It is possible to recoup losses from cryptocurrency fraud schemes — but the odds are not always favorable. Here are five steps for fraud victims to follow to improve their chances for the best possible outcome.
1. Don’t blame yourself.
Many victims of cryptocurrency fraud schemes have faced months of blatant lies and endless excuses before they finally realize they’ve been swindled. Men and women in these situations may be tempted to blame themselves for ignoring red flags and warning signs that, in retrospect, suddenly seem obvious. Shock and embarrassment are natural reactions, but surrendering to shame and self-blame is counterproductive at a time when efforts should be focused on financial recovery.
Consider the example of cryptocurrency romance scams, commonly run by criminal gangs in Southeast Asia. These groups operate with corporate-style efficiency and multiple layers of personnel, including ‘hosts’ who specialize in cultivating intimate relationships with their victims. They work in teams with scripts and strategies for financial exploitation. This is organized crime. These are sophisticated operations with deep resources and expertise in emotional and psychological manipulation. Culpability and blame belong to the fraudsters, not the innocent people whom they targeted and victimized.
2. Gather your evidence.
It is important to preserve documentation of all funds sent to the fraudsters, including principal investments and any related payments. If you transferred cryptocurrency or tokens from a major exchange (such as Coinbase or Crypto.com) then the full transactional history should be accessible online through your personal account. You should make note of each cryptocurrency wallet address where funds were sent, in addition to dates, amounts, and, if known, the transaction hash – a unique, alphanumeric identifier for specific entries on the blockchain.
In addition, it is helpful to have clear, chronological record of all communications with the fraudsters. Of particular interest are statements describing the investment opportunity and misrepresentations regarding risk and profitability. Demands for payment of purported taxes, fees and fines should also be documented.
Fraudsters in cryptocurrency schemes frequently use messaging apps that have stronger encryption than email or text messages. Certain apps, such as WhatsApp, make it easy to export transcripts of private chats. Other apps have security features that can make this process more complicated. Telegram, for example, allows senders to auto-delete private messages without the recipient’s consent. Snapchat sends notifications whenever a screenshot is taken – a tipoff to fraudsters that records of their communications are being saved and scrutinized.
3. Retain the right investigator.
Local police departments rarely have the technical resources and trained personnel to conduct forensic investigations of cryptocurrency crime. Federal law enforcement and regulatory agencies are better equipped, but often have a backlog of complaints, as well as a minimum loss threshold of a million dollars.
For these reasons, it can be beneficial to hire a qualified investigator to privately conduct a fraud examination, before filing a complaint with the local police or federal agencies.
Professional fraud investigations should produce clear, evidence-based reports that can be easily followed by financial crimes detectives at municipal police departments, including those who do not have experience in cryptocurrency casework. The report should identify service providers used by fraudsters, including any ‘exit ramps’ where crypto assets were potentially laundered or exchanged for dollars, euros or other fiat currency. Fraudsters often reuse the same exchanges for several weeks, and sometimes months, which creates an opportunity for a significant seizure of assets after a fraud is exposed. Following this investigative roadmap, law enforcement officers have a variety of legal mechanisms (e.g., warrants, asset forfeiture, MLATs, etc.) that can be used to freeze accounts with cooperation of compliant cryptocurrency exchanges.
The fraud investigation report can also be used to support civil litigation. Cryptocurrency fraud schemes frequently involve perpetrators in foreign countries, plus service providers in offshore havens, scenarios which can lead to jurisdictional headaches and high legal costs. However, if an investigation yields evidence of responsible parties based in the U.S. or Europe, civil action may be an appropriate path toward financial recovery.
4. Don’t be ‘double duped.’
Cryptocurrency fraud investigation remains limited to a very small field of experienced investigators and forensic experts. Relevant credentials include professional licensing as a private investigator with specialized training as a Certified Fraud Examiner (CFE) and Cryptocurrency Tracing Certified Examiner (CTCE).
Unfortunately, today there are a number of unqualified firms (and outright scams) posing as “crypto recovery” specialists who falsely claim they can regain stolen funds through extrajudicial means. They might present themselves as negotiation experts or ‘ethical’ hackers who can illegally gain access to private keys of the criminals. They often charge an upfront payment, followed – indefinitely – by monthly fees. Rather than helping victims rebuild their financial lives, they only dig a deeper hole, compounding the total extent of losses.
Some fake ‘recovery fraud’ schemes actively target victims of online scams whose identities and contact details have been resold on darknet markets or passed long by criminal associates. A fraud advisory by the Commodity Futures Trading Commission warns:
Commonly, a victim receives a phone call or email from a person claiming to be a government official, an attorney, or recovery service representative. In most cases, the fraudsters claim to have the money already in hand, or are working with the court to distribute the funds. In other cases, the victims are told that the fraudsters who took their money have been tracked down and the caller is notifying victims to begin a civil court action. Sometimes, victims are told that most or all their money will assuredly be returned if they first pay a small donation, retainer, or overdue taxes. However, after making the first payment, requests for more funds often follow.
Defrauded investors and their legal counsel should confirm they are dealing with a reputable firm before paying for an investigation. Basic due diligence can be accomplished online in minutes, such as verification of private investigation licenses and business registration details through appropriate state agencies.
5. Set reasonable expectations.
Successful recovery from a crypto fraud scheme is possible, but not guaranteed. Partial recovery is more common than full restitution. These are complex cases – and the process is not likely to be quick, easy or cheap.
The likelihood of financial recovery from cryptocurrency fraud or cryptocurrency theft can be influenced by multiple factors, including the extent of support from law enforcement and regulatory agencies; operations in foreign jurisdictions; and feasibility of tracing certain transactions, coins and tokens. Positive identification of perpetrators — and related analysis to de-anonymize cryptocurrency addresses, accounts and activity — may require subpoenas, warrants, or court orders. Financial restitution may also be contingent on the cooperation of commercial exchanges and virtual asset service providers in multiple countries, depending on the complexity of the crime.
Much depends on the technical sophistication of fraudsters, including their skills in money laundering. Stolen cryptocurrencies and tokens are often transferred through a series of intermediary wallet addresses in a process known as layering. Every extra layer of transactions makes it more difficult and time-consuming for law enforcement and blockchain intelligence analysts to follow the money. Other methods are also used to obfuscate the flow of funds, such as peel chains, mixers and darknet markets. Fortunately, not every fraudster has the computer skills – or the patience – to properly clean up after themselves. Their assets may remain traceable through cryptocurrency intelligence tools and forensic investigation.
About the Author: John Powers, CFE, CTCE is president of Hudson Intelligence, an investigation agency specializing in complex fraud investigations and international asset tracing.