Fraud Trends Stemming from the COVID-19 Pandemic

In a memorable scene from the esteemed HBO crime drama The Sopranos, mob boss Tony Soprano is angry with his captains about their dwindling earnings, claiming that the recession is no excuse for poor financial results in their line of work.  He rhetorically asks his consigliere, Silvio Dante, “…what two businesses have traditionally been recession-proof since time immemorial?”.  Silvio responds, “Certain aspects of show business, and our thing[1]

While the developments of the last several months – a global pandemic, government-ordered closures, mass unemployment, civil unrest – have presented problems far more formidable than those of a typical recession for enterprises both criminal and legitimate, they have also provided fertile ground for fraud and other wrongdoing.  Despite some underworld revenue streams being disrupted or completely drying up[2], such as sports gambling (due to professional leagues suspending their seasons), protection rackets (due to mandated business closures), and the drug trade (due to border restrictions), other opportunities have presented themselves for those willing and able to exploit them, suggesting that Silvio’s argument holds true even in these extraordinary times.

This article addresses some of the recent fraud trends that have emerged over the past several months in Canada as well as in other parts of the world, because of COVID-19.

A Confluence of Circumstances

The coronavirus pandemic has created waves that have touched virtually all corners of the globe, giving rise to a convergence of many, often mutually exacerbating, developments, including:

    • Death and illness of loved ones;
    • Widespread layoffs;
    • Physical distancing requirements;
    • Remote work arrangements;
    • stock market volatility;
    • Mandated business and school closures;
    • Closed borders/ other travel restrictions; and
    • Critical shortages of certain goods.

Collectively, these circumstances have created widespread uncertainty, fear, anxiety, instability, isolation, and desperation – precisely the sorts of conditions that opportunistic ‘bad actors’ can readily exploit[3]

According to the Canadian Anti-Fraud Centre (CAFC), Canadians reported losing $1.8 million to frauds related to COVID-19 between March 6 and May 25, 2020[4].  Like many attempts to quantify the pervasiveness of fraud, this figure is almost certainly understated, as frauds often go undetected, and even those that are detected often go unreported.  Indeed, the CAFC acknowledges that what gets reported to them is “typically the tip of the iceberg”[5]. Notwithstanding, the extent and variety of frauds reported to date to the CAFC (and to other authorities) suggest a pervasive problem.  In general, many of these frauds fall into one of five categories: product scams, investment scams, cybercrime scams, impersonation scams, and government scams.

Product Scams

Product scams include the sale of test kits, medicines, medical supplies, and other goods/services that are fake, substandard, exorbitantly priced, and/or never delivered.  Organized crime groups are believed to be heavily involved in these types of scams[6].

According to the CAFC, reported frauds of this nature have included fraudsters posing as cleaning or heating companies selling decontamination services, duct cleaning, or air filters that purportedly protect against the coronavirus.  The CAFC has also received reports of questionable testing kits or remedies that in many cases are ineffective[7].

In British Columbia, an investigation by the RCMP and Health Canada resulted in over 1,500 illegal COVID-19 testing kits being seized[8], while Toronto Police made an arrest following an investigation conducted alongside American authorities, in connection with prohibited COVID-19 testing kits being shipped across the Canada-U.S. border[9].

Product scams appear to be a worldwide concern amid the pandemic.  For example, a Europol report on how COVID-19 will affect European crime trends cites “…the trade in counterfeit and substandard goods” as one of the most prominent developments that they have observed[10].  Moreover, it is a trend that they anticipate to continue in the medium term (with an expected proliferation of counterfeit vaccines) as well as the long term (with an expected recession-spurred increase in demand for cheaper products)[11].

Mitigating the Risk of Product Scams:

    • Purchase only from reliable sources
    • Assess price against the price of comparable goods or services
    • Be skeptical of claims about products that seem too good to be true
    • Perform online searches for customer reviews of companies and products before making purchases

Investment Scams

Investment fraud and other financial services schemes have also been a widespread problem during the current crisis.

In April, the Ontario Securities Commission (OSC) and the RCMP’s Integrated Market Enforcement Team (IMET) issued a joint warning about pandemic-related investment scams, including cases in which investors have been approached by companies claiming to offer methods of preventing, detecting, or curing COVID-19.  They also warned about aggressive stock promotions and ‘pump and dump’ schemes in which false or misleading information (including about potential cures, remedies, or tests) may be disseminated to artificially inflate stock prices[12].

Similarly, the CAFC has issued a warning about fraudsters posing as financial services companies or financial advisors and offering loans or debt consolidation or promoting certain investments[13].

