Can we use stolen materials to craft?

Absolutely. The crafter doesn't care about the legality of anything. I mean, heck, you can probably steal an item, dismantle it into parts and make a whole new thing out of it.

Seems like a good way to get rid of the evidence.

Actually, that is the recommended loop if you steal an item, right? So because items have an ownership associated to them and either you somehow get rid of the ownership marking and replace it, or you go the easy way and just disassemble it and craft the item yourself because you don't have to hunt down the materials. Or not as much materials because, again, not the one to one ratio if you disassemble.