Cryptocurrency and Pandemic Relief Fraud–More Investigative Obstacles

By Andrea L. Moseley

The Special Inspector General for Pandemic Recovery (“SIGPR”), Brian D. Miller, recently put out a plea for crypto companies to lend a hand in SIGPR’s efforts to combat Pandemic Relief Fraud. At the end of September, SIGPR Miller and his former special counsel wrote an article on how crypto companies could do them a solid by partnering with law enforcement.

SIGPR Millers’ plea follows his call to increase funding and expand SIGPR’s jurisdiction in it’s last quarterly report to Congress. Earlier this year, a Justice Department legal opinion narrowed the scope of SIGPR’s jurisdiction to programs established under title IV, subtitle A of the CARES Act. This opinion drew a distinction between oversight over Treasury’s direct loans and the Federal Reserve’s lending programs and coronavirus relief fund, payroll support program and paycheck protection programs.

According to the legal opinion, SIGPR only has jurisdiction over Treasury’s direct loans and the Federal Reserve’s lending programs. This leaves the Treasury Department’s Office of Inspector General (OIG) responsible for overseeing the balance of those programs. SIGPR Miller said, “There is nothing more frustrating to achieving these missions [the mission of statutory oversight] than turf battles.”

Aside from this year’s tug of war over jurisdiction with the Treasury Department’s OIG, SIGPR Miller is no stranger to complex hurdles. Now, SIGPR Miller has opened up about some of the challenges that cryptocurrency presents for his investigative mission.

SIGPR Miller summarized the problem:

“. . . cryptocurrency offers a variety of tools for shielding the identity of its users. This can prevent law enforcement from determining who holds stolen funds. That problem is exacerbated, in part, by entities within the current crypto ecosystem that have yet to establish Bank Secrecy Act protocols, or that may not yet be required to do so. This potentially impedes oversight of pandemic relief funds and raises serious questions aboutwhether taxpayer dollars are making their way to bad actors overseas.”

Crypto currency is generally stored in crypto wallets which are digital files that store crypto addresses. These typically consist of both a public and a private key. The public key allows for the viewing and verification of a transaction involving that address but does not reveal the address holder’s identity. Contrast this with a traditional bank deposit associated with a bank account where the account holder’s identity is not difficult to determine.

According to SIGPR Miller, “crypto players” called “mixers, or tumblers” present unique challenges to law enforcement efforts. These crypto players receive orders from multiple users, mix the users’ units of cryptocurrency and then send payments out to varying addresses. This commingling makes it difficult to trace a specific payment to the true sender of that payment.

Michele Korver, the Financial Crimes Enforcement Network’s first chief digital currency adviser says that cryptocurrency does not pose a new kind of crime but instead, “represents the availability of new tools” to financial criminals. Focusing on the issue of anonymity in the realm of pandemic relief fraud, SIGPR Miller recounted a common fraud scheme.

This notorious scheme is called the “romance scam.” The storyline of the romance scam is where a person convinces a duped romantic partner over the internet into applying for pandemic relief funds. Once received, the funds are moved several times through “money mules” and somewhere down the line, the money is converted into cryptocurrency. The funds can then be sent through mixers and wind up at a final address held by unknown account holders.

According to the Federal Trade Commission, $304 million in losses to romance scams were reported last year which is a 50% increase over 2019. “Hearts are broken and wallets are emptied.” The isolation of the pandemic has made this scam even easier by limiting potential “romantic” partners (or scammers) from meeting up in person (because of COVID risk) and thereby evading detection.

When law enforcement is unable to identify the ultimate recipient of ill-gotten pandemic relief funds, it is difficult to claw that money back and to prosecute the perpetrators. In addition, investigators are often unable to freeze or seize the cryptocurrency held at a given address because the private key is only known to the address holder. Meaning, anyone without the private key cannot access or freeze those funds.

In the wake of these types of challenges, SIGPR Miller hopes that companies in the “crypto space” will willingly take the opportunity to work with law enforcement the way that financial institutions have partnered with them “for decades.”

In the meantime, individuals and entities swimming around in crypto space should be aware of the Department of Justice’s view that mixers and tumblers “are engaged in money transmission” and therefore are subject to the requirements of the Bank Secrecy Act. Indeed, given the current atmosphere of cryptocurrency oversight, individuals and entities engaging in these types of transactions should obtain legal advice in order to monitor compliance efforts and avoid unwelcome government scrutiny.

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