Crypto scams targeting online acquaintances cost victims billions

Bruce has been playing catch-up ever since. The crypto-based investment scam that ensnared him, his investigation revealed, has defrauded tens of thousands of victims around the world. And it’s probably cost them billions, according to experts — far more than previous estimates from federal agencies.

In the last nine months of 2022 alone, victims lost more than $500 million on just one of the three blockchains targeted by fraudsters, according to a new analysis that the intelligence company Inca Digital provided to The Washington Post. Ian Schade, a blockchain intelligence analyst at TRM Labs, said the full cost of the fraud likely ran into the billions in each of the past two years.

The scam strategy has a name – “slaughtering pigs,” which refers to to win people trust with quick first gains as scammers then use to attract greater investment, fatten them up like pigs before slaughter. The scammers meet potential targets on dating apps or other platforms, most recently including Airbnb. And perpetrators get away with more than even most law enforcement officials realize.

Even as the crypto world endures a years-long slump exacerbated by the implosion of stock exchange FTX and other high-profile firms, fraudsters have continued to catch new victims and rake in conspicuous features, the data shows. Inca Digital analyzed part of the scam, gathering data from eight leading exchanges that fraudsters use to lure the quarry and considering only a portion of the crypto they target.

“It will become the costliest internet fraud in the United States in terms of dollars lost within a few years, if it hasn’t already,” said Andrew Frey, a forensic financial analyst at the US Secret Service.

But despite the scam’s growing scale, federal law enforcement and the major crypto exchanges that fraudsters use to carry out these cons seems to be behind in hitting down. Federal authorities have yet to arrest any suspected architects of the scheme – a task they say is complicated by the fact that the perpetrators are concentrated in China and Southeast Asia – and they are still deciding how to contain it.

“The incentives are aligned with the fraudsters, because they can get away with it,” said Inca Digital CEO Adam Zarazinski. “Law enforcement is paying attention, but probably not as much as they should. Crypto service providers are paying attention, but not as much as they should.”

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Sensing a vacuum, a handful of self-trained amateur detectives and local law enforcement are stepping up to develop their own grassroots response.

Bruce helps lead the charge. In his spare time, he leads investigations for the Global Anti-Scam Organization, or GASO, a group dedicated to helping victims of pig slaughter and staffed by 40 volunteers who are themselves victims of scams. He has also emerged as a key resource for federal law enforcement, including giving a presentation in November to a conference organized by the National Cryptocurrency Enforcement Team, the Justice Department’s cryptocrime-fighting task force. A spokesperson for the Ministry of Justice declined to comment.

Meanwhile, local law enforcement officials are doing what they can to help the victims. Erin West, an assistant district attorney in Santa Clara, California, has pioneered the use of tracking tools and new legal methods to hunt down, seize and return stolen crypto — and she’s sharing them with prosecutors across the country.

West achieved his first successes in his jurisdiction in December, seizing more than $2 million in fraudulent crypto and returning assets to 10 fraud victims. “This is a step in the right direction, but I am aware that we have a long way to go,” she said. “There are an untold number of unheard victims who have been devastated by this crime and still cannot find any form of help.”

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Jonathan Scharf, an assistant district attorney in Queens County, NY, acknowledged that law enforcement at all levels is struggling to help victims. “Our success rate is not great and anyone who tells you otherwise is very disingenuous,” he said.

Late last year, federal law enforcement officials achieved their first successes against criminals involved in the scheme, arresting 11 people suspected of laundering proceeds from pig slaughter and seizing seven domain names that scammers used to target victims.

“Greater resources are needed for law enforcement and financial agencies … to identify and dismantle these criminal networks,” Carole House, former director of cybersecurity and secure digital innovation at the National Security Council, said in an email. She noted that the United States needs more help from partners around the world. “These networks operate across borders. The United States cannot do this alone.”

The challenge is compounded by the nature of the scam, which combines elements of traditional romance and investment scams into what Secret Service Frey calls a “super-scam.”

Fraudsters often spend months earning their victims’ trust. After developing a rapport and moving the conversation away from a social networking app and onto another messaging service, the scammer will mention their success investing in crypto and offer to coach the prospect sacrifice on how to turn around their own profit.

Scammers explain to crypto newcomers how to create an account with a named trading exchange, such as Coinbase or Crypto.com, and ask them to deposit $1,000 or $2,000 there. They then ask them to send their crypto to what looks like another investment platform, even though it is an account controlled by the scammer.

The scammer leads the victim through some initial trades that appear to yield healthy gains, then encourages the target to test the business by withdrawing the funds. Convinced that huge returns are within easy grasp, many victims will go to great lengths, including taking out loans against their homes, to plow into the scam.

Once fraudsters have secured a significant haul from a victim, they usually move within hours to convert the stolen crypto into traditional currency. With most of the fraud’s perpetrators operating out of Southeast Asia, often beyond the reach of federal agents, there is little US authorities can do. It can take victims weeks or longer to realize they have been defrauded and then report the crime.

Inca Digital produced its estimate by analyzing the activity of crypto wallets known to be controlled by fraudsters. The firm studied these accounts’ transactions and then developed an algorithm to find other such wallets. And it traced the crypto passing through those accounts in two directions: back to where victims first bought them on major cryptocurrency trading platforms, and on to other platforms and services the fraudsters use to hide their tracks. Then the money lands on another exchange, typically an international operator, where thieves exchange crypto for traditional currency.

Inca Digital, which provides crypto analytics for private firms and government agencies, found that in the last nine months of 2022, clients of the top crypto exchanges lost $506 million. The analysis gave exactly part of the scam. It focused only on the ethereum blockchain, although the scammers also target the bitcoin and Tron blockchains.

Federal agencies have determined casualty losses at lower levels. The FBI’s Internet Crime Complaint Center said that according to complaints it received in 2021, crypto-romance scams amounted to $429 million in losses. The Federal Trade Commission estimates that consumers lost $547 million to romance scams in 2021, the most recent year they analyzed.

The exchanges say they are working to combat fraud, including cooperating with law enforcement, blocking accounts known to be associated with fraudsters from interacting with their platforms and educating users about threats. But they note that customers ultimately bear the burden of protecting themselves.

“It is the user’s responsibility to verify the legitimacy of any investment they make on our platform,” Coinbase spokeswoman Lisa Johnson said in an email. “While Coinbase has a number of techniques to identify and block illegal addresses associated with fraud and other criminal activity, it is impossible to predict all addresses operated by external bad actors.”

Crypto.com recently added a tool Inca Digital developed to detect fraud in near real time, to alert potential victims before they invest heavily. Company spokeswoman Victoria Davis said the exchange takes other steps to protect users, including daily updates of blacklisted accounts.

The platform — where pig slaughter victims lost nearly $300 million in the last nine months of 2022, according to Inca data, the most of any exchange it surveyed — also stresses that customers need to be vigilant. “Safety is a shared responsibility,” Davis said.

With victim losses piling up, Bruce presses on with his campaign for justice. In late January, he traveled to Bangkok to meet with the US Embassy and law enforcement and a man who escaped from a Myanmar compound where he says he was forced to carry out the fraud.

“I may be one of the only hopes some victims have,” Bruce said. “And I want to see the criminals behind bars. That’s what keeps the fire in my belly.”