DOJ Applies Currency Investigative Techniques in Cryptocurrency Money Laundering Case
On February 8, DOJ announced that it had arrested two individuals, Ilya Lichtenstein and Heather Morgan, for allegedly conspiring to launder approximately $4.5 billion worth of cryptocurrency. In 2016, cryptocurrency exchange Bitfinex was hacked, and, according to DOJ, 119,754 bitcoin were transferred to a digital wallet controlled by Lichtenstein. Subsequently, some of the bitcoin was transferred to financial accounts controlled by Lichtenstein and Morgan, while the remainder of the funds stayed in the digital wallet. Although illicit transactions involving digital assets make up only a small fraction of the financial crimes in the United States and globally, and the market continues to provide innovative, transformative uses of digital assets, DOJ’s charges demonstrate the increasing sophistication in law enforcement’s pursuit of criminals looking to exploit cryptocurrency.
DOJ alleges that Lichtenstein and Morgan constructed an elaborate scheme that involved creating fictitious accounts with false identities, using automated computer programs to control transactions, and “chain hopping,” a process in which bitcoin is converted to other digital currencies. DOJ alleges that Lichtenstein and Morgan ultimately transferred the money into multiple digital currency exchanges, all laundered through US bank accounts and fiat currency through advanced layering of funds to make the digital transactions appear legitimate. The pair allegedly created AlphaBay accounts, which made breaking up the stolen digital currency easier. Smaller amounts were deposited into the AlphaBay accounts. Lichtenstein and Morgan then purportedly withdrew and deposited these funds into Virtual Currency Exchanges (VCEs) around the world.
Lichtenstein and Morgan may have succeeded had these actions been conducted using traditional money laundering tactics, but they could not hide from the digital ledger. Despite Lichtenstein and Morgan’s efforts to conceal each transaction, because digital currency exchanges have a permanent digital footprint, law enforcement traced, accessed, and seized the stolen funds. DOJ says that it traced Lichtenstein’s and Morgan’s various VCE accounts and pieced together the information that allowed investigators to discover the larger digital currency laundering scheme. DOJ estimates that the seized bitcoin was valued at $3.6 billion “at the time of seizure.”
Money laundering through cryptocurrencies remains relatively rare despite the growing popularity of cryptocurrencies because these currencies leave a permanent trail for federal investigation. Some commentators have gone so far as to describe money laundering through cryptocurrencies as “like pulling off a jewelry heist, but leaving a map to your apartment at the scene of the crime.” With cryptocurrency money laundering, violators may be able to make the map more difficult to piece together, but the map still exists.
Lichtenstein’s and Morgan’s arrests show that DOJ is willing and able to extend its money laundering enforcement efforts to cryptocurrency when needed. DOJ is taking a multifaceted approach to preventing digital currency money laundering through the Department’s recent creation of the National Cryptocurrency Enforcement Team with recently appointed Director Eun Young Choi at the helm. In addition, DOJ utilizes existing Criminal Division resources, including from the Computer Crime and Intellectual Property and the Money Laundering and Asset Recovery Sections, in digital currency money laundering investigations. But individuals and companies who want to take advantage of cryptocurrency’s benefits for legitimate purposes need not worry. Indeed, they arguably are better protected when law enforcement scrutinizes illegal activity.
While DOJ can and will pursue purported money launderers like Lichtenstein and Morgan, the cryptocurrency market remains a legal, viable option for individuals and business.
*Laurel Ruza contributed to this blog post. Ms. Ruza is a graduate of the University of Michigan Law School and is employed at Arnold & Porter's New York office. She is not admitted to the practice of law.
© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.