ACCPD helped uncover multibillion cryptocurrency fraud


By Joe Johnson

The Athens-Clarke County Police Department played a key role in an investigation that led to the seizure last year of approximately 50,676.17851897 Bitcoin, then valued at over 3.36 billion.

The U.S. Department of Justice said the seizure from the Gainesville home of 32-year-old James Zhong was at the time the largest cryptocurrency seizure in the history of the U.S. Department of Justice, and today remains DOJ’s second largest financial seizure ever.

Zhong on Nov. 4 pleaded guilty to stealing Bitcoin from the Silk Road “dark web” in 2012, the DOJ said in a news release.

He also 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, according to the Justice Department.

According to an ACCPD incident report, the investigation began in March 2019, after Zhong reported that his home on Ruth Street in Athens had been burglarized.

He told officers that a briefcase containing $400,000 and a USB thumb drive containing personal information had been stolen, according to the report.

The stolen items “raised red flags for the IRS,” said ACCPD spokesman Lt. Shaun Barnett. “ACCPD assisted with interviews of the subject and provided the relevant information to our federal counterparts.”

According to the DOJ release, allegations contained in filings in Manhattan federal court and statements made during court proceedings were as follows:

Silk Road was an online “darknet” black market. In operation from approximately 2011 until 2013, Silk Road was used by drug dealers and other criminals to distribute massive quantities of illegal drugs and other illicit good, and to launder all funds passing through it. In 2015, following a groundbreaking federal prosecution, Silk Road’s founder Ross Ulbricht was convicted by a jury and sentenced to life in prison.

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 in a manner designed to conceal his identity, 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 transferring the Bitcoin into a variety of separate addresses also under Zhong’s control and in a manner designed to prevent detection, conceal his identity and ownership, and obfuscate the Bitcoin’s source.

Zhong funded the fraud accounts with an initial deposit of between 200 and 2,000 Bitcoin. After the initial deposit, he 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 Sept. 9, 2012, Zhong deposited 500 Bitcoin into a Silk Road wallet. Less than five seconds after making the initial deposit, he executed five withdrawals of 500 Bitcoin in rapid succession, resulting in a net gain of 2,000 Bitcoin.

Also, a different fraud account made a single deposit and over 50 Bitcoin withdrawals before the account ceased its activity. Zhong then moved that Bitcoin out of Silk Road and, in a matter of days, consolidated them into two high-value amounts.

Nearly five years after Zhong’s scheme, in August 2017, due to his possession of the 50,000 Bitcoin that he unlawfully obtained from Silk Road, Zhong received a matching amount of a related cryptocurrency — 50,000 Bitcoin Cash — on top of the 50,000 Bitcoin. In 2017 Bitcoin split into two cryptocurrencies, traditional Bitcoin and Bitcoin Cash (BCH). When this split occurred, any Bitcoin address that had a Bitcoin balance, such as Zhong’s, then 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 he 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 bringing his total illegal gain to approximately 53,500 Bitcoin in the third quarter of 2017.

According to the DOJ, the government is seeking to forfeit, in connection with Zhong’s guilty plea to wire fraud in September 2012, approximately 51,680.32473733 Bitcoin; Zhong’s 80-percent interest in RE&D Investments, LLC, a Memphis-based company with substantial real estate holdings; $661,900 in cash and bars of gold and silver seized from Zhong’s home in Gainesville.

“James Zhong committed wire fraud over a decade ago when he stole approximately 50,000 Bitcoin Silk Road,” U.S. Attorney for the Southern District of New York Damian Williams said in a prepared statement. “For almost ten years, the whereabouts of this massive chunk of missing Bitcoin had ballooned into an over $3.3 billion mystery.”

“Thanks to state-of-the-art cryptocurrency tracing and good old-fashioned police work, law enforcement located and recovered this impressive cache of crime proceeds, Williams said. "This case shows that we won’t stop following the money, no matter how expertly hidden, even to a circuit board in the bottom of a popcorn tin.”

IRS Criminal investigations Special Agent in Charge Tyler Hatcher said, “Mr. Zhong executed a sophisticated scheme designed to steal bitcoin from the notorious Silk Road 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.’ IRS-CI Special 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.

Zhong faces a maximum penalty of 20 years in federal prison. Sentencing has been scheduled for Feb. 22, 2023.

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