Paxful Sentenced Over AML Failures and Illegal Prostitution Links

The sentencing of Paxful Holdings Inc marks one of the clearest judicial warnings yet to virtual asset trading platforms that anti-money laundering failures will be treated as criminal conduct, not regulatory oversight. On 11 February 2026, the US Department of Justice confirmed that the peer-to-peer crypto platform was ordered to pay a $4 million criminal penalty after pleading guilty to conspiring to violate the Travel Act, the Bank Secrecy Act (BSA), and operating an unlicensed money transmitting business.

While the penalty reflects an assessment of the company’s ability to pay rather than the scale of misconduct, the underlying facts are significant. Between 1 January 2017 and 2 September 2019, Paxful facilitated 26.7 million trades worth nearly $3 billion, generating almost $30 million in revenue. Prosecutors established that the platform knowingly processed funds linked to fraud, extortion, romance scams, illegal prostitution, commercial sex trafficking and child sexual abuse material.

Critically, Paxful’s business model was built around attracting high-risk users. According to court documents, the company marketed itself as requiring minimal know-your-customer KYC information, presented anti-money laundering AML policies to third parties that were not implemented in practice, and failed to file suspicious activity reports despite awareness of criminal activity. The deliberate positioning of weak controls as a commercial advantage is central to the criminal charges.

The case also underscores the continued enforcement focus on crypto’s role in facilitating prostitution and trafficking networks. Paxful knowingly transferred bitcoin on behalf of Backpage, the notorious online advertising platform that admitted to profiting from illegal prostitution, including offences involving minors. Internal references to the so-called “Backpage Effect” demonstrated that Paxful’s founders recognised the revenue uplift generated by servicing this sector. Between December 2015 and December 2022, approximately $17 million in bitcoin was transferred from Paxful wallets to Backpage and a similar site, generating at least $2.7 million in profit for Paxful.

The guilty plea covers conspiracy to violate the Travel Act by promoting illegal prostitution through interstate commerce, conspiracy to operate an unlicensed money transmitting business, and conspiracy to breach the BSA’s AML programme requirements. The Department of Justice assessed that an appropriate penalty based on the facts and law would have been $112.5 million, but determined through independent financial analysis that the company could not pay more than $4 million.

Importantly, Paxful’s resolution was coordinated with the Financial Crimes Enforcement Network (FinCEN), reinforcing the integrated criminal and regulatory approach to crypto compliance failures. The investigation was led by Homeland Security Investigations HSI and Internal Revenue Service Criminal Investigation (IRS-CI), with prosecution handled by the Criminal Division’s Money Laundering, Narcotics and Forfeiture Section.

For compliance professionals and virtual asset service providers, the case reinforces several structural lessons. First, weak AML controls are not merely supervisory deficiencies but can constitute criminal conspiracy where intent and knowledge are present. Second, marketing compliance gaps as a competitive differentiator creates evidential risk that will be difficult to defend. Third, collaboration with high-risk counterparties such as platforms linked to prostitution or trafficking can elevate exposure from regulatory breach to criminal liability.

This sentencing reflects an escalating enforcement posture toward crypto platforms that position themselves as compliance-light environments. The message from the Department of Justice is unambiguous: platforms that prioritise growth and revenue over KYC, AML and BSA compliance risk criminal conviction, not simply civil penalty.

Read the press release here.