Risk In:Review #56 - 05 May 2024
Anthony Hope
Risk & Compliance Executive | Fintech Founder & Innovator | Strategic Leader | Expert Speaker
Welcome to Risk In:Review, your weekly newsletter curating the best of the week’s news stories from the crossroads between risk management and technology in Asia Pacific.
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Perspectives
Welcome to this week’s Perspectives, where I focus on two news stories about the cost of money laundering and fraud.
The first headline draws on the findings from LexisNexis Risk Solutions in their 2023 True Cost of Fraud Study. The report paints a stark picture of the cost of fraud being multiples of the actual transaction amount.
In Hong Kong for example, this translates to an average of HKD 3.64 for every dollar lost, covering losses, labour, legal fees, etc. The banking sector feels this even more acutely, incurring costs of HKD 4.31 per dollar lost.
This will resonate with anyone who manages the end-to-end of fraud risk management for a financial institution. Often the costs associated with investigating and remedying fraud are seen as indirect, secondary to the cost of making a transaction good. ?
This study shows the importance of helping Risk Owners understand the value of investing in upstream detection, authentication, and know-your-customer tools that will correspondingly help mitigate downstream monitoring and collection costs.
Turning to the cryptocurrency industry, the second headline relates to Changpeng Zhao, the former CEO of Binance, who has been sentenced to four months in prison for failing to implement robust AML controls.
While Zhao was not directly accused of facilitating money laundering, Binance has been widely recognised to have allowed illicit funds to move through its platform.
Many in the crypto industry consider the sentence mild, and the accompanying fine of USD 50 million a slap on the wrist, considering Zhao's substantial net worth of over USD 40 billion.
It is worth however drawing a comparison between Zhao and his rival, Sam Bankman-Fried, who was recently sentenced to 25 years in prison. Unlike Zhao and the charges brought against Binance, Bankman-Fried’s FTX exchange and Alameda Research faced allegations of fraud and misuse of customers funds.
Arguably Zhao’s case relates more to regulatory and compliance failures, while Bankman-Fried’s case relates to financial misconduct and deception.
But while the court may be comfortable with this delineation, the case has sparked widespread debate on the handling of white-collar crimes within the crypto sector, with some raising whether the judgement serves as a sufficient warning to the industry.
This Week In:Review
Australia
Hong Kong
India
Korea
Best of the Rest
Australia In:Review
Detectives from the Financial and Cyber Crime Group's Money Laundering Unit in Queensland have charged four individuals linked to a boiler room investment fraud, dubbed ‘Operation Uniform Tapenade’, initiated in July 2022.
Investigations revealed that the companies involved, namely ‘Crypto Advisers Australia’, ‘Strategic Capital’, ‘Active Marketing Solutions’, and ‘Alternative Capital’, orchestrated cold call investment fraud involving crypto currency.
They allegedly swindled over AUD 1.5 million from around 30 people between 2018 and 2021 using Ponzi schemes and identity theft.
Further allegations include the laundering of these illicit funds through crypto currencies, precious metals, luxury vehicles, and real estate to obscure their origins.
Detective Acting Inspector Steve Paskin advised the public on the importance of due diligence when considering investment opportunities, especially those promising quick returns.
The National Anti-Scam Centre's Targeting Scams report indicates a 13.1% decrease in reported scam losses to AUD 2.74 billion for the year ending December 2023, with a notable 21% reduction in the latter half of the year.
Investment scams were the most damaging, accounting for AUD 1.3 billion in losses, followed by remote access and romance scams.
The report highlights that bank transfers and cryptocurrencies are the primary methods used by scammers, with significant losses reported through both channels.
Measures by major banks to restrict transactions to high-risk cryptocurrency exchanges have notably reduced scam-related losses.
Innovations like Telstra and CBA's Scam Indicator and NAB's payment prompts have also enhanced scam detection, preventing substantial financial losses. The ongoing implementation of a confirmation of payee system across banks is expected to further reduce scam incidences.
The report emphasises the need for continued collaboration and data sharing between financial institutions and the National Anti-Scam Centre to improve scam prevention and response strategies.
The Federal Court of Australia has ruled against BPS Financial for operating the Qoin Wallet, a crypto-asset token service, without the necessary Australian Financial Services Licence.
This decision marks the first legal case in Australia concerning a non-cash payment facility using crypto assets. Justice Kylie Downes found that from January 2020, with a 10-month exception, BPS contravened the Corporations Act by failing to secure a licence or authorisation from a licensed holder.
The case, led by the Australian Securities & Investments Commission (ASIC), also revealed BPS Financial's misleading claims regarding the Qoin Wallet. These included misrepresentations about its registration status, merchant acceptance, and the feasibility of exchanging Qoin tokens for other currencies or crypto assets.
ASIC chair Joe Longo highlighted the ruling's importance for crypto asset regulation, emphasising the need for providers to possess the correct licences and provide accurate, clear information to investors.
