Bitcoin Pyramid Schemes Wreak Havoc in Brazil’s ‘New Egypt’ | Business and finance

CABO FRIO, Brazil (AP) — In April, Brazilian federal police stormed the helipad of a beachfront boutique hotel in the state of Rio de Janeiro, where they arrested two men and a woman loading a helicopter with 7 million reais ($1.3 million) in neatly wrapped packages. bills.

The detainees told police they worked for GAS Consulting & Technology, a cryptocurrency investment firm founded by a former server-turned-multimillionaire who is the central figure in what is believed to be one of the world’s largest pyramid schemes. from Brazil.

Police say the company owned by Glaidson Acácio dos Santos, 38, carried out transactions worth a total of at least $7 billion (38 billion reais) from 2015 to mid-2021 in connection with a Bitcoin-based Ponzi scheme that promised investors 10% monthly returns.

In hundreds of pages of documents obtained by The Associated Press, police and federal and state prosecutors accuse dos Santos and his associates of staging a sophisticated racket defrauding thousands of small investors who thought they were getting rich from Bitcoin’s strong appreciation. He is now in a Rio jail awaiting trial on charges of racketeering, financial crimes and ordering the murder and attempted murder of two business competitors. He remains under investigation into the attempted murder of a third competitor.

In public statements, dos Santos repeatedly asserted his innocence. His attorneys did not respond to requests for comment from the AP.

Despite the long list of accusations against him, dos Santos is an unlikely hero to his staunch supporters. Many see him as a lowly black man whose unorthodox bitcoin business has made them rich by gambling on a financial system they believe is rigged by wealthy white elites.

The case also highlights the growing appetite for cryptocurrencies in Brazil, where years of economic and political crises have made digital currencies an attractive shield against the depreciation of the Brazilian real and double-digit inflation.

Bitcoin fervor was particularly strong in Cabo Frio, the resort town of 230,000 people where GAS was based. As GAS revenues grew, enriching early adopters, copycat companies sprung up, seeking to cash in on the craze. A wave of cryptocurrency violence quickly followed.

With so many alleged pyramid schemes, Cabo Frio has become known as “New Egypt”. And as the top dog in town, dos Santos has been dubbed the “Bitcoin Pharaoh.”

Police say dos Santos began trading bitcoin after quitting his job as a server in 2014. A former evangelical preacher in training, he enlisted clients of the Worldwide Church of the Kingdom of God, the largest neo-Pentecostal group. of Brazil, who earned a referral fee for bringing in new recruits and reimbursing money to GAS, according to police documents.

Jéfferson Colombo, a cryptofinance researcher at the Getulio Vargas Foundation in Sao Paulo, said religious groups are often targeted by pyramid schemers. “It is through contacts that you increase the base of the pyramid,” he said.

In a statement, the Universal Church said it was cooperating with authorities and accused dos Santos of “harassing and recruiting” pastors and their flocks to join his company.

By 2017, dos Santos was starting to make a lot of money and attracting the attention of authorities. That year, his company’s transactions totaled nearly 10 million reais ($1.8 million), 15 times more than the previous year, as money was siphoned in and out of his bank accounts from all of Brazil, according to a federal police report. The country’s financial intelligence unit also noticed that the company – at the time registered as a restaurant – regularly traded cryptocurrencies on online exchanges.

According to prosecutors, the alleged scheme worked as follows: Dos Santos instructed clients to deposit their money — in cash to avoid further scrutiny — into bank accounts operated by managing partners. The money would then be transferred to dos Santos or his Venezuelan wife, Mirelis Yoseline Diaz Zerpa, who would pocket it, use it to buy bitcoins and other cryptocurrencies as well as traditional financial assets, or pay back other program members.

Clients were promised a 10% monthly return on their investments over contract periods of 12 to 48 months, but did not own the bitcoins they were told GAS was buying with their money. And, they were assured, it was risk-free: they would recover their entire initial investment at the end of the contract.

As Bitcoin fever rose, dos Santos was quickly becoming a celebrity in Cabo Frio.

“If he wanted to run for mayor or even governor, he would win,” said Gilson Silva do Carmo, 52, one of dos Santos’ alleged victims.

The chubby young man in thick-rimmed glasses was also taking a liking to the high life, police and prosecutors said. Dos Santos bought expensive jewelry and a posh apartment as contracts poured in from elsewhere in Latin America and from as far afield as the United States, Europe and the Gulf.

Brazil’s lenient laws governing cryptocurrency have helped fuel the rise of dos Santos, experts say.

At the same time, Brazil’s securities regulator was making digital currencies more attractive: it allowed investment funds in the country to invest in cryptocurrencies in 2018, giving them greater credibility. Last year, Brazil approved Bitcoin exchange-traded funds, only the second country in the world to do so. And Rio de Janeiro recently said it wants to offer incentives to those who pay municipal property taxes using bitcoins.

