M.

FAIELLA, the defendan t .

57. Fur ther , as descr ibed in paragraph 27, in numerous e

mai ls or ig ina t ing from BTCKing'su var ious e-mai l accounts ,

BTCKingu s igned h is e-mai ls with the l e t t e r B.u Addi t ional ly ,

a t l eas t two e-mai l s were s igned with the name Bob.u

58. Simi la r ly , as re fe renced in paragraph 43 .c . iv , in an

e-mai l sent to SHREM BTCKingu mentioned he was 52 years o ld .u

This matches the age of ROBERT M. FAIELLA, the defendan t .

59. I have a l so examined the headers of many of the e

mai ls sent by BTCKing,u many of which r e f l e c t a pa r t i c u l a r IP

address fo r the sender of the e-mai l . According to records from

the In te rne t se rv ice prov ider t ha t con t ro l s the IP address , the

26



IP address was ass igned a t the re l evan t t imes to a woman known

to be the wife of ROBERT M. FAIELLA, the defendant , a t an

address in Cape Coral , Flor ida known to be FAIELLA's homeaddress . Further from reviewing BTCKing's e-mai l

communications with SHREM I know t ha t in an e-mai l dated May

24, 2012, BTCKing t o ldSHREM

he l ived in south Flor ida .

60. Accordingly , I be l ieve t ha t the i nd iv idua l respons ib le

for opera t ing an underground Bitcoin exchange se rv ice on Si lk

Road as BTCKing, with the ass i s tance of CHARLIE SHREM the

defendant , i s ROBERT M. FAIELLA, a /k /a BTCKing, the defendant .

WHEREFORE I respec t fu l ly reques t t ha t a r r e s t warran ts be

i s sued for ROBERT M. FAIELLA, a /k /a BTCKing, and CHARLIESHREM the defendants , and t ha t they be a r r e s t e d and imprisoned

or ba i l ed as the case may be.

Swor£ to before me t h i s

i ~ ¥ 1 ay of January 2013

IJ

UNITED-S'fiTES MAGISTRATE JUDGESOUTHERN DISTRICT OF NEW YORK

·~ ~c ; : : > ~ cr·-ty / £

/

Special Agent

In te rna l Revenue Service

Date post:	03-Jun-2018
Category:	Documents
Upload:	sam-e-antar
View:	214 times
Download:	0 times

USA v Robert M. Faiella & Charlie Shrem - Sealed Complaint

Documents