Identifying and Reporting Crypto Scams

Increasingly, we’re being tasked with identifying potential cryptocurrency scams. As with traditional financial crimes wherein criminals try to steal money from your bank account or put fraudulent charges on your credit card, crypto scammers are quite creative in ways to separate you from your crypto.

To protect your crypto assets, let’s review several key takeaways to determine if you’re being targeted and what you can do if you suspect that your crypto investment may be a scam (compiled via numerous crypto information sources and governmental agencies):

Key Takeaways

• The goal of crypto scams is to gain private information, such as security codes, or to trick a person into sending cryptocurrency to a digital wallet that the scammer controls.
• Examples of scams are giveaways, hustles involving new romance, phishing, extortion emails, fake company alerts, blackmail, “rug pulls,” and may involve fake mining apps or networks.

(A rug pull is a scam where a cryptocurrency or NFT developer hypes a project or cryptocurrency to attract investors, only to suddenly shut down or disappear, taking investor assets with them, in essence “pulling the rug out” from the victim. Rug pulls have increased as decentralized finance (DeFi) attracts more investors to the crypto space. In the first six weeks of 2023, there were at least 11 rug pulls, resulting in the theft of a combined total of more than $14 million, according to Comparitech’s crypto scam database.)

• Signs of crypto scams include poorly written white papers (if any at all), excessive marketing pushes, fake social media identities, and get-rich-quick claims.
• A so-called “investment manager” contacts you out of the blue. They promise to grow your money — but only if you buy cryptocurrency and transfer it into their online account. The investment website they steer you to looks real, but it’s really fake, and so are their promises. If you log in to your “investment account,” you won’t be able to withdraw your money at all, or only if you pay high fees.
• Federal regulatory agencies, such as the Federal Trade Commission (FTC), Financial Crimes Enforcement Network (FinCEN), and the FBI’s IC3 unit (Internet Crime Complaint Center) and your crypto exchange are the best places to contact if you suspect you’ve been the victim of a scam.

As private investigators specializing in financial crimes, we’re often called in when a crypto scam is suspected, to identify and locate the scammer. There are numerous licensing and registration requirements for crypto brokers. Our first course of action is to determine if your broker is a) who he claims he is and b) is authorized and licensed to sell crypto. As each case is unique, post identification action depends on various factors that are best left unstated so as to not give scammers inside information on recovery and law enforcement activity.

The bottom line is, before investing in cryptocurrency, thoroughly research your broker and the exchange platform. It sounds simple but many of these scammers are expert at creating seemingly credible identities and website, referrals, fake news articles, etc. An ounce of prevention goes a long way.

BNI Operatives: Situationally aware.

As always, stay safe.

Part II/II: Crypto Assets – Hidden in Plain Sight

Though cryptos (cryptocurrencies) remain a bit strange and elusive to many people, when attempting to uncover crypto assets, they can be dealt with in the same manner as any other major financial stake.

Often thought of as a way to hide capital or conceal transactions, cryptocurrency searches by an assets investigator are conducted much in the same way as we perform bank locates and searches. Instead of processing information through the banking structures, we work through crypto platforms. Proceedings and records for crypto assets should be sought in a similar fashion by attorneys as to how a lawyer would request assets like bank statements or stock market investments- by making a formal request through any and all cryptocurrency platforms being used. Hopefully, this information will engender a peace of mind knowing that there is a way to determine the existence of cryptocurrency even in the absence of official documentation to that effect.

One of the main issues attorneys face in determining assets valuation with cryptos is that they are not static as, for example, cash or real estate. Bitcoin and Ethereum, for example, have seen quite drastic changes in a short period of time — on the order of five to ten thousand dollars in a single month. As with stocks and bonds, this can make the actual value of an estate all but impossible to know with certainty from one month to the next. The best advice is to do your due diligence, be aware that the value of these assets can experience wild fluctuations and, repeat the valuation process immediately prior to any settlement or division of estate assets.

All assets should be listed on the financial affidavit.  The financial affidavit does not include a field to declare cryptocurrencies like Bitcoin, but there is a section for “Cash or Cash equivalents.”

“Bitcoin clearly qualifies as “money” or “funds”…Bitcoin can be easily purchased in exchange for ordinary currency, acts as a denominator of value, and is used to conduct financial transactions.” United States v. Faiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014)

Cryptocurrencies must be disclosed on the financial affidavit. Failure to do so may result in sanctions.

The question then becomes – how would one verify cryptocurrency holdings? Would you secure a screen grab from the crypto online platforms or would you go through the cryptocurrencies themselves? Would your client simply provide their soon-to-be ex the keys to all of their crypto accounts? (I’ll be referencing a divorce case in this article but clearly crypto searches occur in other types of matters, such as a partnership split.)

Some U.S. based coin exchanges such as Coinbase and Kraken will issue a 1099-K each year if there have been $20,000 or more in exchanges of cryptocurrency.

If the opposing party will not fully disclose their cryptocurrency holdings, you will have to turn to third parties to uncover those holdings.

Subpoenaing Cryptocurrency Exchanges

The most popular cryptocurrency exchange, Coinbase, allows themselves to be subpoenaed.

Coinbase and other exchanges do not hold cryptocurrency. They merely effect the transaction. So, a subpoena to Coinbase will be like subpoenaing a bank and asking not “what’s in your accounts?” but rather “what checks have your clients issued.”

