Police officials in Rio de Janerio have uncovered a money laundering scheme in which state officials siphoned off money intended for prison supplies, using bitcoin to exchange some of the proceeds.

The scam involved misstating the budget spent on food for state-run prisons, ultimately diverting funds worth $22.4 million - though only a small portion of the total was converted into bitcoin.

According to local reports, warrants were issued to search 28 sites, with seven people being held so far. Former police chief Marcelo Martins and the former head of the state prison system, Cesar Rubens Monteiro Carvalho, were arrested in connection with the racket on Tuesday.

Warrants have also been issued for several other suspects. At least one state official said the scheme was spearheaded by former Rio de Janerio governor Sérgio Cabral, who was sentenced to 14 years in prison in 2017 for charges that included corruption and money laundering.

Agência Brasil reports that the money laundering scheme has been going on since 2001, long before some of the participants started converting cash into bitcoin.

The Superintendent of the Internal Revenue Service in Rio de Janeiro, Luiz Henrique Casemiro, reportedly said (via translation):

"We drew attention, in the Federal Revenue, regarding this specific operation, because for the first time [the] operations [involved] bitcoin. ... [There] were remittances made with the purchase of bitcoin."

Brazil flag image via Shutterstock

The leader in blockchain news, CoinDesk is a media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. CoinDesk is an independent operating subsidiary of Digital Currency Group, which invests in cryptocurrencies and blockchain startups.