A few months ago, new global regulations were recommended by the Financial Action Task Force (FATF) to help prevent and deter terrorists and criminals from using cryptocurrencies. However, it will take some time before countries adopt these regulations and have proper prevention and compliance programs in place. In the meantime, numerous firms that specialize in blockchain analytics have created software with the focus of preventing, detecting and investigating cryptocurrencies used for terror financing, money laundering, fraud and compliance violations. Here are three firms who should be on your radar because of the fascinating and groundbreaking work they are doing in the world of blockchain analytics.Read More
One of the most exciting technological innovations to emerge from the development of cryptocurrencies is blockchain — or distributed ledger — technology. Blockchain is essentially a decentralized ledger or database maintained across a network of computers. Anyone with access to the network can view the database, which is updated across all connected devices, rather than being maintained at a central location.Read More
2017 was a year of unprecedented progress for cryptocurrencies. From the Japanese government’s decision to recognize Bitcoin as legal tender to the overall cryptocurrency market cap exceeding $500 billion, it is a safe bet to argue that this revolutionary digital asset class is here to stay. With cryptocurrencies quickly becoming both a speculative investment and payment method, certain names in the space are gaining credibility.Read More
FROM THE ARCHIVES
Zach Capers, CFE
Contributing Author, Association of Certified Fraud Examiners
The technology underlying the virtual currency bitcoin has the potential to disrupt several industries while significantly reducing fraud. Known as blockchain, the technology was created to ensure the legitimacy of every bitcoin transaction by tracking them in a distributed public ledger. Bitcoin has endured a divisive reputation due to its volatile value fluctuations and use in illicit transactions on the Deep Web; however, the security and utility offered by its blockchain is anything but controversial.
Any addition to bitcoin’s chain of information represents a new block that must be validated by every copy of the ledger spread across a worldwide computer network. Because the ledger is permanent, public and decentralized, it is incredibly difficult to defraud. These characteristics have resulted in an influx of investment and research aimed at adapting the blockchain concept to a diverse array of new applications.
Illuminating Supply Chains
The information in a blockchain can consist of anything that can be represented digitally. As such, blockchain technology can be used to ensure the authenticity and source of any number of products from organic produce to jewelry. For example, a start-up named Everledger is betting that a diamond’s myriad attributes can be recorded and tracked using an inscribed serial number and a digital blockchain to ensure that the stone being purchased is authentic.
This idea can be applied to a host of high-end goods that have typically relied on paperwork and certificates of authenticity that can be faked far more easily than a blockchain can be manipulated. Furthermore, stolen goods that are recovered can be re-authenticated to regain their value, which is important to former owners and insurance companies that have paid claims on stolen goods.
The Rise of Smart Contracts
One of the most heralded potential uses of blockchain technology is its ability to facilitate smart contracts. Rather than a standard legal contract that must be litigated or otherwise disputed if breached, a smart contract can enforce itself through digital means when preset terms are met, and revoke the contract automatically if the terms are breached.
Ethereum, a crowd-funded smart contract platform, might foretell the future of smart contracts. The network allows users to input virtually any stipulations (e.g., if this, then that) into the smart contract's blockchain and exchange value using virtual currency. For example, if one were to purchase an item from an online seller, a smart contract could be employed to hold the payment in escrow until a tracking system confirms that the item has been delivered.
Impact on Financial Institutions
A key advantage of blockchain is its ability to allow two entities that do not necessarily trust one another to trust one another. Because a blockchain can only be updated when there is consensus among the participants, the need for a third party to mediate a transaction is lessened or removed. This can alleviate many factors that complicate financial transactions (e.g., need for collateral, time required for settlements) and automate many banking processes currently requiring human interactions that add time, costs, and opportunities to commit fraud.
Stock exchanges around the world have begun to experiment with blockchains. The Japan Exchange Group announced a collaboration with IBM to test securities trading in a blockchain environment. The Australian Stock Exchange has partnered with Digital Asset Holdings, a blockchain start-up founded by well-known former JP Morgan executive Blythe Masters, to increase efficiencies related to post-trade settlements. To keep pace, the Toronto Stock Exchange hired the co-founder of aforementioned smart contract platform Ethereum to serve as the organization's first chief digital officer.
