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Out-Law News 3 min. read

Crypto investment frauds a ‘daily’ scourge

Thousands of people in the UK a year are being defrauded in small-scale cryptoasset investment scams but lack a clear route to recover their money, according to an expert in tracing stolen cryptoassets.

In an exclusive interview with Out-Law, Marlon Pinto, director of investigations at AnotherDay, explained how his company receives “daily” calls and emails from distressed investors concerned that they have been victims of cryptoasset investment scams.

“We get enquiries on the smaller cases daily and we will see perhaps three to four of those enquiries coming in [per day],” Pinto said. “Those cases are people losing between £500 and £20,000. It is a large problem and it's just getting worse.”

With the dramatic increase in the scale of investment fraud, much still needs to be done

AnotherDay specialises in consultancy, crisis management, intelligence gathering and asset tracing. Pinto said an increasing proportion of the company’s work is in forensically investigating alleged cryptoasset frauds.

In his interview with Out-Law, Pinto shared his insight into how cryptoasset fraud investigations are carried out in practice, delving into the detail of one case in which AnotherDay has helped trace more than £560,000-worth of bitcoin poured into a suspected crypto-style Ponzi scheme.

Pinto said that while AnotherDay is currently engaged in a further five crypto fraud investigations of similar value, there are many lower value cases his company is contacted about.

“Those who invested a substantial amount of money tend to have reserves somewhere to pay for legal fees or investigation fees,” Pinto said. “However, there are those who invested £2,000, £3,000 and have been duped into believing their portfolio is worth £20,000 when, really, they haven't got that, and nor do they have the £3,000 they invested or any backup funds to be able to support an investigation or for us to even have a cursory look.”

“They are desperate individuals who want something to be done because they've lost everything they have, which is to them a substantial amount, and want us to do something about it. Unfortunately, there's not much we can do with that,” he said.

“In many cases people approach Action Fraud but I think it's no secret that nothing actually happens. Even if we can help in collating and putting together a package of evidence that's good enough to hand over to the police, the main problem is that the police just don't have the capabilities or the capacity to deal with frauds in general, so some people are left wondering where to even start,” Pinto said.

Hinesh Shah, forensic accountant and financial crime investigator at Pinsent Masons, the law firm behind Out-Law, said that data from Action Fraud shows that investors lost £113 million to crypto-fraud in 2020 – an increase of almost 50% on the previous year – with more than 5,500 reports being filed.

Shah said: “Crypto-fraud has been on the rise as people try and cash in on the surge in price of cryptocurrencies. Bitcoin, despite its recent slump, is currently trading 400% higher than at the same time last year. With more and more cryptoassets entering the market, retail investors are likely to continue to be attracted by the potential substantial returns on offer.”  

Pinto’s and Shah’s comments come at a time when the UK Financial Conduct Authority (FCA) has reported that the number of enquiries it received about potential cryptoasset scams over the year to the end of March 2021 grew steadily, from 176 enquiries in April 2020 to 566 enquiries in March this year.

The regulator has previously estimated that as many as 2.3 million UK consumers now hold cryptoassets but has described investment in them as “high risk”. The FCA has now drawn up a new three-year consumer investments strategy, which contains proposals for how it intends to combat investment scams.

In its strategy, it said that, by 2025, it wants to halve the number of consumers investing in high risk investments who indicate a low risk tolerance or demonstrate the characteristics of vulnerability, and is further targeting a reduction in the amount of money consumers lose to investment scams, through reductions in investment scams perpetrated or facilitated by regulated firms.

The FCA said that 6% of consumers increased their holdings of higher risk investments during the Covid-19 pandemic, with 45% of non-advised investors saying they did not realise the risks. It said that consumers lost nearly £569.1 million in total to investment fraud in 2020-21 – triple the amount thought to have been lost to such scams in 2017-18. The average amount lost per scam is £24,000.

In May, the FCA said it would clamp down on financial institutions that “assist” unregulated businesses “marketing bogus investment activity”. Last year, the FCA issued 1,204 specific warnings concerning investment scams – double the number it issued in 2019. 

Financial regulation expert David Hamilton of Pinsent Masons said: “The FCA’s increasing emphasis on the relatively high-risk nature of cryptoasset investments has been driven by two principal concerns: consumer protection; and market integrity. While the volatility of cryptoasset values is undoubtedly a concern for the regulator, exposing consumers to potentially significant losses, it is principally concerned to identify and root out bad actors. Measures to facilitate this have included bringing crypto businesses within the scope of the Money Laundering Regulations 2017, requiring them to register with the FCA. The registration process enables the FCA to identify shortcomings in firms’ financial crime systems and controls, and only those firms that meet the required standard can register and continue carrying on their business.”

“Reform to the UK’s financial promotions regime is also in prospect, extending that particular regulatory perimeter to a broader range of cryptoassets. With the dramatic increase in the scale of investment fraud, much still needs to be done,” he said.

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