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Beware Of Scammers Who Try To Launder Money Through Crypto Exchanges – A Case From Changehero. How We Found The Fraudster And Consequences We Faced?

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Most of us can agree that cryptocurrencies are a powerful tool that can completely reshape finance in the following years of the digital era. As much as credit is due, though, the market also has earned its fair share of negative reputation, mostly because of how often it is used as a front for scams and frauds. Since crypto has made a few millionaires, many see it as quick money — and obviously there are opportunists for whom the quick money is made off the uninformed.

 

Here’s a few examples of fraud schemes that plague crypto:

  • Fake ICOs and Ponzi schemes (pyramids);

This is one of the most widespread forms of fraud in crypto. These usually promise you a return that is too good to be true.

  • “Overnight” exchanges and unregulated brokers;

Applicable to new services that do not bother to build reputation. ChangeHero works since 2018, and for two years we have gained trust of hundreds of thousands of users.

  • Phishing and fake sites;

In May, 2019, Binance security was compromised by a phishing site. Even the largest players are not safe from scams and hacks.

  • Pump-and-dump and social media engineering.

These two phenomena are rooted in psychology. A large number of fake reviews and replies create an illusion of trustworthiness.

 

There are a couple of innate qualities to crypto that are used by the scammers to extort money.

Firstly, transactions on blockchains use addresses that cannot be tracked to a person by default. Therefore, it is transparent but anonymous. This gives bad actors a lot more ground to remain untraceable once the money leaves or enters cyberspace.

Secondly, transactions on the blockchain are irreversible. It is technically impossible to issue a refund on most chains with only the means of code and network. Once the money is transferred, there is no trustless way to get it back, which, of course, is another design feature that scammers make use of.

 

Last winter, one of the cases that could have involved fraudulent activity or stolen funds became public. The response it caused damaged the reputation of our service and our partners, so we must address it even now, almost six months later.

 

A user has attempted to make an exchange of approx. 21,000 USDT to Monero. We had to put the transaction on hold since the destination currency is a privacy coin, for which our alert system has even more strict requirements, and ask the user to go through a KYC procedure: provide us with a selfie with an ID and the origin of funds. By that time, the money arrived at the generated address for the exchange, where it stayed for the entire time.

 

The proof of identity and proof of funds, provided in KYC, contained contradictory information, so we decided to take an additional step and make a Skype call with the user. It further made us sure the funds owner was using a proxy for KYC. We decided to reach out to the Binance exchange that was involved with the origin of funds to learn about the account and help us prove whether or not the funds were stolen, all the while monitoring the reports about possible thefts and waiting for a formal request.

 

The situation became public when the user went on a mission to create a post on every forum and review site, labeling us as a fraudulent service that embezzled his money. Due to the backlash, BestChange had to disable our page on their service. Meanwhile, we got a reply from Binance but no official request, and we had to make a decision that in order to mitigate the response a refund along with our official statement had to be issued. Nevertheless, our fraud detection system raised an alarm not for naught and the attempt to launder money did not go past a reviewing procedure.

 

Some time later, we were contacted by another exchanger about the case. As it turned out, an extremely similar situation happened to them, and it turned out to be the same user (with the same wallet address). The exchanger reported they had come to the same conclusion that a proxy was being used (allegedly, another person this time around). The developments of this case and the findings most certainly point at money laundering.

 

In the end, we followed the best practices for counteracting illegal conduct and prevented a possible crime. We admit that reputational damage to our partner BestChange could have been avoided. We are glad that we settled the matter in a professional manner and continue with our partnership.

 

To respond more actively, we have hired a community manager to monitor English- and Russian-speaking outlets. Additionally, we made sure our Terms of Use and AML/KYC clearly communicate our position. We have also revised our internal KYC guidelines, so now the whole procedure should not take longer than 24 hours.

 

ChangeHero is an AML/KYC compliant service. In addition to having an actively updated blacklist and a system flagging suspicious transactions, our support/compliance specialists monitor the transactions manually. We collaborate with independent blockchain analysis companies. ChangeHero is also participating in Crypto Defenders Alliance — an initiative that unites representatives of largest market players and pledges to prevent illegal conduct from happening in the space.

 

We have had a history of interacting with the authorities and collaborating with investigations, for example, in the light of the Upbit exchange hack in 2019 with the Korean law enforcement or helping German law enforcement investigate a case of money laundering in January of this year. 

 

ChangeHero will continue to build a reputation of a customer-oriented trustworthy and reliable service. We are trusted by the largest names in the industry when it comes to security — Trezor and CoolBitX, as well as thousands of customers worldwide, as seen from the reviews on BestChange and Trustpilot.

 

 

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