Fraud , Fraud Management & Cybercrime

Feds Arrest 'Silk Road' Investigators

Former Federal Agents Face Fraud, Money Laundering Charges
Feds Arrest 'Silk Road' Investigators

The U.S. Department of Justice has charged two former federal agents with money laundering and wire fraud based on allegations that they attempted to profit from the federal investigation into the notorious underground narcotics marketplace known as "Silk Road."

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Charges against Carl M. Force IV, 46, who was formerly a special agent with the Drug Enforcement Administration, and Shaun W. Bridges, 32, who was a special agent with the U.S. Secret Service, are included in a 95-page criminal complaint published March 30. The complaint notes that both had been assigned to investigate illegal activity relating to the Silk Road "darknet" marketplace; they're suspected of stealing cryptocurrency from Silk Road and committing other crimes.

In addition to the money laundering and wire fraud charges, Force also is charged with theft of government property and conflict of interest. Both resigned as a related investigation into their activities heated up, The New York Times reports.

The Silk Road Connection

The Justice Department says that Force, working undercover from Baltimore, was assigned to establish direct communications with a target in the Silk Road investigation - site administrator "Dread Pirate Roberts," who was later revealed to be Ross Ulbricht.

Silk Road launched in 2011, and was shut down in October 2013, when the FBI arrested Ulbricht on charges that he was in charge of the Bitcoin-based $1.2 billion enterprise. Ulbricht was convicted in February on seven related felony charges, including reaping commissions of more than $13 million. The 30-year-old is currently in jail awaiting a scheduled May 15 sentencing. He faces a maximum sentence of life in prison; his second, murder-for-hire trial is still pending.

During the course of the Silk Road investigation, according to court documents, Force "went rogue" and created additional online personas, which were not officially sanctioned. Force allegedly then used these personas not only to steal Bitcoins from the government, as well as targets in its investigation, but also then used the online persona "French Maid" to sell information about the Silk Road investigation directly to Ulbricht in exchange for $100,000 in Bitcoins, prosecutors say.

"Force stole and converted to his own personal use a sizeable amount of Bitcoins" that he received from Ulbricht, which he then laundered in part by transferring $235,000 to an account located in Panama, according to court documents. Force also served as the chief compliance officer for a third-party digital currency exchange company called CoinMKT and illegally froze and seized the funds from a CoinMKT account worth $297,000, prosecutors allege. He also issued a fake subpoena to payments company Venmo to attempt to unfreeze another one of his accounts after it had been flagged for suspicious transactions, according to the indictment.

The Mt. Gox Connection

After the Baltimore-based task force investigating Silk Road gained access to an administrator account for the "darknet" marketplace, on Jan. 25, 2013, a large number of Bitcoins were stolen from Silk Road and moved to Mt. Gox, a currency exchange based in Japan, prosecutors say (see Bitcoin Trading Website Goes Dark).

"Darknet" refers to websites that are only reachable using the anonymizing network known as Tor.

The criminal complaint says that Bridges "or someone acting on his behalf" stole those Silk Road Bitcoins, and that in February 2013, Bridges created a company called Quantum International Investments and opened a related account with Fidelity Investments. He then allegedly used nine wire transfers to fund the Fidelity account with $820,000 from Mt. Gox.

Two days after making one of those wire transfers, Bridges then signed an affidavit relating to "a multi-million dollar seizure warrant for Mt. Gox and its owner's bank accounts," the court documents say. But Bridges was later interviewed by the FBI as part of its criminal investigation into the Silk Road task force, after which he moved $250,000 out of the Fidelity account, prosecutors say.

More Evidence to Come

Investigators say they have yet to present the full extent of related evidence they gathered in the course of their investigation. "Because this affidavit is for the limited purpose of establishing probable cause for the crimes proposed to be charged at the present time, it does not include certain additional facts known to me and the government's investigation continues," reads an affidavit in the criminal complaint signed by Tigran Gambaryan, a special agent in the Criminal Investigation Division of the Internal Revenue Service.

One interesting aspect to this case is that the two investigators facing charges theoretically would have known which techniques they might use to foil their fellow investigators, says Ken Westin, senior security analyst at security software vendor Tripwire.

"The investigators [charged] in this case were knowledgeable and had a deep level of expertise with Bitcoins and were in a position of authority to help themselves to a sizable amount of the cryptocurrency," he says. "Both of the agents [allegedly] went through multiple steps to hide their transactions and activities and abused their authority throughout to work the system."

Bitcoins: Sometimes Anonymous

Bitcoins have a reputation for offering the ability to anonymously move money or make purchases. But security researchers have long warned that what the cryptocurrency offers is more akin to pseudonymity, meaning that users' identities can be disguised, but not always effectively hidden.

Indeed, three University of Luxembourg researchers recently reported that with just $2,000 in equipment, they were able to identify anonymous Bitcoin users between 11 percent and 60 percent of the time, depending on the level of stealth that users attempted to employ (see Tougher to Use Bitcoin for Crime?).

While using Bitcoins might offer a degree of anonymity, the criminal complaint against Force and Bridges suggests that attempting to convert cryptocurrency to cash is more difficult to keep anonymous. "Believing that the anonymity of Bitcoin would cloak their activities, it was when they tried to convert those funds and move them into bank account - some offshore - that they were caught," Westin says.

In Europe, the association of police agencies known as Europol has been working to forge stronger ties with EU banks, in part to help identify and trace crime-related funds and money laundering activity.


About the Author

Mathew J. Schwartz

Mathew J. Schwartz

Executive Editor, DataBreachToday & Europe

Schwartz is an award-winning journalist with two decades of experience in magazines, newspapers and electronic media. He has covered the information security and privacy sector throughout his career. Before joining Information Security Media Group in 2014, where he now serves as the executive editor, DataBreachToday and for European news coverage, Schwartz was the information security beat reporter for InformationWeek and a frequent contributor to DarkReading, among other publications. He lives in Scotland.




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