He pointed out the inherent risks and complexities of crypto assets, stressing that the case serves as a reminder that many crypto products are considered financial products requiring appropriate licensing.
The Attorney-General's Department (AGD) has released the second phase of its public consultation on reform the AML/CTF Act (Act), including proposals to amend how digital currency-related services are addressed.
The digital currency sector in Australia has seen a significant rise in usage, with over 1 million Australians reporting them in their tax returns in 2022. Expansion of the Act is deemed essential to protect the rapidly growing sector from potential exploitation by criminals.
Currently, Australia's Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regime only covers exchanges between digital currencies and fiat currencies. The proposal aims to extend regulations to cover all services identified by the FATF, which are vulnerable to misuse for money laundering and terrorism financing.
This extension will require businesses providing these services to identify, mitigate, and manage their risks effectively.
The proposals also suggest adopting the term 'digital asset' to replace 'digital currency' in the Act, reflecting broader regulatory coverage and aligning with global standards.
This change aims to close existing regulatory gaps, such as those involving non-fungible tokens (NFTs) and certain types of stablecoins, ensuring comprehensive oversight of the digital asset ecosystem.
Hong Kong In:Review
LexisNexis Risk Solutions released its 2023 True Cost of Fraud Study – Asia Pacific, indicating a significant rise in fraud across Hong Kong businesses, with 58% reporting an increase year-on-year.
The study demonstrates that businesses in the APAC region face a fraud cost that is 3.95 times the face value of the lost amount in fraudulent transactions.
In Hong Kong, the average cost tied to each dollar lost to fraud amounts to HKD 3.64, incorporating financial losses, labor, legal fees, and costs related to stolen or misplaced goods. Financial institutions face even higher costs at HKD 4.31 per Hong Kong dollar lost.
领英推荐
The surge in digital payment systems has led to greater exposure to fraud, particularly through digital channels which now represent 51% of overall fraud losses in APAC, overtaking physical channels.
The report highlights that the most significant fraud losses occur at the new account creation stage within the customer journey, due to criminals exploiting digital banking and commerce with fake or stolen identities.
Fraud not only affects financial losses but also impacts customer perceptions and engagement, with 79% of Hong Kong organisations noting a negative influence on customer conversion rates.
The Hong Kong Monetary Authority (HKMA) has issued a warning about fraudulent activities involving bogus law firms targeting cryptocurrency investors. These scammers, impersonating legal firms, offer to recover lost digital currencies.
On 2 May 2024, the HKMA specifically named three non-existent entities—Dex Law Firm, Morgan Bell Law Firm, and Watson Liddell Law Firm—as claiming to have affiliations with the central bank to mislead victims.
These firms are fraudulently listed on their websites as being in cooperation with the HKMA, which the central bank has categorically denied. Further investigations revealed that these so-called law firms are not registered with the Law Society of Hong Kong.
Dex Law Firm, claiming US origins and specialising in fraud and cryptocurrency issues, has been found mimicking the website of a legitimate law firm and falsely attributing industry recognition and legal victories to itself.
The websites of these firms also feature links to supposed reputable press coverage that does not exist.
India In:Review
India's Enforcement Directorate (ED) has intensified its crackdown on cryptocurrency-related scams, making significant seizures and arrests in two major cases.
The first operation led by the ED's Kolkata office targeted the "E-Nugget" scam, an "online gaming app scam" that deceived investors with promises of high returns.
The app, initially posing as a gaming platform, ceased operation after collecting funds from users, rendering them unable to retrieve their investments. The ED seized cryptocurrencies worth approximately INR 90 crores from 70 accounts across exchanges like Binance, ZebPay, and WazirX, linked to this scam.
In a separate case, the Central Bureau of Investigation (CBI) has launched a nationwide search against entities involved in a fake cryptocurrency mining scam through the HPZ token app.
This app falsely claimed to offer investments in crypto-mining hardware rentals. The scheme operated on a classic Ponzi model, using new investors' funds to pay earlier investors, thus falsely portraying profitability and building trust.
Over 150 bank accounts were identified in collecting these funds, which were subsequently transferred out of India using cryptocurrencies.
The total assets seized by the ED in these scams amount to INR 163 crores, including cash, cryptocurrencies, and bank balances. Additionally, the ED had previously confiscated assets worth INR 176.67 crores related to the HPZ token scam.
These enforcement actions are part of India's broader strategy to regulate the cryptocurrency sector.
Korea In:Review
South Korea is set to enhance its measures against crypto-related crimes by promoting its temporary crypto crime investigative unit into a permanent department.
This development comes in response to a significant increase in cryptocurrency fraud and criminal activities within the country. According to a report by Segye Ilbo, the Justice Ministry and the Ministry of the Interior and Safety will initiate discussions in early May to elevate the status of the Joint Virtual Asset Crime Investigation Unit.