According to Torys LLP, both Canadian and American securities regulators are actively pursuing companies that have made inaccurate disclosures relating to COVID-19-related goods/services such as therapeutics, vaccines, or personal protective equipment, as well as companies that have attempted to hide existing financial problems by falsely representing them to be related to the pandemic[14].

Mitigating the Risk of Investment Scams:

    • Perform due diligence before making investment decisions
    • Make sure the business you are dealing with is regulated and/or licensed
    • Be wary of businesses based overseas
    • Be skeptical of those who aggressively promote certain investments

Cybercrime Scams

Cybercrime is another area that has been – and is expected to continue to be – an area of focus for the criminal element looking to take advantage of the pandemic.Cybercrime can be carried out through various means, including emails, text messages, and illegitimate websites, usually for the purpose of obtaining money, personal information, or both[15].

Victims of such schemes have been induced to open email attachments, click on links in text messages, visit websites, or perform other similar actions by fraudulent communications relating to the pandemic.  These include ‘phishing’ emails and other messages indicating that recipients have been exposed to a person who tested positive or instructing them to click on a link or provide personal information in order to collect government benefits[16].

Mitigating the Risk of Cybercrime Scams:

    • Do not open attachments or click on links from texts or emails unless you are certain that they are from a trusted source
    • Check the sender’s email address
    • Check email content for spelling and grammar errors
    • Be leery of any requests for personal information – do not respond unless there is a legitimate reason why the information os required AND you trust the entity to which you are providing the information

Impersonation Scams

There have also been numerous reports of fraudsters pretending to be charities, government agencies, or other authorities, in order to obtain funds and/or personal information from unsuspecting victims.  Such impersonations may be part of the types of cybercrime-related schemes described above, or they may be a unique category of schemes altogether.

The CAFC has received reports[17] of fraudsters posing as:

    • public health authorities offering fake information relating to infections in a given neighbourhood or personal test results, and then soliciting personal information;
    • charities seeking donations under false pretenses;
    • utility companies threatening to disconnect services if payments are not made; and
    • government departments asking for personal information.

In addition to the above, there have been reports of ‘job scams’ in which criminals pose as employers offering work-from-home employment – an enticing proposition for many, given the prevalent unemployment and stay-at-home orders – and request money or personal information as part of the purported job application[18].

The OSC has also warned about similar types of impersonation schemes, including ones in which fraudsters are posing as banks, financial advisors, prospective employers, or government departments/agencies, in an attempt to obtain financial or personal details[19].

Mitigating the Risk of Impersonation Scams:

    • Verify the identity of parties representing themselves to be agents of the governments or other authorities, and corroborate claims that they make
    • Be skeptical of any requests for personal information or payments

Government Scams

In the wake of the pandemic, governments have been hurrying to provide financial support to people and businesses, as well as trying to procure the necessary testing kits, medical supplies, and personal protective equipment. While both measures are much-needed, they also create areas that crooks can abuse, including by claiming financial relief or other benefits to which they are not entitled, and by setting up companies to source and re-sell needed supplies and equipment at excessive mark-ups.  For example, a Virginia man was recently charged with submitting fraudulent loan applications to take advantage of emergency financial relief provided by the CARES Act[20].

In response to concerns about support programs being abused, the Canada Revenue Agency recently opened up a ‘snitch line’, which provides a mechanism for people to report information relating to individuals who are receiving the CERB or CESB despite not being eligible, or businesses that are misusing the wage subsidy program[21].

 Possible Future Trends

As governments continue to ease restrictions and businesses and institutions begin to open up again, many of the aforementioned problems will persist, and several others will likely present themselves.

Financial difficulties are likely to continue for many individuals and businesses, as continued mandatory closures, concerns about subsequent ‘waves’ of the coronavirus, strained financial resources, and other factors will cause some employers to be slow to rehire and reopen.  Many customers and tenants that have been able to defer or reduce credit card, loan or rent payments temporarily, or that have only been able to meet such obligations with funds from government support programs, will find it difficult to make ends meet when such concessions or support programs are phased out.  These problems will only be exacerbated when landlords begin to evict and lenders begin to call loans with greater frequency and zeal than they have in the last few months. All of which is to say that financially speaking, the worst of this crisis may not be behind us.

Such ongoing financial difficulties may give rise to a number of conditions that criminals and other unscrupulous opportunists can take advantage of.  For example, struggling companies may feel compelled to scale back or eliminate certain ‘non-revenue-generating’ activities, such as internal audit, control, and compliance functions, thereby leaving themselves vulnerable to fraud at a time when bad actors, both internal and external, may be looking to defraud them.

These types of cost-cutting measures can lead to shortcuts being taken, standard procedures being bypassed, and financial information being misrepresented[22], all of which create risks for the organization. The trend of working from home, which is expected to continue for many office workers, may also make some of these negative outcomes more likely.

