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--:-- Sean Rameswaram: Welcome to Today, Explained. I'm Sean Rameswaram.
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--:-- Sean Rameswaram: We all have moments where we could have done better, like cutting your own hair. Oh, yikes. Or forgetting sunscreen, so now you look like a tomato. Ouch. Could have done better. Same goes for where you invest. Level up and invest smarter with Schwab. Get market insights, education, and human help when you need it. Learn more at schwab.com.
--:-- Sean Rameswaram: Warning. Today's show is about the Bonnie and Clyde of Bitcoin. Bonnie has a bit of a potty mouth. Listener discretion is advised.
--:-- Sean Rameswaram: My name is Devlin Barrett. I cover the FBI and Justice Department for The Washington Post.
--:-- Devlin Barrett: So on February 8th, a pretty amazing arrest happened of a couple in New York in their 30s, arrested on charges of trying to launder $4.5 billion worth of Bitcoin. Today, the Department of Justice has dealt a major blow to cyber criminals looking to exploit cryptocurrency. The Justice Department says that's the largest seizure they've ever done. The Department of Justice has seized over $3.6 billion worth of that stolen cryptocurrency. Largest ever, like bigger than an Al Capone, comparatively, relatively bigger than a Bernie Madoff, anything like that. Madoff wasn't chump change, but this is just an astronomical amount of money in the form of Bitcoin.
--:-- Devlin Barrett: It's funny though, because Al Capone, Bernie Madoff became household names. I don't know if you could find an American who could name the two people who got arrested for this $4.5 billion scheme here. Who are they? A 34-year-old man named Ilya Lichtenstein. He is essentially a tech entrepreneur. He's had, you know, a fairly observable career in the world of tech and startups. We help the little scrappy startups compete with the big incumbents. And his wife, named Heather Morgan, Heather Morgan is 31, started some of her own businesses in that space. I am a serial software entrepreneur, an investor, a copywriter for more than a decade, a former economist.
--:-- Devlin Barrett: But I think what was sort of more eye-popping about his wife's background is that she also is some sort of aspiring rapper. Do you ever have people in your life who just suck? Well, this song's about them. It's an amazing couple of characters to be at the center of the biggest seizure in U.S. Justice Department history. What's her nom de plume, you know? What's her rapper's pseudonym? I believe she goes by Razzlecon. Razzlecon. She refers to herself as the crocodile of Wall Street.
--:-- Devlin Barrett: What does that mean? I, boy, you know, I guess, I guess the wolf was already taken. I've been a rich man and I have been a poor man and I choose rich every fucking time. His public profile seems to be a little more straightforward. He has both U.S. and Russian citizenship. He describes himself as basically an angel investor. Her sort of more official work is a little different. She started a company that she calls Salesfolk, which describes itself as a cold email marketing company.
--:-- Devlin Barrett: So if you want to be successful in today's world, whether you're in sales or not, you need to know how to build relationships online as well as offline through the power of email outreach. She postures the company as advising clients on how to make more successful cold emails to people. I think most of us would call that spamming.
--:-- Sean Rameswaram: One of the things that's interesting about them is they have a very extensive online life. It's a little strange to see that according to the feds, these folks were involved in trying to launder just a massive amount of Bitcoin and being, you know, allegedly some of the biggest criminals the Justice Department has ever caught.
--:-- Sean Rameswaram: How do this angel investor tech entrepreneur and his rapper wife, spam email marketer end up seizing $4.5 billion of Bitcoin? How does that happen exactly? So far, the government has not accused them of the actual theft. But it a very interesting criminal complaint that was filed against them because it seems to suggest that from the moment this Bitcoin was stolen from a cryptocurrency exchange called Bitfinex in 2016 This money was essentially under the control of Lichtenstein and Morgan pretty much from the moment it was taken.
--:-- Sean Rameswaram: So they don't know if they took it, but they certainly received it. The government is very confident they can prove that these two tried to launder the money. I think what they're not saying is if they think they can prove that these two actually stole it.
--:-- Devlin Barrett: It's the kind of theft that really could only happen in the modern world, which means they basically went into Bitfinex and they were able to hack their way into creating 2,000 separate unauthorized transactions. Meaning they basically took a lot of bytes out of other people's accounts. They were able to manipulate other people's accounts and send Bitcoin wherever they wanted it to go.
--:-- Devlin Barrett: And through those 2,000 different transactions, the hackers, whoever the hackers may be, the hackers were able to take off close to 120,000 Bitcoin. One of the amazing parts of this whole story, right, is that at the time in 2016 when this is done, 120,000 Bitcoin was worth roughly $71 million. But because Bitcoin and cryptocurrency in general has been exploding in value in the years since, that $71 million of Bitcoin is now worth about $4.5 billion.