While blockchain technology is still in its infancy, it is not too early to see bitcoin as the first use case of a versatile and potentially revolutionary concept. From proving an asset’s origin to the streamlining of high finance, various new uses for blockchain continue to emerge. And while applications might vary greatly, what they all have in common are enhanced audit trails, increased efficiency and improved transparency — each of which is a known foe of fraud.
*For background on bitcoin, I recommend listening to this Fraud Talk podcast by Jacob Parks , J.D., CFE.
**This article was originally published in the ACFE's members-only monthly newsletter, The Fraud Examiner in April of 2016.
Dennis Lawrence, CFE, CAMS
Lawrence is a Denver-based risk consultant.
Bitcoin’s value in the criminal underworld continues to rise. Although well known as the preferred payment method on the Deep Web for illegal goods and services, the digital currency has attracted the attention of increasingly shadowy figures seeking to anonymously transfer funds. ISIS advocates its use for terrorist financing, and kidnappers seeking ransom payments have even begun demanding bitcoins instead of cash. Given its popularity amongst wrongdoers, discussions surrounding the role of digital currency in the multi-billion dollar business of bribery are curiously absent. Silence on the issue is perhaps all too ironic since the threat has never been greater for bribes to be both covertly delivered and hidden indefinitely from the eyes of investigators, forensic accountants and financial institutions.
In principle, Bitcoin transactions are far from untraceable. All transfers of currency are recorded in a public ledger called a blockchain, but only randomly generated Bitcoin addresses comprised of numbers and letters are logged… not names or identities. Many wallets containing Bitcoin addresses which are used for receiving, storing, and sending bitcoins also record IP addresses and require the uploading of personal identification documents. However, these security measures can be easily sidestepped by any determined individual with enough imagination. A few wallets purposely refrain from collecting any identifying information at all in order to appeal to specific audiences.
In order for a transaction to be traced to a person, investigators must figure out a way to tie an individual to a Bitcoin address. At present, users are able to transfer money without revealing their identities so long as they understand how to effectively operate the anonymous web browser Tor, certain wallets and exchanges, Bitcoin ATMs, and web applications such as Bitcoin Fog or Dark Wallet. These tools collectively subvert the digital currency’s traceability by disguising the true origin and destination of Bitcoin transactions. Paranoid users can even resort to private in-person meetings with local traders who exchange cash for bitcoins at a small fee with no questions asked.
So how can Bitcoin be leveraged in the payment of a bribe? Read the scenario below.
A construction company agrees to bribe a city official in exchange for facilitating the award of a lucrative public works contract. Given the high stakes involved, the bureaucrat wants no incriminating evidence that could potentially be uncovered in an investigation. After careful discussion, the parties arrive at a mutually agreeable solution.
In light of the construction industry’s common practice of paying certain workers in cash, a weekly purchase order request begins to be submitted at the company which describes compensation for day laborers. At the direction of executives, a trusted manager pays cash for a used laptop that he connects to a downtown coffee shop’s public Wi-Fi network during his lunch break in order to set up several Bitcoin wallets. He decides on an anonymous wallet or perhaps a Chinese wallet since they are the most unlikely to cooperate with Western authorities in the event of a subpoena. Shortly thereafter, the manager starts making weekly deposits of $5,000 into his wallet via anonymous Bitcoin ATMs . Using Bitcoin Fog on the Deep Web, the manager transfers $20,000 in cash per month to the city official who keeps the money hidden online in his wallet. Once a quarter, the bureaucrat travels abroad to cash out his small fortune using local Bitcoin traders and Bitcoin ATMs, partaking in luxury vacations and spending sprees. After the entirety of the $250,000 bribe has been paid to the city official, the construction manager physically destroys the laptop and never accesses the Bitcoin wallets again.
As illustrated, bribery using Bitcoin offers numerous advantages and few methods of detection. Even if a whistleblower were to come forward to disclose general details of the scandal, investigators would almost certainly hit a dead end. And in the unlikely event that authorities knew Bitcoin was somehow involved, where would they even start? It would be nearly impossible to establish a trail of evidence that could adequately serve as a basis for criminal prosecution or civil action. At worst, the construction company would receive a slap on the wrist for paying day laborers in cash.
The reason why we haven’t heard more about the involvement of Bitcoin in bribery schemes might be due to fraudsters not yet realizing the full potential of digital currency. Or perhaps, it’s because many investigators remain unaware of the extent to which it has already been used as a tool for bribery worldwide.