Cryptocurrency, or crypto for short, is a fairly new term. Coined in 2008 by a person using the pseudonym Satoshi Nakamoto, the term combines the words “cryptography” and “currency.” Crypto is any type of digital currency that is maintained by a decentralized system instead of one single authority. While some cryptocurrencies such as Bitcoin have become worth thousands of dollars (on June 14, 2023, one Bitcoin was worth almost $26,000 USD), others have never been worth more than a few pennies. The market has fluctuated greatly, too, leading some authorities to declare crypto to be nothing more than a new, digital form of fraud.
That said, cryptocurrencies are, at least for the immediate foreseeable future, here to stay. As a business owner, it’s vital that you understand at least the basics of crypto and how it can affect your industry and your investors. If you do use crypto or are considering it, you also must recognize the risks it poses. Here are some examples of companies that have committed fraud, money laundering, and other crimes through cryptocurrency and what you can do to recognize such businesses.
Crypto can, and has, been used in a variety of criminal ways, including to fund terrorism, bribe officials, and evade sanctions. There are a few reasons for this, including the fact that there are few regulations surrounding crypto and that it’s very easy to make use of crypto platforms and services located in other countries. Since it can be very difficult to track transfers from one platform to another, terrorists and others seeking to avoid the law can easily move money into and out of countries. While it may be difficult to purchase cryptocurrency anonymously in the U.S. and Europe, it’s much easier to do so in other countries.
The use of decentralized systems also makes it difficult to block transfers into countries that have been sanctioned. For example, the U.S. has had to block Bitcoin and ether addresses that have been used to transfer money to Russia. Russian nationalists were using cryptocurrency to violate sanctions. One of these addresses was actually connected to a company founded by Sam Bankman-Fried, an individual we will discuss in one of the examples below.
While this form of currency was very hot in 2021, values started cooling in 2022. In fact, the value of a number of new cryptocurrencies dropped dramatically, resulting in many people losing money. This caused a number of different crypto exchange platforms to close. However, one platform, FTX, seemed to weather this storm without any issues, or so it appeared.
In reality, the platform, its founder, Sam Bankman-Fried, and other leaders were committing a number of different fraudulent acts in order to make it appear that FTX remained stable. As part of this fraud, he stole billions of dollars from investors. Bankman-Fried had a dozen charges leveled against him by the SEC, including conspiracy to commit fraud and securities fraud charges. He was found to have used customer deposits to fund various other venture investments, support the company, advertise FTX as a trustworthy platform, and even make illegal campaign donations to various elected officials in order to have some control over what crypto regulations were passed.
While Bankman-Fried has pled not-guilty and is still attempting to overcome the charges brought against him as of June 2023, other leaders in the company did plead guilty to fraud and other charges, including a co-founder and two other executives. Companies and investors who had not done any deep due diligence could have blindly invested in FTX. As a result, they could have lost thousands or millions of dollars.
The lesson here is that if a business appears to be doing too well, they may have engaged in some shady practices to avoid failure. Of course, you’ll want to invest or partner with a company that is successful, but you should always do your due diligence before doing so. That’s where Infortal comes in. We can assist you in conducting a thorough deep due diligence investigation, gathering all of the relevant information about a company that a standard due diligence search may not uncover.
Celsius was another cryptocurrency company that found themselves rapidly losing money as the crypto bubble burst. In July of 2022, they filed for bankruptcy, making them one of the few crypto companies to seek relief under the law. This was one of the handful of bankruptcy cases that made lawmakers realize that there were few laws that directly addressed digital assets and how such assets were treated through bankruptcy. This by itself was something of a wakeup call to investors as they realized that bankruptcy laws and protections may not apply to their digital currency investments.
In addition to finding that they had little protection under bankruptcy laws, investors also found out that Celsius may have been engaging in corrupt lending practices. A judge in the trial ordered a probe into the company to determine if Celsius engaged in acts similar to a Ponzi scheme. Some investors believed that Celsius was using deposits from new investors to pay previous investors. There was enough evidence to convince a judge.
Celsius isn’t the only cryptocurrency platform to be accused of such fraudulent practices. Terraform Labs, Three Arrows Capital, and Voyager Digital all went bankrupt following crypto crashes. In some cases, the founders of these companies fled their respective companies and have managed to evade authorities, making it seem clear that they did engage in some form of illegal activity such as corruption, bribery, or money laundering
Fortunately, with Celsius, it seems investors may recoup at least some of their money. In May of 2023, the company accepted a proposal to form a new company that would be wholly owned by its account holders and controlled by a board of directors appointed by its creditors.
Again, had investors done any due diligence investigation into Celsius before investing, they may have found some warning signs that it wasn’t a company they should have partnered with. Unfortunately, because crypto was seen as the exciting new investment fad, few people took the time to really learn about it. They failed to see the warning signs and, as a result, lost a lot of money, not to mention reputation damage.
Binance was once known as the largest cryptocurrency exchange service in the world. Investors who were serious about crypto investments used the platform, and it routinely handles millions, if not billions, of dollars in transactions every day. However, the service failed to do any due diligence into who was using it. Even basic due diligence investigation would have detected or prevented fraud, sanctions violations, organized crime syndicates, and state sponsored actions.
It was estimated that billions in illicit funds were funneled through Binance between 2017 and 2021. The service did not know who was creating accounts or where the money being used to purchase crypto was coming from. Because of this, numerous hackers and other fraudsters used the platform to fund bribery, money laundering schemes, and other illegal activities
One of the biggest use of Binance for illegal activities occurred in September of 2020. A group of hackers from North Korea attacked and stole $5.4 million in cryptocurrency from an exchange company in Slovakia. They then created several dozen accounts on Binance anonymously and used the platform to move the stolen money to other accounts. All of this was done within a very short period of time.
It wasn’t the only case of Binance being used for illegal activities. In total, authorities believe more than $2.3 billion in funds has been moved through Binance. This money came from cyberattacks, fraud, drug sales, and other illegal activity, and much of it was used to fund other illegal actions. In fact, evidence suggests the money stolen from the Slovakian exchange was used to fund research into nuclear weapons in North Korea.
Binance refuted many of these facts, claiming that their platform was secure and that they did perform checks on the funds routed through their platform and on those who created accounts. However, despite this claim, hackers and others continue to use the platform. Binance has even refused to suspend accounts from Russia, leading to money being funneled into the country as a way of avoiding sanctions.
Currently, the U.S. Department of Justice has an ongoing investigation into Binance, and in March of 2023, the Commodity Futures Trading Commission filed a civil suit against the service. Companies and investors will want to be very careful when working with any company that makes use of Binance. It’s possible their funds could end up being used in a way that violates sanctions, bribe officials, or directly fund other illegal activities.
While there are certainly a number of legitimate uses of cryptocurrency, it can be difficult to tell if the opportunity or partnership you’re considering is one of those uses or if it’s fraudulent. Engaging in any sort of fraudulent behavior, even if it’s simply by association through a partnership or vendor contract, can result in being fined or penalized in some way.
The best way to avoid this is to always do your legal and financial due diligence, further enhanced by due diligence investigations of key actors and business enterprises, whether it’s when hiring an executive, forging a partnership, contracting with a vendor, or acquiring another business. Infortal has years of experience in deep dive due diligence investigations and is here to help. We have the resources, including resources in 160 countries, that enable us to gather detailed information about individuals and businesses to help you make an informed decision. Reach out today to learn more.