Recent economic conditions may also lead to more risk aversion, both for individual investors as well as financial institutions[23].  This may make it more difficult for businesses to obtain financing through traditional avenues, which may lead them to turn to other financing sources, including those looking to exploit them.  Such sources include criminal groups, which may be looking to buy or lend money to struggling businesses[24], given that legitimate businesses offer organized crime groups a means of laundering proceeds of crime, demonstrating legitimate earnings, and carrying out further criminal activity.

In fact, Italian police recently arrested 91 suspected mobsters who were allegedly involved in laundering proceeds of their extortion and drug trafficking operations by purchasing failing businesses affected by the COVID-19 lockdown[25].

Desperation may also lead otherwise honest employees and businesses to carry out fraud against their employers, vendors, customers, or insurers, which could lead to increases in payroll fraud, procurement fraud, expense report fraud, benefits fraud, financial reporting fraud, and insurance fraud.

Another trend that is expected to continue in the near future is ongoing growth in online retail transactions, contactless purchases, and digital wallets.  Stores and restaurants that were a short time ago primarily or exclusively physical businesses are rapidly adapting to offer online ordering[26].  These changes in how consumers are making purchases are expected to give rise to upticks in chargeback fraud (in which customers claim goods were not received and request refunds through their credit card company) and account takeover (in which a customer’s online account is taken over by someone else)[27].

While nobody can be sure what the future holds, past experience and current trends would appear to suggest that crooks will continue to look for ways to use worldwide uncertainty and instability to their advantage.  

About Our Firm

nagel + associates is a Toronto-based boutique forensic accounting firm that focuses exclusively on Forensic Accounting, Investigations and Disputes, Anti-Fraud Training, Anti-Fraud Consulting and Crypto Advisory. For more information about our services, please click here.

Sources:
[1]  Source: “For All Debts Public and Private.”  The Sopranos. (Season 4, Episode 1).  HBO.  Television.
[2] Source: cbc.ca
[3] Source: cbc.ca 
[4] Source: antifraudcentre.ca 
[5] Source: www.cbc.ca
[6] Source: Ibid.
[7] Source: antifraudcentre.ca 
[8] Source: citynews1130.com 
[9] Source: torontosun.com 
[10] Source: europol.europa.eu 
[11] Source: Ibid.
[12] Source: osc.gov.on.ca 
[13] Source: antifraudcentre.ca 
[14]Source: torys.com
[15] Source: cbc.ca
[16] Source: cbc.ca
[17]Source:  antifraudcentre.ca
[18] Source: cbc.ca 
[19] Source: osc.gov.on.ca
[20] Source: justice.gov 
[21] Source: canada.ca
[22] Source: corporatecomplianceinsights.com 
[23] Source: cbc.ca 
[24] Source: cbc.ca
[25] Source: cbc.ca
[26] Source: oliverwyman.com
[27] Source: forbes.com

Tether: The (Un)stable Cryptocurrency

Having both a personal and professional curiosity about cryptocurrencies, I am often asked, “Should I buy Cryptocurrency ‘X’?”, or more broadly, “Should Cryptocurrencies be a part of my investment portfolio?”. I have always been reluctant to answer for a litany of reasons, and today I will explain my rationale.

If you had to guess which cryptocurrency accounted for the highest 24-hour trading volume in April 2020, I suspect many of you would guess Bitcoin. However, despite representing greater than 60% of the total value of all cryptocurrencies, Bitcoin’s volumes have been surpassed by another, lesser-known, cryptocurrency for quite some time now: Tether.

Source: coinmarketcap.com – April 15, 2020

So what is Tether? Tether is the most widely used example of a ‘stablecoin’. Stablecoins are cryptocurrencies or cryptocurrency tokens that attempt to minimize price volatility – a major criticism of ‘traditional’ cryptocurrencies – through pegs or reserves.

When Tether launched, the principle was relatively simple: For each US Dollar they held in reserve, they would issue a Tether token, thus maintaining a 1-to-1 peg. Therefore, while Bitcoin’s supply is predetermined and released algorithmically, Tether’s reserve-based supply requires an entity to manage and be a custodian of the reserve US dollars. In theory, stablecoins such as Tether could become critical to the cryptocurrency ecosystem as they can limit exposure to volatility. With that said, let’s briefly review some of the major red flags that have emerged to date with respect to Tether.

One of the key features of cryptocurrencies that sparks excitement and curiosity is their ability to function without the coordination of a central entity. However, this feature does not apply to Tether. As noted above, Tether’s reserve-based structure necessitates such an entity. A cryptocurrency that requires a middleman defeats the whole value proposition of decentralized currencies. Why would a crypto investor avoid government powers only to trust a tech company?

