The rapid rise of cryptocurrency romance scams
The following is a guest post from Brendan Cochrane and Katya Gozias.
“Pig butchering” scams, where victims are “fattened” up with flattery, often under the guise of romance, before handing over their assets to the scammer, are on the rise, and the government and cryptocurrency exchanges should be doing more to protect people from these scams.
In June, the Commodity Futures Trading Commission (CFTC) began an enforcement action against California man Cunwen Zhu, who they say pretended to romance 29 people to get them to deposit $1.3 million to buy cryptocurrency on their behalf. Instead, he took it for himself. Unfortunately, most of the perpetrators behind the over $250 billion in crypto fraud FBI reported will never be brought to justice.
Be suspicious of all communications you get from people you do not know.
The Psychology of the Scam
Scammers contact potential victims through social media and pretend to befriend their victims, even romance them from afar. Most pig butchering scammers frequently find their victims on dating sites, playing on their desire for connection and companionship to gain their trust. But it’s not just dating sites – these scammers will use any social media platform. For instance, people have been victimized through Instagram, Discord, Telegram, YouTube, Facebook and LinkedIn. Conversations then move to WhatsApp.
At this point, the scammer convinces the victim to invest in crypto, often sending them a link to a legitimate-looking cryptocurrency exchange website or app. One victim received a link to what appeared to be So-Fi – even including a working customer service contact – but it was a fake.
Victims are discouraged from trying to withdraw funds over concerns of “taxes” and “processing fees,” but the scammers already have their money by now. Sometimes, scammers will return what appears to be a portion of the victim’s investment to continue the cycle and maintain trust when they’re repatriating another victim’s stolen funds, much akin to a Ponzi scheme. This is often where the victim realizes they’ve been scammed.
You can protect yourself by being careful with whom you share your contact information, not responding to messages from people you don’t know or haven’t met in person, or clicking on links they send you. Independently research exchanges and trading platforms and see if they are legitimate, have dispute resolution mechanisms, and comply with U.S. law enforcement requests.
Prosecuting pig butchering scams can be complex, involving local, state, and federal law enforcement and regulatory agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission. It is further complicated by the fact that the scammers are typically not in the same country as their victims.
Scammers frequently operate from China, Cambodia, Myanmar, and the United Arab Emirates, where no extradition treaties exist, or extradition can be difficult because of remoteness and lack of coordination. Scammers may also have bribed local law enforcement.
Even worse, the scammer contacting the victim may be a victim themselves — of human trafficking rings. The FBI recently warned that people traveling to Southeast Asia are being lured into the hands of criminal organizations by false job offers and then held as virtual slaves, forced to perpetrate the scam. As a result, law enforcement focuses on disrupting the scammers’ shell companies, money laundering chains, and fake websites.
One thing is clear: law enforcement and regulatory agencies need more teeth to deal with these scams and public-private cooperation.
When law enforcement makes a dent in investigating pig butchering scams, it represents a drop in the bucket of the overall amount of stolen money. Earlier this year the federal Department of Justice recovered over $100 million worth of cryptocurrency, but reported losses are believed to be around $3 billion a year and rising. Moreover, oftentimes, victims do not report their losses.
The Future of Public-Private Partnerships
An investigation by CNBC found that one scam victim’s bitcoin was transferred via Crypto.com to a wallet that has received $1.6 billion in bitcoin since 2019 and regularly transfers funds through Binance. The victim contacted Crypto.com but was told they couldn’t assist in recovery. He filed complaints with law enforcement but has yet to hear back.
Suppose exchanges cannot help victims recover their money. In that case, they are, at a minimum, in a unique position to refuse to host wallets associated with suspicious activity or flag them for law enforcement. Public-private partnerships and information sharing are key to disrupting pig butchering operations.
Just because some of the money is recovered doesn’t mean it’s returned to the victim, mainly because many local law enforcement agencies are unfamiliar with investigating crypto-related crimes. That’s where Santa Clara County, CA, deputy district attorney Erin West comes in.
According to Forbes, “often the first step is teaching cops and prosecutors’ offices how to create a government-controlled wallet, so that when a cryptocurrency exchange is ordered to hand over ill-gotten crypto holdings, investigators have a way to receive it.”
Once the funds are frozen, West can go to a judge and seek a seizure warrant. “Then the Santa Clara District Attorney’s Office can hold the crypto in custody, while going through the judicial process of making sure that no one else has a claim on those funds. Once those notification procedures are exhausted, a judge signs off on the final transfer back to the victim”. West has led a team that’s recently restored $1.15 million to fraud victims.
West is also raising awareness of the crime among lower-level law enforcement agencies. She’s built two organizations, the Crypto Coalition and Operation Shamrock. The Crypto Coalition has about 1,100 law enforcement agencies as members that provide education for law enforcement professionals. Operation Shamrock hopes to interrupt the pig butchering scams by educating the public, seizing stolen money, and disrupting the scammers’ operations by involving the tech industry.
Pig butchering scams are a growing danger. They prey on the basic human need for companionship and love. Using social media like a parasite, scammers can hide in plain sight and gather information to construct personae victims will empathize with. While many scams target the elderly or people who aren’t tech-savvy, anyone can fall victim to a pig butchering scam. In fact, according to some statistics, two-thirds of victims are women between the ages of 25-40. We must be vigilant and do more to educate people of the danger and the precautions they can take.
Should you or someone you know fall victim to such a scam, third-party consultants who use tools such as Chainalysis or QLUE (created by Blockchain Intelligence Group), can trace funds to an exchange. These tools pull data from public blockchains layer the information with intelligence from law enforcement agencies, and present the information in a chart that illustrates the flows of funds.
Exchanges that cooperate with US law enforcement can then be subpoenaed for “Know Your Customer” information, which can be used to attempt to claw back the funds.
Disclaimer: The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials provided here are for general informational purposes only. Information on in the article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser.
Katya Gozias is a Managing Director at Guidepost Solutions. She works with blockchain companies to develop a roadmap and framework for the addition of fully operable blockchain technology solutions for enterprise clients, to include configuration for KYC, cyber security, anti-fraud, and supply chain tracking. She also assists pig butchering victims with tracing the movement of funds to an exchange and liaising with law enforcement.
Brendan Cochrane is a partner at YK Law LLP, where he focuses on blockchain and cryptocurrency issues, and an adjunct professor at Suffolk University Law School teaching “Blockchain, Cryptocurrency and the Law.” He is also the principal and founder of CryptoCompli, a startup focused on the compliance needs of cryptocurrency businesses.
