Crime & Punishment: Bitcoin Criminals

Crime is changing. Law enforcement has better tools and more information. Investigators solve cases now with DNA, cell phone location, and social media posts. At the same time, crime has become more sophisticated. Drug dealers and thieves have adopted technology designed to make detection impossible. As with crime throughout the ages, though, criminals are still making false assumptions about what can be discovered and are simply making old fashioned mistakes.

Recently, media reported that thousands of computers had been infected with ransomware. To put it simply, ransomware is code that prevents you from using your system until a ransom is paid in Bitcoin.

Bitcoin is a virtual currency that appears to be favored by cybercriminals. Several fascinating cases involve the use of Bitcoin. But we can see from the fact that the cases were solved that Bitcoin isn’t foolproof for the criminal.

What Is Bitcoin?

Bitcoin is a virtual currency that has gained wide acceptance. It is not backed by any government or bank but maintains value because users are willing to trade for it and convert it into traditional currency. Bitcoins can be purchased through an exchange using traditional currency.

The system is designed to be anonymous. The bitcoins are sent to a user’s Bitcoin address, which is an individual code or a key. Bitcoin transactions are recorded on something called a block chain, which is essentially the ledger or the way to keep track of the bitcoins that have been issued. The block chain does not record any personally identifying information. The anonymity, of course, is very attractive to cybercriminals.

Silk Road

The Silk Road was a “dark web” forum for buying, selling and trading that was set up to be anonymous. Its founder and operator was the Dread Pirate Roberts, later discovered to be Ross Ulbricht. Many of the transactions involved illegal drugs. You would think that a person who set up a website that openly sold drugs would be caught quickly or at least driven out of business quickly.

That wasn’t so with the Silk Road because of technology. First, the marketplace was set up to use the TOR network that was set up to hide the Internet Protocol addresses of the users and thus allowing anonymity.[1] Second, the transactions were conducted with Bitcoin, which at least at the time was believed to be untraceable. When developing the Silk Road, Ulbricht first offered hallucinogenic mushrooms that he’d grown. Use expanded exponentially.

The government claimed that Silk Road operated like an illegal eBay.[2] The Silk Road operated for several years and served as the vehicle for millions of dollars of illicit transactions.

Apparently, anonymous online drug dealers were kept honest through a series of user reviews.

Finally, through a careful and detailed investigation that included obtaining cooperation from others involved in operating the Silk Road, the government learned the identity of the Dread Pirate Roberts.[3] Agents found him in a public library in San Francisco, logged in as the administrator of the Silk Road. They seized his laptop. The forensics on the laptop provided much of the evidence used to try and convict Ulbricht. He was indicted in federal court in New York for engaging in a narcotics trafficking conspiracy, computer hacking and money laundering. The indictment alleged that the Silk Road was the “most sophisticated and extensive criminal marketplace on the Internet” and was “used by several thousand drug dealers and unlawful vendors to distribute hundreds of kilograms of illegal drugs and other illicit goods and services to well over a hundred thousand buyers worldwide” and to launder hundreds of millions of dollars. Ulbricht was also alleged to have solicited the murder of several individuals he believed posed a threat to the Silk Road.[4]

Unfortunately for Ulbricht, he kept a text file on his laptop that detailed many of his activities operating the Silk Road.[5] As noted by the Second Circuit, “[a]s the site began to garner significant interest in 2011, Ulbricht wrote in his journal that he was “creating a year of prosperity and power beyond what I have ever experienced before. Silk Road is going to become a phenomenon and at least one person will tell me about it, unknowing that I was its creator.”[6] That probably did not help him at trial.

Ulbricht’s theory at trial was that he had devised the Silk Road as a free-market, libertarian experiment but divested himself of any ownership or control and that there were several Dread Pirate Roberts who operated the Silk Road.

The jury took just a few hours to convict. Ulbricht received a life sentence after the court held him responsible for several overdose deaths from Silk Road drugs.

But that isn’t the interesting part. The interesting part is the greed that gripped some of the brilliant investigators who took down the Silk Road. After Ulbricht was tried and convicted, two of the agents who worked on the investigation were arrested and charged with extorting Ulbricht and stealing from the Silk Road. The agents got caught up in the activity they were investigating. The affidavit in support of their arrest warrants reads like a crime novel.[7] Carl Force was a Drug Enforcement Administration agent, and Shaun Bridges was a Secret Service agent. They served on the Baltimore Silk Road Task Force. Force was the lead undercover agent who was in communication with the Dread Pirate Roberts. Bridges was the computer forensics expert. During the investigation (and acting on his own), Force created several online aliases to communicate with the Dread Pirate Roberts and extorted money from him in exchange for not providing the government with certain information. One of the personas was “French Maid.” Dread Pirate Roberts sent French Maid $100,000 in Bitcoin. Force also stole much of the Bitcoin he received while acting undercover. He even figured out how to steal approximately $300,000 worth of Bitcoin from another user. When one of his own accounts was frozen, he fraudulently stamped his supervisor’s name to a subpoena and directed the company to unfreeze his account.

