Psychology, Red Flags, and Prevention of Crypto Romance Scams

One of the most insidious and pervasive scam typologies we see in our industry is the romance scam. In 2020, this particular scam jumped 50% according to a Psychology Today article.

A loneliness epidemic ripples through the United States, and it disproportionately affects the elderly and disenfranchised. Potential victims oftentimes have retirement savings, funds from real estate transactions, or a pension.

There is a peculiar psychological component to the scam.

The fact that victims are older, may show signs of cognitive decline, and don't have a large support system, or are suffering from depression, make them vulnerable to exploitation.

Romance scammers, who likely work in concert with each other, may belong to an overseas cybercrime organization or "fraud shop," and play the long game when they target victims.

How Scammers Approach and Fleece Victims

These are some key features of how they approach their targets:

? They develop a rapport with the victim. They discover them online via social media, in various kinds of chat groups, forums, cyber meetups, and other online locales. Typically, the scammer looks for people who are suffering — they are a widow or widower, or a divorcee — and they post content putting their melancholy on display.

? After the scam artist develops a pseudo-affair with the victim, they eventually appeal to their target's newfound loyalty and sense of emotional connection. The fraudster claims they are stuck in some hostile jurisdiction, but are trying to make it to America. They get stopped by border patrol, or face other insurmountable challenges. They may even claim they are in a hospital or require some kind of emergency procedure to heal. In other words, they almost always conjure up the pretense of a "false emergency."

? The scam artist requests large sums of money from the victim, claiming it will help them overcome their "false emergency." They claim the funds will enable them to travel to America and into their lover's arms. Of course, this is the scam part. The victim does not know their supposed paramour is a scammer, and oftentimes the scam can go on for months or even years. The victim also has no clue about the scammer's true identity.

The insidious part of the con is the victim may not even realize they're being scammed for some time. The individual will be in denial. They are so bonded with the scam artist's manufactured persona they can't admit they fell for it...oftentimes giving up hundreds of thousands or millions of dollars over the course of months or years.

Identifying the Romance Scam; Red Flags

It is also challenging for financial institutions to catch the scam in progress and help victims, because much of their attention is focused on source of funds (typical in fraud schemes). The problem is the fund source is almost always legitimate; because it is the victims retirement or savings account.

In the cryptocurrency ecosystem, the fraudster compels their targets to purchase bitcoin or other cryptoasset (likely because they believe they can launder the funds with more anonymity. Obfuscation through layering is a hallmark of the laundering process, and this is no different). The victim then purchases crypto from an exchange and sends it to the scammer.

There are key red flags exchanges and financial institutions should acknowledge to identify the typology:

??Victim is elderly or infirm.

??Victim does not understand cryptocurrency or how to handle the technology.

??Victim is conducting transaction on behalf of another or wallet does not belong to them.

??Blockchain analytics shows customer wallet interacting with a mixer, "fraud shop," or other scam category, only a few hops away.

Helping the Victim; The Customer Interview

So how can we discover and uncover these red flags and identify potential romance scams coming through our institutions?

Conducting customer interviews for certain customer types is the key to identifying red flags and disrupting the scam. One of our top priorities — aside from the prevention of money laundering and terrorist financing (ML/TF) — is to protect our customer-base from being victimized.

An important piece of information we should glean from the interview is whether the customer understands cryptocurrency.

Do they know how wallets work? Have they used services before? Have they researched the technology? Oftentimes, victims of the romance scam are told to purchase cryptocurrency, but they typically know next to nothing about it.

Through the combined action of the customer interview process, transaction monitoring procedures, and customer profile, crypto exchanges should readily be able to identify and protect victims of romance scam fraud...although identification will still be challenging in many cases.

Self-Regulation in the Fight Against Romance Scamming

As a final consideration, rather than relying on governmental enforcement and rulemaking, crypto financial institutions should acknowledge and understand romance scam risk and its pervasiveness.

With keen awareness, it will be easier to develop internal policies and controls that allow the institution to route out romance scams and protect victims.

The cryptoasset industry is currently beset by scammers and bad actors. Hence why we should leverage the tools at our disposal to disrupt their activities and prevent more victims from piling up.

We must protect the reputation of our ecosystem, and the surest way to do this is to work on a united front by understanding and addressing typologies as they emerge. With a mindset toward protecting victims, we create a de facto safer and more trustworthy crypto economy.