How the Fed cracked down on suspected money launderers linked to the Bitfinex hack


The US government’s $3.6 billion bitcoin bust this week appears to mirror its success five years ago in disrupting some operations used by criminals to launder stolen funds.

The Justice Department said it executed a search warrant last week and seized 94,636 bitcoins from the online wallets of two suspected money launderers, Heather Morgan, 31, and her husband, Ilya Lichtenstein, 34.

The bitcoin seized is believed to have made up the bulk of around 120,000 bitcoins stolen in 2016 from crypto exchange Bitfinex in a hack.

According to the federal government’s complaint, the couple moved the stolen funds through sites such as AlphaBay, which exist in what’s known as the dark web – a part of the internet accessible only through special browsers designed to hide identities. – and services called mixers used to break down crypto transactions to make them harder to track. They created fictitious accounts with non-hosted wallets and about 10 other cryptocurrency exchanges, using numerous email addresses, according to the government.

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The pair have not been charged with the original Bitfinex theft, and no one else has been charged with it so far.

Attempts to reach Lichtenstein and Morgan for comment on February 9 were unsuccessful. A lawyer for the couple, Anirudh Bansal, declined to comment.

On February 8, Bansal told a judge that his clients had known about the government investigation since November and had not attempted to flee the country.

On Tuesday, federal prosecutors announced they had arrested Lichtenstein and Morgan and charged them with attempting to launder the stolen funds.

In July 2017, the Department of Justice seized and shut down AlphaBay, which the government says had 200,000 users buying and selling stolen identity documents, counterfeit goods, malware, guns and electronics. other illicit products.

Prosecutors did not specify in this week’s complaint how they initially linked Morgan and Lichtenstein to the stolen bitcoins. According to Tom Robinson, co-founder of crypto-analytics firm Elliptic Enterprises, it’s likely the government identified the two through the AlphaBay marketplace.

The complaint includes flowcharts that show the stolen funds flowing from Bitfinex to AlphaBay, and through the bitcoin blockchain to the various other accounts the couple allegedly created.

“It probably allowed [the government] to access AlphaBay’s internal transaction logs, which would allow them to trace stolen Bitfinex funds,” Robinson said.

The Justice Department declined to comment.

Authorities said they traced the flow of funds through non-hosted wallets and through exchanges, according to the complaint, finding transactions that landed in accounts on exchanges that the two alleged launderers had in their real names. In one instance, according to the complaint, two of those accounts shared a connection from the same location in New York.

READ Crypto crime hits record high as $14 billion goes to fraudsters in 2021

About $2.9 million was transferred from those accounts to bank accounts held by Lichtenstein and Morgan, according to prosecutors.

Authorities also traced some of the funds through two exchanges and different accounts to transactions in 2020 with a gift card service, whose account was held in Lichtenstein’s real name, according to the complaint.

According to the complaint, Lichtenstein and Morgan exchanged some bitcoin for other cryptocurrencies, cashed out some through bitcoin ATMs, and used the stolen funds to purchase non-fungible tokens, or NFTs. These digital collectibles have recently become another way for crypto thieves to launder digital money, the US Treasury Department said in a report last week.

On January 31 and February 1, agents from the US Department of Justice executed a search warrant and seized bitcoins from online wallets, according to the complaint.

Federal authorities have had their own crypto wallets which they use to hold seized assets.

Over the past decade, the US government has expanded its infrastructure to track down crypto theft, supplementing its traditional investigative methods with those aimed at the unregulated digital asset market.

The federal government has contracted with analytics firms, including Chainalysis and Elliptic, to create software designed to track illicit funds on the blockchain. While the blockchain publicly tracks every bitcoin transaction, there are hundreds of millions of pseudonymous transactions for authorities to sift through.

Both companies declined to say whether they had helped with the investigation.

A San Francisco-based digital bank called Anchorage Digital has a contract with the Department of Justice whereby it hosts the government wallet and related services. The bank declined to comment, although it has already made the contract public.

Prosecutors said victims of the hack with legitimate claims can ask for the money to be returned and the courts will ultimately decide how to allocate the money.

Write to Paul Vigna at [email protected]

This article was published by Dow Jones Newswires


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