Meanwhile, transactions in Brazilian reais on the world’s largest cryptocurrency exchange, Binance, jumped to nearly $8.5 billion in the fourth quarter of 2021, from just $152 million during the same period. period a year earlier, according to market data provider Kaiko.

In and around Cabo Frio, where residents had seen their neighbors reap the rewards by investing their savings in GAS, many began to fear they would miss out.

Do Carmo was among them. After catching COVID-19 and struggling to get back to work, he was forced to dip into his retirement savings to make ends meet.

Then his therapist told him that he had sold his house to invest in GAS and had been receiving monthly returns of 10% for the past year. Do Carmo invested 40,000 reais ($7,000) – just over half of the money left in his retirement fund.

In Cabo Frio, the success of dos Santos inspired other budding entrepreneurs to follow in his footsteps, not to mention those of Charles Ponzi, who died nearby in a charity ward of a Rio de Janeiro hospital in 1949. Italian immigrant who engineered one of the biggest scams in US history in the 1920s has been buried in a public cemetery in Rio with his last $75.

Some competitors have promised even higher returns than GAS – 20% or more per month.

The mayor of Cabo Frio, José Bonifácio, admitted that his city was under the spell. “The talk of the town was how much (Bitcoin) was at which gave a bigger return,” he said.

In mid-April, he discussed with associates how his rivals were encroaching on his territory, according to WhatsApp messages intercepted by federal police.

“There is a trader here in Cabo Frio, Mr. Pessano, who picks up my customers. I can’t let this happen,” dos Santos wrote.

Less than four months later, on August 4, Wesley Pessano, who identified himself on social media as a cryptocurrency trader, was shot dead in his Porsche. Police accuse dos Santos of ordering the hit.

Rio state police also linked two attempted murders to dos Santos and what they called his “kill squad.” On March 20, a shopkeeper known as Nilsinho was shot dead while driving his BMW in Cabo Frio. He was seriously injured but survived. Three months later, the operator of another company is targeted, his car hit by 40 bullets; he also survived.

Things came to a head on April 28 when federal police in Rio, acting on an anonymous tip, seized the 7 million reais at the Insolito Boutique Hotel heliport in Buzios, a short drive from Cabo Frio. A months-long investigation into dos Santos’ affairs followed.

On August 25, alerted that dos Santos was planning to flee Brazil, federal police raided more than a dozen GAS-related locations, including dos Santos’ home where he was found with 13.8 million reais ($2.5 million) and taken into custody. Officers also found hard drives containing 10 times that amount in Bitcoin, gold bars, jewelry, and several sports cars, including a white Porsche Panamera and an electric blue BMW Z4 convertible.

Sixteen other associates have also been charged, including Diaz Zerpa, dos Santos’ 38-year-old wife, who left the country weeks before the raid and is believed to be in Florida, authorities said. They say she withdrew more than 4,300 bitcoins worth $185 million (1 billion reais). Attempts by the AP to locate her have failed.

Do Carmo watched in horror as the seizures and arrests unfold; he had invested the rest of his savings in the business a few weeks earlier.

“I thought, ‘My God, what have I done?’ “, he said. “You look at everything you fought for, your whole life fades away at any moment.”

Yet many early GAS investors who received regular monthly payments refused to believe that dos Santos had done anything illegal.

After his arrest, a crowd gathered outside the TV Globo television station in Rio de Janeiro to protest coverage of the alleged racketeering. In October, dozens of supporters blocked the street outside a federal courthouse in Rio, demanding his release.

Jeferson Brandão, a tax lawyer, GAS investor and staunch defender of dos Santos, said the company offers an attractive alternative to a banking industry that “only charges you fees”.

GAS offered investors a chance to “share in the profits”, Brandão said. “‘Instead of giving you a piece of the cake, I’m going to give you a piece of it'”.

From prison, dos Santos proclaimed his innocence. In an open letter to investors last month, he accused authorities of freezing GAS assets and “forbidding me to pay you”.

Brazilian law enforcement is still trying to uncover the true size of dos Santos’ empire.

Prosecutors have identified at least 27,000 GAS victims, with operations in at least 13 Brazilian states and seven other countries, including the United States, United Arab Emirates, United Kingdom and Portugal.

The true tally is likely much higher, said Luciano Regis, an attorney representing dozens of victims. He said one of his clients enlisted his 82-year-old husband, mother, brother, sister-in-law and aunt, investing a total of 822,000 reais (about $150,000).

“It’s hard to have a conversation with someone in Cabo Frio who doesn’t know someone who has invested,” he said.

Copyright 2022 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.