Combat Cryptocurrency Scams: Master the New Anti-Money Laundering Statute (AML)

January 5, 2023
How to Blow the Whistle on Cryptocurrency Scams Using the new Anti-Money Laundering Statute (AML)

Combat Cryptocurrency Scams with the New Anti-Money Laundering Statute (AML)

If something seems too good to be true, it probably is. Websites that offer investors incredible returns without any disclaimers or caveats are probably outright fraudulent and even legitimate sites may have hidden anti-consumer components and further may facilitate crimes by failing to engage in simple know your client (KYC) techniques.

Even sites that appear well hyped and legitimate by advertising prominently can’t always be trusted. Celsius, which offered and initially “paid” high interest on cryptocurrency deposits, had a meltdown and the bankruptcy court ruled that people’s own deposits weren’t their own money! FTX appears to have been basically a Ponzi scheme; and we’ll see how much emerges from the Blockfi bankruptcy. All three sites seemed legitimate on their face but had certain disclaimers that should have given investors pause. They indicated that cryptocurrency deposits were not really being segregated but were commingled and used for other purposes. There was also no guarantee that investors could withdraw their own principal. Many depositors who were only hoping to earn a little interest on their crypto in-turn bled billions in aggregate from these schemes but some they’re hard earned savings just imploded

Those caught in the Celsius and FTX collapses might have benefited from early whistleblowers providing information under programs like the SEC whistleblower program about how the companies were internally mismanaging funds and externally fleecing investors and depositors.

Further, with the passage of the new anti-money laundering statute, it’s believed that billions are being laundered through banks under the guise of legitimate cryptocurrency transactions hiding transfers to or from  prohibited entities.. For instance, even though marijuana dispensaries are legal under state law they are still prohibited from using federally regulated banks, so these businesses often conceal the origins of the funds and the true nature of the business from their banks – and that’s money laundering. Other examples of money laundering include banking with a prohibited entity such as a sanctioned country but concealing the origin of the funds.  The biggest AML cases will be, however, financial entities that routinely abandon KYC principles in favor of profits.

The Role of the Anti-Money Laundering Statute in Protecting the Financial System

The Anti-Money Laundering (AML) statute is meant to short-circuit criminality and to keep prohibited actors from accessing the federally regulated banking system. Under the AML, whistleblowers can receive up to 30% of the sanction levied on the money launderer that  the government recovers. With billions laundered each year, that’s hundreds of millions of dollars up for grabs in AML whistleblower awards (and Congress just strengthened the laws protections for whistleblowers recognizing how important it is for people to step forward (and possibly stay anonymous!)).

The Threat of “Love Scams” and Other Cryptocurrency Fraud Schemes

In a common cryptocurrency fraud scheme, a pop-up site will promise extravagant returns and even show performance surpassing all expectations, thereby enticing you to double-down on your investment. Then when it’s time to withdraw your funds, the site never lets you do it. That’s when the second wave of the scam kicks in and they claim that in order to withdraw the funds, you need to deposit money for taxes or regulation or identity confirmation or some other bogus reason. However, it’s all bogus – your money is in a black hole and is never coming out. On top of it all, the identifying information they asked you for upon deposit under their KYC (know your client) pretext, such as driver’s license, social security cards, credit cards, and banking information, will now be  on a list that is sold and re-sold, exposing you to additional scams, theft, and loss.

A variation of this is the “love scam,” where sites like Tinder, WeChat, or other dating sites (or even “accidental” texts) are used to build up an online relationship. Often the scammer will send pictures and encourage the victim to invest, or just to send them money (or crypto). The love part of the scam relationship is built up through constant messaging which will lead to attempts to video chat after the scamster learns intimate details about the person. The video then will attempt to put the individual in a compromising position and the other side will secretly film it to use the content to attempt to blackmail victims into cooperating, especially if the victim is married or acting contrary to their public persona in some way.

A cryptocurrency fraud litigation law firm can tackle some of these issues through the various whistleblower programs like the SEC whistleblower program using an SEC whistleblower attorney, CFTC whistleblower program and AML whistleblower programs, or possibly through a class action – if there’s a solvent defendant to sue.

Unfortunately, there’s often not much to be done for individual victims of pop-up or love scams, because the criminal enterprise is generally outside the US and cloaked in anonymity. Certain crypto whistleblower law firms will take these cases on an hourly paid basis or for a flat fee, but it’s generally throwing good money after bad because even where a judgment is obtained it’s generally uncollectable. You may even need a paid consultation with a lawyer about your options because one of these scams may have deep ramifications to your profession or relationship. In any event, don’t believe the scamster’s lies, don’t send them any more money – their demands will never end. You may also want to seek psychological help, as falling victim to one of these scams can unfortunately wreck one’s nerves and have emotional consequences. Know that others have been through it before, and things will eventually get better.

Cryptocurrency Money Laundering Risks

  • Anonymity- Anonymous transactions between buyers and sellers often go unnoticed. There is no information about these block chain transactions. There is a lack of information, making it difficult but an ideal environment for such fraud to occur. This makes Know Your Customer (KYC) checks challenging so entitities that facilitate these transactions without having KYC compliance may be subject to an AML whistleblower case
  • Suspicious transaction patterns- In some cases, the risk of money laundering can be linked to specific patterns in transactions. Criminal groups, for example, may make multiple transfers without a clear commercial justification, prompting questions about the nature of these transactions. Additional suspicious patterns include high-frequency transactions in which large sums are transferred from multiple wallets into a single account in a short period of time.
  • Cross-border transactions- Cryptocurrency transactions can cross borders, making it difficult to identify the source and jurisdiction of the transaction, but not impossible. As an example, consider Silkroad. Furthermore, money launderers can direct funds through jurisdictions that have minimal AML regulations.

Surge in Cryptocurrency Fraud in 2023

In 2023, crimes related to cryptocurrency scams have experienced a notable surge, recording a 53% year-over-year increase, as reported by the Federal Bureau of Investigation in its latest internet crime report. The document revealed a specific uptick in investment fraud linked to cryptocurrency, escalating from $2.57 billion in 2022 to $3.94 billion in 2023[1].

These scams are strategically crafted to lure individuals with promises of substantial returns on their investments. According to data from the Internet Crime Complaint Center (IC3), online fraud losses reached a staggering total of over $12.5 billion in 2023, marking a significant 22% increase from the previous year. Among the various scams, those involving business email compromise, targeting both companies and individuals, accounted for $2.9 billion of the total losses recorded in 2023, as highlighted by the FBI’s findings.

Cryptocurrency Anti-Money Laundering Best Practices

Experienced financial institutions should strategically focus their anti-money laundering (AML) efforts on knowing their client and their interface functions, specifically on the nature of transactions between the client and other entities like major cryptocurrency exchanges. This targeted approach improves their ability to distinguish between typical client behavior and potential money laundering activities. Monitoring transactions is critical, and advanced algorithms designed for the currency can be adapted to detect suspicious behaviors and patterns, which can serve as red flags for potential money laundering in both traditional and cryptocurrency transactions.

Seeking Legal Assistance for Cryptocurrency Investment Disputes and Whistleblowing Cases

All this brings us back full circle with the rule that something which seems too good to be true probably is. It’s best to consult with a registered financial professional before investing in novel products, and further, it never hurts to consult with a whistleblower law firm that has a track record in the space to learn your options.