Feds say they caught a key figure in the massive Mt. Gox Bitcoin hack

Feds say a Russian man laundered criminal proceeds through the BTC-e exchange.

Timothy B. Lee – Jul 27, 2017 11:46 am | 56

On Wednesday morning we reported on the arrest of a Russian man suspected of running a $4 billion dollar money laundering scheme. Later in the day, US officials released the indictment against the suspect, Alexander Vinnik.

That indictment reveals that the alleged $4 billion money laundering operation was actually BTC-e, one of the Internet’s most popular Bitcoin exchanges. And Vinnik, the feds say, was an owner and operator of BTC-e. According to the feds, BTC-e didn’t comply with anti-money laundering laws that require financial businesses to collect information about their customers and report suspicious activity to the authorities. As a result, it became popular with ransomware authors looking to cash in their ill-gotten bitcoins and drug traffickers and other criminals looking to move money around the world.

The feds also suggest that Vinnik was a central figure in the massive bitcoin theft that was a major factor in the downfall of Mt. Gox, the Japanese Bitcoin exchange that led the market in Bitcoin’s early years. If those allegations are confirmed, it would lay to rest one of the biggest unsolved crimes in the Bitcoin world.

At the same time, the Financial Crimes Enforcement Network, the US agency responsible for enforcing money laundering laws, announced a $110 million fine against BTC-e.

“We will hold accountable foreign-located money transmitters, including virtual currency exchangers, that do business in the United States when they willfully violate US anti-money laundering laws,” said Jamal El-Hindi, acting director of FinCEN. “This action should be a strong deterrent to anyone who thinks that they can facilitate ransomware, dark net drug sales, or conduct other illicit activity using encrypted virtual currency.”

BTC-e has always had a reputation for secrecy. Until recently, all that was known about its ownership was from a 2013 Coindesk article stating that the exchange was run by “Russian programmers Aleksey and Alexander.” The exchange was rumored to be based in Bulgaria, but it used a variety of shell companies and intermediaries to hide its operations.

The law—in the US and other countries—requires financial intermediaries to collect identifying information from customers to assist law enforcement’s fight against money laundering and other crimes. But the indictment charges that BTC-e failed to follow these laws. Anyone could register for a BTC-e account with just a username, password, and e-mail address, allowing them to potentially cash-in ill-gotten bitcoins without leaving fingerprints.

The scale of BTC-e was huge. Between 2011 and 2016, the feds say, the site received 9.4 million bitcoins. That’s more than $20 billion at today’s prices, though bitcoins were worth a small fraction of their current value in BTC-e’s early years.

Bitcoin is often described as an anonymous payment platform. But the open nature of its shared transaction ledger, the blockchain, often makes it possible to do forensic analysis of financial flows on the Bitcoin network. And the indictment suggests that Vinnik didn’t do a good job of covering his tracks. Funds stolen from Mt. Gox were deposited at BTC-e, to a now-defunct Bitcoin exchange called Trade Hill, and back to Mt. Gox under another account name.

The BTC-e deposits were made to several different BTC-e accounts. These accounts, in turn, were “directly linked to a variety of different BTC-e administrative accounts, accounts for which only BTC-e administrators and/or operators would have had access.” The authorities say that some of these deposits were then cashed out to conventional bank accounts controlled by Vinnik.

Other criminals used BTC-e too, prosecutors say. The perpetrators of a ransomware program called CryptoWall used BTC-e to cash out hundreds of thousands of dollars’ worth of Bitcoin. The indictment also names two corrupt federal agents who engaged in theft of government property and extortion and then laundered the funds through BTC-e.

The operators of BTC-e have not responded to Vinnik’s arrest. A Tuesday tweet stated that the site had been taken down for “unscheduled ongoing maintenance.” The most recent tweet, written in Russian on Wednesday, said that the site expected to go back online in five to 10 days. But with the site being named alongside Vinnik in the criminal indictment, that seems pretty unlikely.