BTC and other Cryptos Not a Safe Haven for Criminals, Officials Claim After Seizing $3.6B in Crypto Stolen in Bitfinex 2016 Hack

Stephen Palley. Partner, Anderson Kill. Chair, Technology, Media & Distributed Systems Group, noted that an FBI agent once told (with “false modesty to be sure”) that their biggest breaks often “come not from law enforcement genius but from mistakes by their targets.”

Palley further noted that this criminal case involving a massive circa 2016 crypto exchange hack has “a bit of both — dogged investigators who spent years painstakingly tracing funds, using the magic of an open blockchain, and alleged criminals who made critical errors, including storing private keys in the cloud.”

According to Palley, the facts here “are fascinating, and a case study for how crypto can sometimes actually make law enforcement easier, even years after an alleged crime.”

As covered, two individuals have were arrested (in Manhattan) for an alleged conspiracy to launder cryptocurrency that was “stolen during the 2016 hack of Bitfinex, a virtual currency exchange, presently valued at approximately $4.5 billion.” Thus far, law enforcement has seized “over $3.6 billion in cryptocurrency linked to that hack.”

Deputy Attorney General Lisa O. Monaco had noted on February 8, 2022:

“Today’s arrests, and the department’s largest financial seizure ever, show that cryptocurrency is not a safe haven for criminals. In a futile effort to maintain digital anonymity, the defendants laundered stolen funds through a labyrinth of cryptocurrency transactions. Thanks to the meticulous work of law enforcement, the department once again showed how it can and will follow the money, no matter what form it takes.”

Assistant Attorney General Kenneth A. Polite Jr. of the Justice Department’s Criminal Division had also noted on February 8, 2022:

“Today, federal law enforcement demonstrates once again that we can follow money through the blockchain, and that we will not allow cryptocurrency to be a safe haven for money laundering or a zone of lawlessness within our financial system. The arrests today show that we will take a firm stand against those who allegedly try to use virtual currencies for criminal purposes.”

Ilya Lichtenstein, 34, and his wife, Heather Morgan, 31, both of New York, New York, are now “scheduled to make their initial appearances in federal court today at 3:00 p.m. in Manhattan.”

According to court documents, Lichtenstein and Morgan allegedly “conspired to launder the proceeds of 119,754 bitcoin that were stolen from Bitfinex’s platform after a hacker breached Bitfinex’s systems and initiated more than 2,000 unauthorized transactions.”

Those unauthorized transactions sent the pilfered BTC to a digital wallet under Lichtenstein’s control. During the past 5 years, around 25,000 of those stolen BTC had been transferred out of Lichtenstein’s wallet through a complicated money laundering process that “ended with some of the stolen funds being deposited into financial accounts controlled by Lichtenstein and Morgan.”

The remainder of the stolen funds, comprising over 94,000 bitcoin, “remained in the wallet used to receive and store the illegal proceeds from the hack.” After the execution of court-authorized search warrants of online accounts controlled by Lichtenstein and Morgan, special agents “obtained access to files within an online account controlled by Lichtenstein.”

Those files contained the private keys needed “to access the digital wallet that directly received the funds stolen from Bitfinex, and allowed special agents to lawfully seize and recover more than 94,000 bitcoin that had been stolen from Bitfinex.” The recovered bitcoin was “valued at over $3.6 billion at the time of seizure.”

U.S. Attorney Matthew M. Graves for the District of Columbia stated:

“Cryptocurrency and the virtual currency exchanges trading in it comprise an expanding part of the U.S. financial system, but digital currency heists executed through complex money laundering schemes could undermine confidence in cryptocurrency. The Department of Justice and our office stand ready to confront these threats by using 21st century investigative techniques to recover the stolen funds and to hold the perpetrators accountable.”

The criminal complaint alleges that Lichtenstein and Morgan “employed numerous sophisticated laundering techniques, including using fictitious identities to set up online accounts; utilizing computer programs to automate transactions, a laundering technique that allows for many transactions to take place in a short period of time; depositing the stolen funds into accounts at a variety of virtual currency exchanges and darknet markets and then withdrawing the funds, which obfuscates the trail of the transaction history by breaking up the fund flow; converting bitcoin to other forms of virtual currency, including anonymity-enhanced virtual currency (AEC), in a practice known as “chain hopping”; and using U.S.-based business accounts to legitimize their banking activity.”

Chief Jim Lee of IRS-Criminal Investigation (IRS-CI), said:

“IRS-CI Cyber Crimes Unit special agents have once again unraveled a sophisticated laundering technique, enabling them to trace, access and seize the stolen funds, which has amounted to the largest cryptocurrency seizure to date, valued at more than $3.6 billion.”

FBI Deputy Director Paul M. Abbate, remarked:

“Thanks to the persistent and dedicated work of our FBI Investigative teams and law enforcement partners, we’re able to uncover the source of even the most sophisticated schemes and bring justice to those who try to exploit the security of our financial infrastructure.”

Acting Executive Associate Director Steve Francis of Homeland Security Investigations (HSI), noted:

“Ilya Lichtenstein and his wife Heather Morgan attempted to subvert legitimate commerce for their own nefarious purposes, operating with perceived anonymity. Today’s action demonstrates HSI’s commitment and ability to work with a collation of the willing to unravel these technical fraud schemes and identify the perpetrators, regardless of where they operate.”

Lichtenstein and Morgan are “charged with conspiracy to commit money laundering, which carries a maximum sentence of 20 years in prison, and conspiracy to defraud the United States, which carries a maximum sentence of five years in prison.”

A federal district court judge will “determine any sentence after considering the U.S. Sentencing Guidelines and other statutory factors.”

The investigation was led by IRS-CI Washington, D.C. Field Office’s Cyber Crimes Unit, the FBI’s Chicago Field Office, and HSI-New York. The Ansbach Police Department in Germany offered assistance during this investigation.

For more details on this update, check here.

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