Now let’s take look at who actually controls Tether. Tether tokens are issued by a Hong Kong-based private company whose proprietors also own the cryptocurrency exchange Bitfinex. While in and of itself this may not be an issue, the ownership structure could raise potential conflicts of interest.

In fact, in April 2019, New York’s Attorney General filed a suit accusing Bitfinex of comingling corporate and client deposits with Tether’s reserves. Specifically, it is alleged that Bitfinex lost access to $850 million, when their makeshift banking partner (a Panamanian payment processor) absconded with the funds. In order to cover this loss and remain solvent, it is alleged that cash from Tether’s reserves was transferred over to Bitfinex in exchange for a bogus receivable.

New York’s Attorney General stated that in effect, Bitfinex executives “fraudulently shifted most or all of Bitfinex’s risk of loss of several hundred million dollars onto Tether’s balance sheet, but continued to represent to the market that Tethers were fully ‘backed’ by U.S. dollars sitting safely in a bank account. They were not.” [1]

Tether’s lack of transparency as it relates to its reserves has been a source of controversy from inception. Even with allegations of unaccounted funds, to date, Tether has been unable to produce a single audit report to confirm their stated reserves and financial position.

In fact, the closest Tether has come to an ‘audit’ is a June 2018 report by the law firm Freeh, Sporkin & Sullivan LLP (FSS), which appeared to confirm that the issued Tether tokens were fully backed by dollars. However, FSS stated, “FSS is not an accounting firm and did not perform the above review and confirmations using Generally Accepted Accounting Principles” and “The above confirmation of bank and tether balances should not be construed as the results of an audit and were not conducted in accordance with Generally Accepted Auditing Standards.” [2]

According to their website, Tether’s reserve and transparency claims have also evolved over time. As noted in the website excerpts below, Tether originally claimed to hold traditional currencies in reserves on a 1-to-1 basis, with their issued Tether tokens subject to ‘frequent’ audits. In response to growing criticism over the lack of formal audits, all claims referencing external reviews were removed. Finally, even the 1-to-1 US dollar backing claim was revised to include other assets and receivables arising from loans made by Tether to third parties, as illustrated by the following:

Source: web.archive.org – Jan 26, 2018


Source: web.archive.org – Jan 1, 2019


Source: tether.to – April 15, 2020

It is also alleged that Tether was involved in price manipulation of cryptocurrencies. Independent research conducted found that half of the increase in Bitcoin’s price in 2017 could be traced to the hours immediately after Tether flowed to Bitfinex and a handful of other exchanges, generally when the price was declining [3].

It is noteworthy that in 2017, Bitcoin’s price went from under $1K to its all-time high of just under $20K. During this same period, Tether’s circulating supply increased from under 10 million tokens to approximately 1.4 billion tokens [4].

Tether’s supply has continued to steadily increase and as of the date of this article, there are currently in excess of 6.4 billion Tether tokens circulating. In fact, more than 1.5 billion tokens were issued since March 2020 [5], following Bitcoin’s rapid decrease in price from $9K to $4K.

Given how illiquid cryptocurrency markets are, it is fair to assume this injection of Tether has helped support the subsequent price recovery of Bitcoin, which raises some obvious questions. How much of this value was created out of thin air versus being properly reserved? What impact will there be on the entire crypto-sphere if Tether, the number 4 cryptocurrency by market cap, goes bust? These are the questions that keep me – and invariably other crypto investors – up at night…

By now it should be abundantly clear why I am reluctant to respond to the loaded question, ‘should I invest’. However, as an enthusiast and a forensic accounting professional, I encourage everyone to acquire a base level literacy on cryptocurrencies and distributed ledger technologies.

Cryptocurrencies have become more accessible and mainstream over time, including gaining widespread use in the world of white collar crime.  It is for this very reason that we added a diverse range of crypto advisory services as one of the core areas of our forensic practice.

Check out our website for our Introduction to Cryptocurrency webinar (under ‘Upcoming Training’).   Note: This webinar will take approximately one hour to complete, and may be eligible for continuing professional development (CPD) credit.  Be sure to check the specific CPD requirements that apply to your industry or designation. Upon successful completion of this webinar and a brief quiz, you will receive a certificate of completion.

About Our Firm

nagel + associates is a Toronto-based boutique forensic accounting firm that focuses exclusively on Forensic Accounting, Investigations and Disputes, Anti-Fraud Training, Anti-Fraud Consulting and Crypto Advisory. For more information about our services, please click here

Sources:
[1] Source: www.bloomberg.com
[2] Source: tether.to
[3] Source: www.nytimes.com
[4] Source: coinmarketcap.com
[5] Source: coinmetrics.substack.com