Dark web fraud: US announces $3.36b crypto seizure

The United States Authority announced today that James Zhong pleaded guilty to committing wire fraud in September 2012 when he unlawfully obtained over 50,000 Bitcoin from the Silk Road dark web internet marketplace.

Silk Road was an illegal dark web marketplace that operated between 2011 and 2013 and ultimately collapsed after its operator, Ross Ulbricht, was arrested.

Silk Road was an online dark web, black market, in operation from approximately 2011 until 2013, Silk Road was used by numerous drug dealers and other unlawful vendors to distribute massive quantities of illegal drugs and other illicit goods and services to many buyers and to launder all funds passing through it. In 2015, following a groundbreaking prosecution by this Office, Silk Road’s founder Ross Ulbricht was convicted by a unanimous jury and sentenced to life in prison.

Zhong pleaded guilty on Friday, November 4, 2022, before United States District Judge Paul G. Gardephe and it was announced on Monday.

In November 9, 2021 the law enforcement agencies siezed approximately 50,000 plus Bitcoin, worth over $3.36 billion.

This was and still remains the largest cryptocurrency seizure in the history of the United States financial seizure ever.

Zhong was able to manipulate Silk Road’s payment system by triggering more than 140 transactions “in rapid succession” and successfully tricking it into releasing about 50,000 Bitcoin, according to an affidavit filed Monday.

The law enforcement agencies were able to locate and recover the proceeds from the crime.

IRS Agents said: “Mr. Zhong executed a sophisticated scheme designed to steal bitcoin from the notorious Silk Road dark web Marketplace.

Once he was successful in his heist, he attempted to hide his spoils through a series of complex transactions which he hoped would be enhanced as he hid behind the mystery of the ‘darknet.’

The IRS Agents are the best in the world at following the money through cyberspace or wherever our financial investigations lead us. We will continue to work with our partners at the US Attorney’s Office to track down these criminals and bring them to justice.”

According to the allegations contained in filings in Manhattan federal court and statements made during court proceedings:

In September 2012, Zhong executed a scheme to defraud Silk Road of its money and property by creating a string of approximately nine Silk Road accounts, the “Fraud Accounts” in a manner designed to conceal his identity; and triggering over 140 transactions in rapid succession in order to trick Silk Road’s withdrawal-processing system into releasing approximately 50,000 Bitcoin from its Bitcoin-based payment system into Zhong’s accounts and then transferring this Bitcoin into a variety of separate addresses also under Zhong’s control, all in a manner designed to prevent detection, conceal his identity and ownership, and obfuscate the Bitcoin’s source.

While executing the September 2012 fraud, Zhong did not list any item or service for sale on Silk Road, nor did he buy any item or service on Silk Road. Zhong registered the accounts by providing the bare minimum of information required by Silk Road to create the account; the Fraud Accounts were merely a conduit for Zhong to defraud Silk Road of Bitcoin.

Zhong funded the Fraud Accounts with an initial deposit of between 200 and 2,000 Bitcoin. After the initial deposit, Zhong then quickly executed a series of withdrawals.

Through his scheme to defraud, Zhong was able to withdraw many times more Bitcoin out of Silk Road than he had deposited in the first instance.

As an example, on September 19, 2012, Zhong deposited 500 Bitcoin into a Silk Road wallet. Less than five seconds after making the initial deposit, Zhong executed five withdrawals of 500 Bitcoin in rapid succession resulting in a net gain of 2,000 Bitcoin.

As another example, a different Fraud Account made a single deposit and over 50 Bitcoin withdrawals before the account ceased its activity. Zhong moved this Bitcoin out of Silk Road and, in a matter of days, consolidated them into two high-value amounts.

Nearly five years after Zhong’s fraud, in August 2017, Zhong received a matching amount of a related cryptocurrency, 50,000 Bitcoin Cash “BCH Crime Proceeds”

In August 2017, in a hard fork coin split, Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash (“BCH”). When this split occurred, any Bitcoin address that had a Bitcoin balance as Zhong’s addresses did, now had the exact same balance on both the Bitcoin blockchain and on the Bitcoin Cash blockchain.

As of August 2017, Zhong possessed 50,000 BCH in addition to the 50,000 Bitcoin that Zhong unlawfully obtained from Silk Road.

Zhong thereafter exchanged through an overseas cryptocurrency exchange all of the BCH Crime Proceeds for additional Bitcoin, amounting to approximately 3,500 Bitcoin of additional crime proceeds.

Collectively, by the last quarter of 2017, Zhong thus possessed approximately 53,500 Bitcoin of total crime proceeds.

Beginning in or around March 2022, Zhong began voluntarily surrendering to the Government additional Bitcoin that he had access to and had not dissipated. In total, Zhong voluntarily surrendered 1,004.14621836 additional Bitcoin.

Zhong guilty plea, on November 4, 2022, and the judge entered a Consent Preliminary Order of Forfeiture of Zhong’s interest in the properties he acquired.

Zhong who is 32 years, of Gainesville, Georgia, and Athens, Georgia, pled guilty to one count of wire fraud, which carries a maximum sentence of 20 years in prison.

The maximum potential sentence in this case is prescribed by Congress and is provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge. Zhong is scheduled to be sentenced by Judge Gardephe on February 22, 2023.

The prosecution of this case is being overseen by the Office’s Money Laundering and Transnational Criminal Enterprises Unit.

Source: United States Department of Justice

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