Crypto investment scams: what businesses need to know for consumer protection

September 28, 2020
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First-time or existing customers may be vulnerable to fraudulent investment schemes that promise high returns that never materialize. Here are some red flags businesses should watch for.

Of all of the typologies we’ve studied in our blog series on scams in the cryptocurrency space, the investment scam may be the one that many in the industry are most familiar with.

To wit, several years ago, the Initial Coin Offering (ICO) market was widely criticized as a hotbed for fraudulent activity, with some estimates concluding that over 80% of ICOs were scams.

The fallout from ICO fraud brought intense regulatory scrutiny from the SEC and FTC, millions in fines, and effectively shuttered the ICO market.

But just because ICOs have all but disappeared from crypto doesn’t mean that crypto investment scams aren’t still common.

In fact, as you’ve come to understand if you’ve been following this blog series, many “classic” financial scams continue to plague traditional finance, and they port over to the crypto space quite easily.

Remember that fraudsters enjoy many of the same benefits of cryptocurrency that regular consumers enjoy, including instant funds availability, partial-anonymity, and the ability to access funds anywhere in the world.

This means that financial criminals who continue to run tried-and-true schemes are attracted to cryptocurrency as a means to extract wealth outside the boundaries of the traditional financial sector.

As a business owner, you play a key, front-line role in combating financial crime in the largely unregulated cryptocurrency sector. In most cases, you might be the last line of defense for a potential victim.

Luckily, doing your part to protect the integrity of the crypto market is largely a matter of adopting the proper disclosures and watching for red flags related to scam activity. This post will help you understand both.

How an investment scam works

The typical investment scam for crypto was, as earlier discussed, the ICO scam. In it, a potential victim will learn about programs that promise unusually high rates of return in foreign exchange (forex) or cryptocurrency trading.

The financial criminals behind the scam would additionally advertise a new or breakthrough cryptocurrency as being a “better Bitcoin” and offering an opportunity to “get in on the ground floor” and implying that the new coin will also experience Bitcoin-like rates of early-stage exponential growth.

However, the fraudster uses investment principal from later investors to pay out earlier investors until the scheme collapses.

One of the strongest warning signs for this type of scam is a promise to pay a specific percentage of earnings daily or weekly. A tactic of referral bonuses may also be deployed, since the fraudster depends on an ever-expanding downstream of networks of distributors to promote the scheme.

Some real-world examples of cryptocurrency investment scams of this kind include: Bitconnect, Onecoin, and Gladiacoin.

Variations and other red flags

Another variation on the investment scam is a one-and-done advance fee scheme, where a fraudster merely attempts to secure one advance payment from a victim and then disappears completely. This variation is more typical of other scams we’ve studied, like prize scams.

Investment “opportunities” that involve offshoring funds to avoid tax penalties may also be offered by fraudsters.

Some of the biggest red flags to be on the lookout for resemble tactics used in classic “boiler room” scams. That is, evidence of apparent legitimacy on the part of the financial fraudsters.

For instance, many investment scammers may have a professional website, video and marketing collateral, a social media presence, even a telephone number and brick-and-mortar address.

Fraudsters are betting that an appearance of legitimacy will assuage potential victims who will then neglect to follow through with proper due diligence and check the credentials of the organization.

What potential victims should do

Research and perform due diligence on any prospective investment opportunity prior to sending funds.

You can check with the SEC’s website for individual investors. You can also search SALI to find information named individuals involved in the scheme to see if they have a record of financial crime or pending charges against them. Lastly, you can also search FINRA for individuals involved. All brokers and investment advisers are required by law to register with FINRA, so if there is no record, that would be a huge red flag.

Ultimately, don’t fall for the classic pressure tactics to “act now” or believe a claim that “everybody is doing it and you don’t want to miss out.” As always, never send cryptocurrency to anyone pressuring you to do so.

You could also contact the business you are purchasing crypto from to inquire about the opportunity. While they won’t be able to verify the legitimacy of the investment, they may be able to advise on potential risks and red flags.

What crypto businesses can do to help

Following on the previous point, business owners can make themselves easy to reach by consumers and willing to offer advice to those who may be confused about the legitimacy of potential opportunities.

Additionally, every cryptocurrency business should take fraudulent activity very seriously, and commit themselves to strong frontline controls, including consistently tuned alert routines (or red flags), consumer outreach, disclosures, and educational resources for its customers and consumers in the wider marketplace.

First-time customers may also be at an increased risk of becoming victims of scams. This underlines the importance of good Know Your Customer (KYC) protocols, especially for customers attempting to transact large amounts of cryptocurrency. Good KYC goes a long way toward warding off potential criminal activity in the cryptocurrency marketplace.

Key takeaways for bitcoin compliance

Regulators have been increasingly taking an interest in cryptocurrency in recent years, and consumer protection has emerged as an area of particular focus and scrutiny.

In response to regulatory scrutiny, as well as increasing financial crime in the space, business owners must expand their AML compliance regimes to include robust controls to support the goal of consumer protection and a fair and safe cryptocurrency marketplace.

Every business owner in the cryptocurrency space is responsible for consumer protection.

If you need help setting up an AML program, or adding consumer protection protocols to an existing AML regime, you can contact BitAML today for a free consultation.

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