--:-- Devlin Barrett: And the government just grabbed $3.6 billion of that. The prosecutors and investigators from the Justice Department, IRS criminal investigation, homeland security investigations, and the FBI followed the stolen money on its complex journey through a labyrinth of virtual currency exchanges and wallets based here and abroad. And that's a huge sum of money in itself.
--:-- Devlin Barrett: There will be some really interesting decisions that you have to make in terms of the government has said they will give that out to the people from whom it was taken. But that's a process that has to go through the court system. So people are going to have to come forward and say, well, this was taken from me and I want my Bitcoin back.
--:-- Sean Rameswaram: So do we know how Ilya and his wife, Razzlecon, get their hands on the money? Some of this stuff has to be sort of aired out in court. What the government alleges is that they have controlled the accounts that hold this money for years. They may have had some role in the actual theft and hacking of it, but the government isn't accusing them of that.
--:-- Devlin Barrett: I think from the government's point of view, from prosecutors' point of view, from the IRS's point of view and the FBI's point of view, they just look at it as, well, we have enough evidence to prove that they tried to launder this money. They controlled it and they tried to launder it, and we can prove that.
--:-- Sean Rameswaram: There will likely be an indictment, a formal indictment that comes out of this investigation. It will be interesting to see if the DOJ adds additional charges in that indictment.
--:-- Devlin Barrett: I mean, what do you do with that kind of money when you're holding it and laundering it, potentially, allegedly? The government charges that part of what this couple were doing was they were trying to cover up the actual original source of the money being stolen by just moving it, hopping it from account to account to account.
--:-- Devlin Barrett: And the government hasn't alleged that they actually spent much of it at all. You know, the charging document that's filed now basically says they bought a $500 Walmart gift card. They spent some money on PlayStation. They spent some money on Hotels.com and Uber.
--:-- Sean Rameswaram: So with, sorry, with $4.5 billion, they lived like a, maybe like an upper middle class American. Exactly. That's the whole point of Bitcoin, right, is that there's this ledger that's tracking everything and it's constantly changing. It's one of the real ironies, I think, of this case.
--:-- Devlin Barrett: Someone stole so much money that it was almost unusable. It may be a little like stealing the Mona Lisa. Like the first time you try to sell it, everyone's going to know what you're up to. It may be in some ways unspendable money.
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--:-- Sean Rameswaram: What's it like want you to be in prison no armed robbery ain't like anything shoot I knew you'd have a robbery place you faker Devlin it sounds like this crime was ultimately historic and huge but kind of dumb Like someone did something here that was literally traceable. They left like a trail, a very literal trail online.
--:-- Sean Rameswaram: Is that fair? Dumb may be a little harsh only because I think everyone's learning how Bitcoin really works, how cryptocurrency really works. It's a learning curve for everyone. And it's a learning curve for criminals. It's a learning curve for law enforcement. And, you know, that's true of any new technology that comes around.
--:-- Sean Rameswaram: But I think what you see in this case in particular is it shows you that this is a learning curve that involves potentially billions and billions of dollars. But the government wasn't really ultimately caught flat-footed here. How did they trace this crime? They don't say exactly how they got onto this couple, but there's a really interesting hint dropped in the court papers.
--:-- Sean Rameswaram: When the government seized a dark web marketplace in 2017 that was called AlphaBay. This is the largest dark market web place takedown in world history. Most of this activity was in illegal drugs, pouring fuel on the fire of a national drug epidemic. AlphaBay was basically a place where, according to the government, people used cryptocurrency to buy drugs, guns, and fake IDs, essentially.
--:-- Sean Rameswaram: And it was a place that sort of billed itself as you can spend crypto here and it won't be traceable like the rest of crypto is. Taking down Alphabay, they were able to see some of the transactions that this couple were making as they tried to move and launder and hide and use the money stolen from Bitfinex.
--:-- Sean Rameswaram: And just to be clear, they don't outright say, you know, the takedown of Alphabay led to these arrests. But if you put the dots together, they seem to all point to that. So they're willing to sort of show their hand a little bit?
--:-- Devlin Barrett: Yeah, and that's part of the cat and mouse game of cops and robbers, to be honest. Every case requires the government usually to say a little bit about how they cracked it. This is a really interesting moment, I think, in the law enforcement and criminal contest around cryptocurrency and Bitcoin.
--:-- Devlin Barrett: Because a lot of criminals, I think, are going to look at this case and think, oh, this could be bad for us down the road because the government has clearly figured out how to do something here because for a long time law enforcement feared that it couldn't follow these kind of transactions. And I think this case proves that they can.
--:-- Sean Rameswaram: How is it different as far as we know than the way the DOJ or FBI typically investigates financial crimes? Pre-crypto and, frankly, pre-internet, a lot of financial crime investigations started because someone picked up the phone and called the FBI. Someone – a human being said something to an investigator like, you should really look at this or that.