Established in July 2023 under the Seoul Southern District Prosecutor’s Office, this unit initially functioned as a temporary entity with the potential to be disbanded.
The proposed transformation into an official department aims to provide greater stability, enable the appointment of additional prosecutors, and secure more substantial budget allocations.
This unit, comprising approximately 30 experts from seven financial and tax regulatory authorities, has been crucial in addressing digital asset crimes. The urgency for its permanence is underscored by the report from South Korea’s Financial Intelligence Unit, which noted that local crypto companies reported 16,076 suspicious transactions in 2023, a 49% increase compared to the previous year.
The move coincides with South Korea's implementation of its first comprehensive crypto regulation, set to take effect on 19 July 2024. This regulation will introduce stricter criminal penalties for crypto market manipulation, including life sentences in extreme cases.
The Financial Supervisory Service (FSS) of South Korea is addressing the surge in crypto-related phishing attacks by collaborating with the nation's largest crypto exchanges to improve public awareness about cryptocurrency scams.
In response to 2,209 phishing incidents reported from January to April, the FSS plans to release a "casebook" containing case studies and tips to help identify and prevent crypto fraud.
This guide will be available on the FSS website and distributed in print to financially vulnerable groups, including the elderly at senior welfare centers.
Key scams identified include fake crypto exchanges, romance scams involving crypto investments, and fraudulent token schemes. One highlighted case involved a victim misled by a scammer posing as a pilot, which resulted in substantial financial losses through a bogus crypto exchange.
The initiative is part of a broader educational effort, with the casebook also being distributed at employment support and local government centers across South Korea.
This project is supported by the Digital Asset Exchange Association (DAXA), which plans to disseminate the casebook and educational videos on phishing protection through its members’ social media channels.
Best of the Rest In:Review
Roger Ver, a prominent cryptocurrency entrepreneur known as "Bitcoin Jesus" for his early advocacy of Bitcoin, was arrested in Spain on charges of evading nearly USD 50 million in US taxes and committing mail fraud.
The charges stem from allegations that Ver did not report capital gains from significant Bitcoin assets after renouncing his US citizenship in 2014. The US Department of Justice is seeking his extradition to face these charges in the US.
It is alleged that during a major sale in November 2017, Ver sold tens of thousands of Bitcoins amounting to approximately USD 240 million, but failed to report these gains to the Internal Revenue Service.
Additionally, he is accused of providing false information to a law firm and an appraiser to conceal the actual size of his Bitcoin holdings.
Changpeng Zhao, also known as "CZ", the former CEO of Binance, has been sentenced to four months in prison over failures in anti-money laundering (AML) controls within the cryptocurrency exchange.
The Department of Justice (DOJ) did not charge Zhao with direct involvement in money laundering but criticised the inadequate AML measures at Binance that purportedly allowed the movement of illicit funds through the platform.
This focus on the company's failings rather than personal misconduct influenced the sentencing outcome, as Zhao is a nonviolent first-time offender, which limited the severity of the sentence under federal guidelines.
The sentence has sparked significant public and expert criticism. Dennis Kelleher, CEO of Better Markets, voiced concerns over the perceived leniency of the punishment, highlighting a broader dissatisfaction with the handling of white-collar crimes in the cryptocurrency sector.
Additionally, Zhao was fined USD 50 million, a sum that is relatively insignificant given his estimated net worth of over USD 40 billion, raising questions about the effectiveness of financial penalties for the ultra-wealthy.
Despite the controversy, Binance continues to dominate the cryptocurrency exchange market and operates without substantial disruptions. Zhao could potentially return to a leadership position within a few years as per his sentencing terms, which has further fueled debates about the adequacy of the punishment.
In response to these concerns, the court has appointed an independent monitor to oversee Binance’s AML compliance for the next five years, indicating a move towards stricter regulation in the industry.
The long-term impact of Zhao’s sentencing and the subsequent regulatory actions remains uncertain.
The effectiveness of the independent oversight and potential future legal actions against other Binance executives will be crucial in determining whether this case marks a substantial shift towards accountability in the cryptocurrency market or merely serves as a public relations gesture.
The Financial Services Agency (FSA) of Japan has issued a warning about a surge in investment scams involving cold calling. Fraudsters impersonating legitimate financial firms contact investors via phone, email, or fax, offering investments in securities and financial products.
After receiving payments, these scammers disappear, leaving investors without their funds or promised securities.
The FSA has highlighted that legitimate investment solicitations require registration or licensing with national regulatory bodies, which these cold callers lack.
To aid investors, the FSA has published a list of unauthorised entities falsely claiming to operate from Japan. Investors are urged to verify the registration of any firm through this list before committing funds.
The FSA's alert supports similar international warnings, emphasising the need for due diligence and caution with unsolicited investment offers, especially those promising high returns or guaranteed profits.
I hope you find Risk In:Review informative and helpful.