Bridges if anything was even more fascinating. He gained access to a Silk Road administrator account as a result of the arrest of a Silk Road employee. Silk Road then suffered a sizeable theft of bitcoins, which were moved to a Japanese digital currency exchange. Bridges formed a company, opened a Fidelity account in the name of the company, and then transferred more than $800,000 from the exchange. Two days after moving this money out of the exchange, he served as the affiant on a seizure warrant for that same Japanese exchange.

When Ulbricht was arrested, his computer contained communications with Force that Force had never memorialized. Force also used encryption on the communications that were not turned over to other law enforcement.

Both agents were charged and pled guilty to various federal felonies. Bridges is serving a 71-month sentence and Force, 78 months.[8]

On May 31, 2017, the Second Circuit affirmed Ulbricht’s convictions and life sentence.

Dr. Evil Likes Bitcoin, Too

Next on our Bitcoin hit parade, we move from the Dread Pirate Roberts to “Dr. Evil,” later discovered to be Michael Brown, whose conviction was confirmed by the Sixth Circuit on May 15, 2017.[9] I recommend reading the opinion if for no other reason than Judge Sutton’s storytelling. During the 2012 presidential campaign, Brown, acting as “Dr. Evil,” sent flash drives to the Franklin, Tennessee, offices of Pricewaterhouse-Coopers and the Williamson County Republican and Democratic Party headquarters, containing encrypted files. Dr. Evil claimed that the files contained Mitt and Ann Romney’s tax returns that he had allegedly hacked from the accounting firm. All the parties had to do to prevent Dr. Evil from releasing the encryption code was deposit $1 million in — of course — Bitcoin into accounts he specified.

Dr. Evil made some errors. The Secret Service was able to find text in the unallocated space of the drives, indicating files that had been deleted. Investigators linked the text to an email address Brown had used. The best part is that the drives also contained images of cats that turned out to be Brown’s neighbor’s cats. So the case also presents an issue of cat identification. When the agents obtained a search warrant, they learned that Brown’s internet browser had bookmarked the Bitcoin addresses he provided in the extortion letters. Brown is serving a 48-month sentence.

Anonymous but Traceable

So, Bitcoin is not infallible for criminals. In fact, because Bitcoin is digital, it leaves a trail that law enforcement will ultimately be able to follow. The Second Circuit succinctly described Bitcoin as “anonymous but traceable.”[10] The federal government has already brought a number of cases against Bitcoin traders who helped others illegally shield their identities and avoid registration or reporting requirements. Expect more to come.

Notes

  1. TOR stands for The Onion Router.
  2. United States v. Ulbricht, 31 F. Supp. 3d 540, 547 (S.D.N.Y. 2014).  After this column was drafted, the Second Circuit affirmed Ulbricht’s convictions and life sentence. United States v. Ulbricht, No. 15-1815-cr (2d Cir. May 31, 2017).
  3. The Second Circuit opinion discusses both the technical aspects and the law surrounding the use of Pen/Trap orders that allowed the government to monitor Ulbricht’s IP addresses; the search warrants for his laptop and Facebook and Google accounts.
  4. Brief of the Appellant, United States v. Ulbricht, United States Court of Appeals for the Second Circuit, Case 15-1815, Document 30, Jan. 12, 2016.
  5. The story is told in fascinating detail in “The Rise & Fall of Silk Road, Part I,” Wired.com, https://www.wired.com/2015/04/silk-road-1/ and Part II, https://www.wired.com/2015/05/silk-road-2/
  6. Slip op. at 15.
  7. United States v. Carl Mark Force IV, et al., N.D.Ca., No. 3-15-70370, Criminal Complaint and Affidavit, available at https://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/03/30/criminal_complaint_forcev2.pdf.
  8. United States v. Bridges, N.D.Ca, No. 3:15-cr-00319.
  9. United States v. Michael Mancil Brown, No. 16-6291 (6th Cir. 5/15/2017), available at http://www.opn.ca6.uscourts.gov/opinions.pdf/17a0105p-06.pdf.
  10. Ulbricht, Slip. Op. at 4.
  11. See, https://www.justice.gov/usao-sdny/pr/manhattan-us-attorney-announces-charges-against-bitcoin-exchangers-including-ceo; https://www.justice.gov/usao-me/pr/detroit-man-pleads-guilty-case-involving-bitcoins.

WADE DAVIES is the managing partner at Ritchie, Dillard, Davies & Johnson PC in Knoxville. He is a 1993 graduate of the University of Tennessee College of Law. The majority of his practice has always been devoted to criminal defense. Davies is a member of the Tennessee Bar Journal Editorial Board.

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