Digital frauds: Binary options trading, ICOs and Bitcoin scams
As technology takes an increasingly central part in all of our lives, digital criminals are increasing the range and sophistication of their frauds and with it, the number of people falling victim to these crimes. Though the law governing some of the latest developments is tightening in most jurisdictions, there are still loopholes large enough for fraudsters to disappear into and at the rate new fintech is being developed, a seemingly endless conveyor belt of opportunities for them to exploit.
Over the last 18 months we have helped an alarming number of clients manage disputes that have arisen as a direct result of digital fraud and the types of frauds they have fallen victim to have included:
1. Binary options trading
A binary option is basically a financial option in which the pay-off is either a fixed monetary amount or nothing at all. A fake company runs a website that displays a 'live' trading environment with higher than average returns for modest investments. The investor then makes an initial deposit which they will see grow in front of them on the screen then, at the point the investor asks to withdraw their returns, the website suddenly disappears with all of the money.
2. Initial Coin Offerings (ICOs)
ICOs support a type of crowdfunding only instead of providing a shareholding in return for an injection of capital, the company releases its own crypto-tokens in return for either Bitcoin or some of the major international currencies. Digital fraudsters have been quick to take note and more and more fake investment opportunities are springing up every month helped by the fact far too many would be investors are still not taking the right precautions or working through the required level of due diligence on the business, its owners, its tech and its business plan before handing over their cash.
3. Bitcoin scams
Bitcoin is currently enjoying its highest every exchange rate and is therefore in greater demand than ever before. That demand has given birth to a huge number of different digital scams ranging from malware designed to access your PC, phishing scams that take control of the victim's Bitcoin key to empty the associated bank accounts and 'Bitcoin-flipping' and Bitcoin pyramid schemes which deliver a high initial return then fold once you invest more money and/or introduce more people into the scam.
However it is a fake cloud mining that has hit the headlines most recently.
Bitcoin 'miners' are totally legitimate and offer a totally legitimate service. They validate transactions in the blockchain using complicated mathematical equations in exchange for new Bitcoins. However yet again scammers have been quick to catch on and have started to offer the same service but after collecting the 'mining fees', they don't do any of the promised mining; they might pay out a few small amounts in the opening weeks just to keep up appearances but they will soon disappear with all of the victims money.
But the legal world is closing in. Earlier this month Homero Joshua Garza, CEO of the fraudulent GAW Miners and Zenmining cloud-mining scams, was fined $12m after allegations made by the US Securities and Exchanges Commission in December 2015 were proven to be correct, accusations that intimated Garza created a scam that netted him nearly $20m.
Garza's scam was fairly standard. He offered investors a share of the profits raised by mining hardware he claimed was "state-of-the art" and "custom-built". More than 10,000 investment contracts were sold before multiple complaints arose from his investors questioning the veracity of his claims. And Garza is by no means a one-off. Over the last year or so we have seen a number of very similar scams run by a list of companies including Gemcoin, CoinTerra, and HashFast.
Speaking on the subject of Garza's fines, the director of SEC's Boston Regional Office, Paule G. Levenson, laid the scheme bare telling reporters:
"Garza and his companies cloaked their scheme in technological sophistication and jargon, but the fraud was simple at its core: they sold what they did not own, misrepresented what they were selling, and robbed one investor to pay another."
Even more worryingly, particularly because of recent tragic events in the UK, we are also seeing a rise in Bitcoin Donation Scams. A scammer will create fake donation pages for any manner of deserving cause and then asking people to donate in Bitcoin rather than by direct cash donation or via a more regulated platform like PayPal.
So how do you spot a scam and avoid the potential for a long, drawn out and expensive dispute to get your money back?
The first rule is sit back and ask yourself is this too good to be true. Are the levels of return you are being offered credible or are they ridiculous? If it's the latter, it is more than probably a scam.
The second rule is always be on your guard; if you receive an unsolicited offer think scam first and don't change that point of view until the person contacting you has provided all of the evidence you need to prove they are legitimate and:
▪ Never trust any unsolicited email or social media post
▪ Never click on any URL associated with a digital or cryptocurrency based offer boasting enormously high returns
▪ Never provide personal information in response to an email or social media account until you are absolutely certain it is a recognised legal entity and established and well regarded in their field
▪ Never enter into any financial transaction – particularly if it's been promoted on email or social media - until you have completed extensive diligence
If you do find yourself a victim of any type of digital scam, always consult a lawyer first. A strongly worded email will cut no ice with a digital fraudster and all your approach will do is tip them off that you have seen through them and are looking to take action to reclaim your funds.
Although these scams are simply updates on some of the oldest financial frauds, today's digital criminals are highly sophisticated and know how to cover their tracks. Stealth and strategy need to be employed and those are the skills a lawyer with experience in resolving cross-border multi-jurisdictional disputes involving digital fraud is probably best placed to provide.
Source: INTERNATIONAL BUSINESS TIMES by Richard Howlett