Due to the nature of cryptocurrency being both decentralised and anonymous, this makes virtual currencies susceptible to fraud. For cryptocurrency businesses, this entails both financial and reputational threats.

This begs the question of how to protect your business and clients from crypto fraudsters. What are the signs? Let’s dive deeper into this problem.

What are cryptocurrency fraud and money laundering?

Fraud and money laundering go together hand in hand, fraud can be an isolated instance where a cryptocurrency wallet is compromised, and the funds are stolen, or it can be part of an elaborate scheme in an attempt to conceal the origins of fraudulent proceeds (money laundering).

Cryptocurrency fraud and money laundering often include identity theft, gaining access to user’s accounts/funds, chargebacks, money muling etc…

Let’s look into these schemes and see how KYC tools can prevent these schemes from happening.

1. Identity theft

Fraudsters can open fictitious accounts using falsified documents, deep fakes, pre-recorded videos, fake photos and masks to attempt to spoof their identity. These fraudsters mix in fake information with true information in an attempt to slip by KYC procedures.

2. Gaining access to a user’s accounts/funds

This type of fraud relies on psychological manipulation and generally happens on social media platforms. Fraudsters trick users into giving away their credentials using social engineering techniques. This includes phishing, pretexting, falsified human interaction, and other methods.

3. Chargeback/payment fraud

Chargeback fraud in crypto occurs similarly to traditional fiat Chargeback fraud. This occurs when an individual attempts to claim back funds using:

• Fake or stolen documents
• Compromised accounts
• Fake identity

As crypto transactions cannot be reversed once completed, chargeback fraud can only happen in cases where crypto was purchased using fiat currency directly from a credit/debit card.

4. Money laundering schemes

Money laundering in crypto occurs in the same ways as with fiat currency, however, there is an additional layer of anonymity which makes it significantly easier for fraudsters to achieve.

Criminals are exploiting the anonymity of crypto blockchains to clean their ill-gotten gains and convert them into seemingly legitimate funds. These fraudsters have many different instruments to achieve this.

• Crypto mixers: these allow users to mix their crypto assets and obscure ties between crypto addresses and real-world identities.
• Privacy wallets: these allow users to hide their transactions from the blockchain by changing the addresses used to send transactions each time a transaction occurs.
• Money-muling: this occurs when criminals use other individuals in order to transfer illicit funds. Money mules are generally individuals with no criminal records and have a clean banking history. This assists them to slip criminal funds through unnoticed. These individuals are generally recruited through online job applications, dating sites and forums. Recruiters can mislead these individuals by promising easy money or deceiving elderly people.

To prevent fraud based on fake, stolen, and synthetic IDs, chargebacks, and money laundering schemes, crypto businesses should build effective KYC processes.

KYC/AML tools to prevent crypto fraud and money laundering

1. Identity verification

Know Your Customer (KYC) is mandatory for all regulated companies, this also includes virtual asset service providers (VASPS). The process of KYC involves identifying and verifying users to prevent illicit activities such as account takeovers and identity theft. The process usually includes the following checks:

• Proof of Identity checks: companies must verify a user’s ID documents to ensure that they aren’t fake. This can be done in three general steps: 1) checking the ID for authenticity, 2) checking the integrity of the images and 3) data validation.
• Liveness + face match: Liveness technology ensures that users are real people rather than paper masks, photos, dolls, etc. Afterwards, Face Match ensures they’re the true document holders by matching their faces with the photo on the submitted document. This process can also ensure that applicants aren’t making duplicate accounts.

2.  Payment verification: This occurs when the banking details that have been provided by the customer are verified as belonging to them.

This process can be done whilst onboarding the client and can indicate the risk of chargeback fraud from occurring if the details of the stipulated cardholder match with the documents submitted.

3.  Transaction monitoring

Crypto companies will have to implement a transaction monitoring system which will detect multiple indicators of suspicious transactions. The indicators that need to be checked include a multitude of variables such as the amount, the age group, location and income to produce a risk scoring for the transactions.

These are only a few of the checks that can be done to prevent fraud, however, they can be costly to implement and difficult to maintain. GloRep has taken up the task to lower the cost of compliance and make it easily accessible to companies of all sizes.