Then there are sites like Localbitcoins.com which allow anonymous transactions of bitcoins. These sites don’t take any information from their users and merely connect a cryptocurrency seller with a cryptocurrency buyer. These sites don’t have terms of service. These sites don’t issue 1099s. Nor could they as the sites don’t even know who is using them. Informally (meaning there is no crime committed by allowing this exchange, yet), these sites can be viewed as facilitating money laundering via cryptocurrency.

Where Are Cryptos Kept? 

A crypto is a string of digital signatures, which can be accessed/sent through the use of addresses. One address is a private address used to send cryptos and the other is a public address used to receive cryptos.

While these addresses can be stored anywhere – on paper, online, etc., once this information is lost, the crypto is gone forever. Because of this risk, many crypto holders have a crypto wallet. There are companies that issue these wallets and, they create a backup. Helpfully, a lost wallet has a recovery seed which allows the owner to retrieve the cryptocurrency addresses.

Of course, if you are able to obtain the private key, you can examine all of the crypto transactions. But, just when that appears to be the most effective solution – along comes the much more sophisticated methods of “crypto-mixing”. Companies who offer this service allow a crypto owner to break the link between addresses by either creating temporary addresses or swapping coins with other addresses of the same value.

Furthermore, some of the newer, emerging crypto companies offer “private coins”; the identities of users and the origins of their transactions are completely protected.

Searching The Crypto Holder’s Computer For Cryptocurrency

Due to al of these methods of masking crypto holdings, you might have to search through the holder’s phone or computer (the only way to buy, sell and trade cryptocurrency).

A holder can object to having their phone or computer searched; the basis of such an objection might be that the search would be so overly broad as to reveal all or other private information contained on the computer or phone. Perhaps simply limiting the scope of the search for words such as crypto, cryptocurrency, Bitcoin or wallet might work in allowing for reasonable discovery while preserving the holder’s privacy.

(Let me repeat for the record that we do not dispense legal advice, are not lawyers, do not promote or advertise for lawyers or law firms. We are simply sharing experience in the field of digital investigative information.)

New currencies are not a fad so it pays to keep an eye on the emerging digital economy and, to develop the skills and gather knowledge to better understand its values and methods of discovery of these currencies.

BNI Operatives: Situationally aware.

As always, stay safe.

Cryptocurrency: Part I/II; Scams & How To Avoid Them

In recent years, we’ve experienced a sharp rise in demand for a) cryptocurrency fraud investigations and, separately, b) their identification in asset searches and tracing for criminal, civil and regulatory cases. In our two-part series on cryptocurrency scams and asset identification, we begin today with a look into cryptocurrency scams; how they work and how to avoid being a victim of this type fraud/theft.

Three of the top cyrptocurrency scams from our friends at Coinsutra:

1. Fraudulent ICOs

The most common way to pull off a scam is to fabricate a fake ICO (Initial Coin Offering), create marketing hype and persuade people to buy.

That is because ICOs are a great and innovative way to kickstart a company and that is the aspect that is misused.

Ethereum has become the breeding ground for these fraudulent ICOs but Ethereum is not directly responsible for it as it is an open-source project.

Instead, it is the ignorance of newbie investors who dream of 100x gains in a matter of weeks by just HODLing worthless ICO tokens.

Usual signs of fraud ICOs or Token Sales:

Copied whitepaper

Half team anonymous

Unusual hurry in execution

Mismatch of written & said words

Ignoring hard questions

No strong reasons for the token economy

No roadmap

2. Shady Exchanges

The second most common form of scam that you will come across would be a ‘shady exchange’. The exchanges that sprang up over-night and started bragging. One needs to be very careful with such exchanges because once you trust them and deposit your coins there, you have no way to get it back if the intentions of that exchange are not right.

Also, some exchanges that start well can run away with your money any time because they fail to scale and innovate to stay relevant in the market.

Some of these platforms as reported by Bitcoin.com are:

01crypto, Btc-cap, Capital-coins, Coinquick, Cryptavenir, Crypto-banque, Crypto-infos, Cryptos.solutions, Cryptos-currency, Ether-invest, Eurocryptopro, Finance-mag, Gme-crypto, Gmtcrypto, Good-crypto, Mycrypto24, Nettocrypto, Patrimoinecrypto, and Ydconsultant.

3. Fake Wallets

With the launch of Bitcoin, many fake android wallets have also been launched on the Play store. That’s why it is a big NO from us to pick any wallet randomly from the Play store because there are chances that it will be fraudulent and you may end up losing your money. And, even though Apple app store is touted as secure, there are many fake apps out there.  

Reporting CryptoCrime:

If you’ve fallen victim to a cryptocurrency scam, you can report it to the FTC, Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission (SEC).

You may also want to report the scam to the cryptocurrency platform used in the scheme. If you’re approached on a messaging or social media platform, you may also report the person to a group administrator who can ban the user or warn others about the scam.

The bottom line in dealing with cryptocurrency is to do your due diligence. Crooks often have an initial advantage as crime is a proactive action, especially in digital fraud- given the ability to now transfer large financial assets in a matter of seconds/minutes.

Look to next week’s Beacon Bulletin for Part II of this series: Cryptocurrency Asset Investigations.

BNI Operatives: Situationally aware; in the real and digital worlds

As always, stay safe.