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The US Department of Justice (DoJ) has announced the arrest of a married couple in connection with a conspiracy to launder $4.5 billion worth of cryptocurrency that was stolen hack of the Bitfinex virtual currency exchange.
Ilya Lichtenstein, 34, and his wife Heather Morgan, 31, both of New York, are said to have “stolen funds through a maze of cryptocurrency transactions,” with law enforcement authorities recovering more than $3.6 billion in cryptocurrency while tracking the trail money, which resulted in “the largest financial seizure in history”.
Prosecutors charged the couple not with the hack itself, but rather with receiving the stolen bitcoin in a digital wallet they owned, some of which was laundered to hide the activity and movement of the money. In 2019, Israeli authorities detained two brothers, Eli and Assaf Gigi, for their alleged involvement in a security breach in 2016.
“Bitfinex will work with the Department of Justice and follow the appropriate legal processes to establish our rights to recover the stolen bitcoins,” the company said in a statement, adding that “we have actively cooperated with the Department of Justice since the beginning of its investigation and will continue to do so.”
The laundering scheme involved moving proceeds of 119,754 Bitcoins (BTC) out of Bitfinex by initiating more than 2,000 unauthorized transactions that were redirected to a digital wallet controlled by Liechtenstein. Over the past five years, approximately 25,000 of the stolen bitcoins were transferred and placed in the couple’s financial accounts.
“Beginning in or around January 2017, some of the stolen BTC moved from Wallet 1CGA4s in a series of small, complex transactions across multiple accounts and platforms,” IRS Investigator Christopher Janczewski explained in a written affidavit. “This shuffling, which created a huge number of transactions, appeared to be designed to obscure the path of the stolen BTC, making it difficult for law enforcement to trace the funds.”
To achieve this, the defendants allege they used a number of sophisticated laundering techniques, including:
Setting up online accounts using fake identities,
Use of transaction automation software,
Depositing the stolen funds into accounts at various virtual currency exchanges and dark markets such as AlphaBay and Hydra, and then withdrawing the money to hide the transaction trail,
Converting bitcoins to other private digital currencies such as Monero, a practice known as chain hopping, and
Abusing US business accounts to legalize your banking activities
“About 21% of stolen bitcoins have been moved and laundered over the past five years,” according to a report by blockchain analytics firm Elliptic, noting the use of AlphaBay as a “mixing” service and privacy wallet Wasabi Wallet in an attempt to hide blockchain money paths.
However, the Department of Justice’s seizure and liquidation of AlphaBay in July 2017 allowed law enforcement to access the service’s internal transaction logs, effectively tracking the stolen Bitfinex funds through AlphaBay and into a cryptoasset exchange account in the name of Liechtenstein.
Pursuant to a court-sanctioned search warrant for online accounts controlled by the two individuals, law enforcement officials eventually obtained access to a file stored in a Liechtenstein cloud storage account that contained the private keys needed to access the digital wallet used to receive the funds. allowing authorities to recover the remaining 94,000+ bitcoins.
Both Lichtenstein and Morgan were charged with conspiracy to commit money laundering, which carries a maximum penalty of 20 years in prison, and conspiracy to defraud the United States, which carries a maximum penalty of 5 years in prison.
“Today, federal law enforcement agencies demonstrate once again that we can follow the money through blockchain and that we will not allow cryptocurrency to be a safe haven for money laundering or a lawless zone in our financial system,” said Assistant Attorney General Kenneth A. Pollitt Jr. of the criminal department of the Ministry of Justice. “Today’s arrests show that we will take a strong stand against those who are believed to be trying to use virtual currencies for criminal purposes.”
A New York couple has pleaded guilty to money laundering in connection with the 2016 hack of cryptocurrency exchange Bitfinex, which led to the theft of about 120,000 bitcoins.
The development comes more than a year after Ilya Lichtenstein, 35, and his wife Heather Morgan, 33, were arrested in February 2022 following the seizure of approximately 95,000 stolen crypto assets held by the defendants. The funds at that time were estimated at 3.6 billion dollars.
Since then, the U.S. government said it has seized an additional approximately $475 million related to the hack.
“Liechtenstein used a number of advanced hacking tools and techniques to gain access to the Bitfinex network,” the US Department of Justice (DoJ) said. “Once inside their systems, Liechtenstein fraudulently authorized over 2,000 transactions in which 119,754 bitcoins were transferred from Bitfinex to a cryptocurrency wallet controlled by Liechtenstein.”
He is also alleged to have enlisted his wife to launder cryptocurrency proceeds using various and sophisticated methods: creating online accounts using fake identities, exchanging some bitcoins for gold coins and other crypto-assets, and covering his trail by sending funds through blending services.
Much of the illegal money was moved to the defunct darknet marketplace AlphaBay, blockchain analytics firm Chainalysis said last month, which it said was used as a mixer by depositing stolen bitcoins and withdrawing equivalent amounts.
After AlphaBay was liquidated by law enforcement, the cryptocurrency was sent to other mixers and virtual currency exchanges (VCEs). Then in 2020 and 2021, some of the digital assets were converted into fiat currency and transferred to a US bank account.
In addition, the pair purchased gift cards for Walmart and other companies from another VCE (called VCE 10 in court documents), which offered a specialized service dedicated to cryptocurrency transactions for gift cards using bitcoins that had previously been moved to an exchange.
“Ultimately, the gift card purchases described above provided key leads in the investigation,” Chainalysis said.
“After tracing the initial movements of the cryptocurrency, researchers discovered that the personal wallet address beginning with 36B6mu, which received more than $1 million worth of Bitcoin linked to the Bitfinex hack, funded the VCE 10 account used to purchase gift cards”.
The investigation also revealed that it was the Walmart gift card that was used through the retail giant’s iPhone app under an account in Morgan’s name, allowing authorities to obtain a search warrant for the couple’s home and their cloud storage accounts.
The latter turned out to be a major breakthrough, as it led to the discovery of files containing details of cryptocurrency addresses used to move the stolen funds, including their private keys, as well as fraudulent information used to open accounts at various cryptocurrency exchanges and their plans to purchase fake passports.
Lichtenstein, a Russian national, faces a maximum sentence of 20 years in prison, while Morgan, who pleaded guilty to one count of conspiracy to commit money laundering and one count of conspiracy to defraud the United States, faces a maximum sentence of 10 years
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