--:-- Sean Rameswaram: And sometimes it was the victim of a crime, like if it's a fraud. Sometimes it was someone who worked alongside someone who was committing fraud. Here, there's a really interesting dynamic that I think points to how future crimes involving crypto are going to be solved, which is the investigators and prosecutors ran a kind of software called clustering software.
--:-- Sean Rameswaram: Pulls out similar transactions and says these transactions seem to be related to each other. You might look at these as possibly involving money laundering or some other crime. And so early in this investigation, what happened was the government went to a judge seeking approval for searches of this couple's accounts.
--:-- Sean Rameswaram: And they basically said, look, the clustering software we use suggests that the users of these accounts are the people who are moving the money that was stolen back in 2016. And the judge spent a lot of time chewing on that and basically said that this computer program is a confidential source in another form.
--:-- Sean Rameswaram: And that's really something new and different. The government has used different types of software to help them solve different types of crimes before. But I think this is really a big moment in terms of how software is used as a tip essentially to point to possible financial crimes.
--:-- Sean Rameswaram: And in this case the tip leads to this tech investor rapper spammer in New York City What happens when it leads to, you know, some dingy warehouse in Moscow? That's a big problem with cybercrime in general.
--:-- Devlin Barrett: What FBI agents and others say all the time is how frustrating it is that a lot of their evidence trails lead to places where they can't make arrests, where local authorities won't help them. It's a particular problem in a different way regarding crypto because, you know, a lot of crypto is used by people who do ransomware.
--:-- Devlin Barrett: And part of the reason the Justice Department is spending so much more time and energy learning how to trace cryptocurrency transactions is that Ransomware is out of control in some parts of the economy. And, you know, if they can harness this technology, it might go a long way to reducing the problem of ransomware.
--:-- Sean Rameswaram: The challenge is, frankly, that a lot of the folks who are doing that live in places that do not cooperate with U.S. law enforcement. Right. In which case, they'll sort of be powerless? Powerless up to a point.
--:-- Devlin Barrett: You know, what U.S. officials always like to say is we have a long memory and long arms, meaning you, you know, ransomware criminal may think you have gotten away with it. And you may think we don't know who you are, but we do know who you are.
--:-- Devlin Barrett: And if you ever take a vacation to Thailand, just use a random example, but it actually happens fairly often, we're going to have you arrested. And then we're going to have you extradited. And then you're going to be in a U.S. prison. So that's the hope that law enforcement brings to these types of investigations.
--:-- Sean Rameswaram: But, you know, not everyone vacations in Thailand. And smart criminals know you shouldn't probably travel to places that have extradition treaties with the United States.
--:-- Devlin Barrett: I would say two things. One, it is true that there is a significant concern among current and former federal law enforcement officials that the post-9-11 era had a debilitating effect on the FBI and the DOJ and their ability to investigate and prosecute white-collar crime.
--:-- Devlin Barrett: What's interesting about sort of the crypto era, we may be in sort of the first generation of cryptocurrency crime. And I think in that era, the FBI and Justice Department have two challenges. One, they're not necessarily as good as they used to be at pursuing financial crimes.
--:-- Devlin Barrett: And two, they have to pursue it in this digital landscape that they are still learning. It's a big score. Any criminal would look at that and be like, well, that's the biggest score that you could ever get. and not be able to spend. A $500 Walmart gift card may await you.
--:-- Sean Rameswaram: And that's evidence against them, right? Like you could argue that even that Walmart $500 gift card was a bad idea. Brutal. Just a brutal, brutal payoff. It's tough out there. Tough out there.
--:-- Sean Rameswaram: It's like the worst heist movie ever because once they get the money, they go to Walmart and buy a gift card. I'm curious as a reporter, I'm sort of waiting to figure out, Like did they get that Walmart card because they actually needed or wanted to spend something or were they sort of testing the system?
--:-- Sean Rameswaram: If it's a test, it failed, right? But either way, it was $500. All of your tradecraft and all of your cleverness and all of the tricks you use to get away with something all look brilliant until the moment the handcuffs come on you.
--:-- Sean Rameswaram: And then it all looks really dumb because it didn't work and because they saw you. So if you're a spy who's leaving something under a rock, if the FBI is already sitting there behind a bush with a camera, you look pretty dumb. But if they're not sitting there behind a bush with a camera, you're a genius.
--:-- Sean Rameswaram: You can read Devlin Barrett's reporting on the Bonnie and Clyde of Bitcoin over at the Washington Post. I'm Sean Rameswaram for him.
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--:-- Sean Rameswaram: Our episode was produced by Victoria Chamberlain, edited by Matthew Collette, engineered by Paul Mounsey, and fact-checked by Laura Bullard. We used music by RazzleCon.
--:-- Sean Rameswaram: Come real far but don't know where I'm heading Motherfucking crocodile of Wall Street Silver on my fingers and boots on my feet Always be a goat, not a goddamn sheep Email me, fuck your message at the beep Beep, beep, beep, beep, beep, beep
--:-- [Closing music continues to play until the end]
