Prize scams: What crypto businesses can do to prepare

September 14, 2020
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First-time customers attempting to purchase cryptocurrency because they “won the lottery” or some other prize could be victims of a scam in progress. Here’s how to put an end to it.

Financial scams are successful because they often mirror legitimate offers, and because scammers successfully apply pressure to their victims to act quickly.

While in some cases, this pressure comes in the form of a threat, as in the “family member in danger” scam or the utility scam, it can also come in the form of convenience (i.e., “I’m deploying soon and need to sell my car ASAP“) or in the form of a special, limited-time offer.

The special offer is among the most pernicious because the victim doesn’t feel threatened or pressured in a negative way to follow through with the fraudster’s request.

Quite the opposite. They feel motivated to follow through because they may win a prize that significantly improves their lives. It is only in the haze after the adrenaline has faded that a prize scam victim understands what has happened.

BitAML is continuing its blog series focusing on financial scams and what cryptocurrency business owners need to do in order to protect customers and the greater cryptocurrency marketplace from fraud and crime.

This week, we’re looking at the prize scam (also referred to as the sweepstakes scam, contest scam, and lottery scam).

We’ll include an overview of the scam, some advice for potential victims, and details on what crypto businesses need to do from a compliance perspective to prevent their institutions from unwittingly aiding in criminal activity.

How a prize scam works

The fraudster contacts the victim to inform them that they have won a prize or contest. Contact can come via mail, email, social media, or, most frequently, a direct phone call.

The “prize” itself can vary greatly. It can involve a cash award of a few thousand dollars, or many millions. It can be a luxury vacation or getaway, or a top-line vehicle. Or, it could even be jewelry, like a diamond ring.

So far, this still could be a potentially legitimate offer. Your first red flag is when the individual on the other line mentions a “processing fee” before they can unlock your prize or winnings.

They will often ask for a “nominal” fee (or potentially taxes, or customs duties) that must be cleared first. They’ll request bank account information, give wire transfer directions, or, relevant to our interests, request a payment in a cryptocurrency, like bitcoin.

Typically once the “processing fee” is paid, the fraudster disconnects and disappears, and the prize never materializes.

We’ve noted frequently throughout this series the fact that many financial scams plaguing the crypto space are not anything new — these scams are tried-and-true methods for taking advantage of thousands of American consumers every single year.

The prize scam is no different. According to the Federal Trade Commission (FTC), 125,000 reports of scams involving a prize, contest, or lottery were filed in 2019. Losses incurred by victims that year totaled $121 million.

The average scam doesn’t necessarily involve a high-dollar ransom, either. The average loss per-consumer was $860.

Variations and other red flags

Some scammers do not cut contact after the first “processing fee” payment and will continue to dog victims with recurring calls, promising that the prize is “one more payment” away. This can go on for months, or even years.

These contacts can take on darker tones, as well. If the victim attempts to cut contact or ask for a refund, the scammer may issue threats, including harm to the victim or their loved ones, or a threat to report the victim to the authorities.

The prize scam frequently targets vulnerable persons over the age of 65. According to AARP, over 80 percent of funds collected by prize scams comes from senior citizens.

Elder financial exploitation is a significant societal problem in the United States. As cryptocurrency becomes increasingly appealing to scammers due to its technological features and benefits, including irreversible transactions, instant availability of funds, and relative anonymity, crypto businesses must be vigilant when first-time customers over the age of 60 attempt to transact with them.

What potential victims should do

As we mentioned, there are many legitimate contests, sweepstakes, and other giveaways that companies run for completely lawful purposes.

This can confuse consumers, who may have a difficult time discerning which offers are authentic and which are scams.

There are a couple of cardinal rules for consumers:

  • If you have to pay, it’s not a prize, per the FTC
  • Never send cryptocurrency to anyone pressuring you to do so

If you believe you have fallen victim to a prize scam or been targeted by fraudsters, you can:

What crypto businesses can do to help

Cryptocurrency businesses need to build effective and robust AML compliance protocols that emphasize consumer protection.

This can be done in a number of ways:

  • Notice of risks when customers attempt transactions (e.g., explaining that cryptocurrency transactions are irreversible, pseudo-anonymous, etc.)
  • Disclosures about scams in the cryptocurrency space and the risks that consumers face when transacting in the marketplace.
  • KYC and surveillance and monitoring to understand first-time customers and their purposes for transacting, as well as identify potentially suspicious transactions indicative of scam activity.

Key takeaways for bitcoin compliance

Protecting consumers from financial scams is the duty of every business in the cryptocurrency space.

Regulators increasingly concerned about consumer protection in crypto, which means that more regulatory scrutiny is on the horizon. Additionally, a safe and fair marketplace is essential to mainstream adoption and long-term viability of cryptocurrency.

At BitAML, we always say that good compliance is good business. If you have questions about consumer protection, disclosures, notice of risks, or big picture institutional compliance protocols like surveillance and monitoring or KYC, you can contact us any time.

We can help your business stay ahead of regulatory trends and adaptable to market realities as you scale.

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