Blockchain & Cryptocurrencies Forensic Services Implications. October 25, 2018

Transcription

1 Blockchain & Cryptocurrencies Forensic Services Implications October 25, 2018

2 Agenda: Forensics and Blockchain & Cryptocurrencies 1. Stolen funds used to purchase cryptocurrencies 2. Employee misappropriation 3. Employee expense statement audits 4. Anti-bribery and anti-corruption investigations 5. Ransomware notices 6. Phishing scams 7. Anti-trust risks 8. Asset tracing 9. Evasion of sanctions 10.Commodities fraud 11.Financial services industry risks 12.Manipulating cryptocurrency price 13.Initial coin offering scheme 14.Tax implications of cryptocurrencies 1

3 1. Stolen funds used to purchase cryptocurrencies You or your client have just uncovered several journal entries indicating substantial amounts of company funds have been used to purchase cryptocurrencies. You know where the initial purchases were made, because you ve seen transaction receipts, but What do you need to do in order to recover and secure those cryptocurrencies? Where do you look for evidence? Does the perpetrator have a cryptocurrency wallet? How can blockchain.info and blockseer.com help you? 2

4 2. Employee misappropriation You or your client think that an employee has been stealing assets and selling them for cryptocurrencies. What do you need to do? Consider that the employee must have a cryptocurrency wallet, or access to one If the employee loses the password to their wallet, they may lose the money for forever! (So passwords are very important for them to hold onto) Search their desk area or on their hard drive and mobile devices for password or wallet information 3

5 3. Employee expense statement audits You are auditing an employee s expense statement and see that the employee is buying a lot of $500 bitcoin mining equipment. What should you do? Keep in mind that mining equipment can be purchased, for example, on Amazon Know that the employee could be plugging them into the electrical outlet under their desk at work Possibly using company resources to purchase the mining equipment Possibly using the company resources to mine for Bitcoin that are likely not coming back into the company 4

6 4. Anti-bribery and anti-corruption investigations You are conducting an anti-bribery and anti-corruption investigation. In the past you may have looked to see If payments were effected via a fraudulent vendor scheme If payments were being funded through petty cash If payments were being supported by fictitious invoices, etc. How has cryptocurrency changed this landscape, and how can you counter these issues? 5

7 5. Ransomware notices Imagine that you are the CEO of a hospital and all your electronic health records (EHR) have been hacked and deleted from your system of records. In order to recover your EHR, you have to transfer a sum of money to the sender of the notice, in Bitcoin. The CEO will not receive an invoice or a receipt for the payment. What issues are presented by this situation? You don t know who you are paying. What other possible risks does the CEO face? 6

8 6. Phishing Scams Everyone likes it s convenient, and scammers are no different they prefer to send s announcing fake ICOs. It is not very difficult to impersonate a real cryptocurrency issuer. What precautions should you take? Remain skeptical of any s that mention an ICO Review previous s that you may have received from the company and compare the format and signatures Review the for grammatical errors 7

9 7. Antitrust risks You are part of a conglomerate of logistic companies who have joined a private blockchain with a series of competitors, and all of a sudden you have visibility into the volume and frequency of transactions that your competitors are engaged in. What is the risk? This gives you intelligence about your competitors, that in the past you couldn t observe directly This knowledge can potentially violate anti-trust laws 8

10 8. Asset tracing You have been hired to assist in a high profile divorce settlement. Your client knows the ex-spouse purchased approximately $100,000 in cryptocurrency last year and wants to make sure they get half of it. You have your client set up a wallet, and you coordinate with the ex s attorney to transfer $50,000. The ex does so immediately, to your and their attorney s surprise. Your client, who is even more surprised, asks you to hire an investigator to better understand why the ex so quickly obliged. What steps should the investigator take and what could they find? 9

11 9. Sanctions evasion Current sanctions regulations do not appear to be keeping up with the advent of cryptocurrencies and blockchain innovation. Since cryptocurrency transactions are not moderated by any government authority, they can provide the opportunity for sanctions evasion. The pseudo-anonymity facilitates the buying and selling across borders, with limited or no oversight. Could you or your client be at risk for inadvertently evading financial sanctions by using cryptocurrency to purchase goods? 10

12 10. Commodities fraud Assume the U.S. Commodity Futures Trading Commission (CFTC) has brought a commodity fraud action against a foreign currency trading firm and the Court has appointed a receiver. On the day of her appointment, the receiver learns firm assets may have been converted to cryptocurrencies by the prior management team. What investigative techniques can be used to assist, what should the receiver do, and where should she look? 11

13 11. Financial services industry risks Assume you are the Chief Compliance Officer of a financial institution or of a credit card company. In going through the monitoring alerts, your compliance team notices that one of your card holders is transacting with a cloud mining company in the Cayman Islands. The team leader wants to know if this qualifies as suspicious activity. What might you want to better understand? How do bitcoin mining companies in the cloud work? Possible risks? 12

14 12. Manipulating cryptocurrency price A cryptocurrency trader at the Chicago Mercantile Exchange engages in a large number of trades and then, seconds later, cancels those trades, causing the price to go up and down. How is this done? Wash trading: Trader simultaneously sells and buys the same amount of cryptocurrency - essentially trading with himself. Spoofing: Trader puts an order in to sell 10,000 Bitcoin, it might cause panic among traders, rushing them to sell their holdings before the price drops, effectively dropping that price as a result. There are more ways to manipulate the price of Bitcoin: the FICC Markets Standards Board (FMSB) in the UK published about 26 of them. 13

15 13. Initial coin offering scheme You are given an opportunity to pre-purchase a new kind of digital currency. It doesn t exist yet, but the company will allegedly use the money raised from early investors, such as yourself, to finance its ongoing development. (Sometimes referred to as a token generation events or TGE s) You get a 30-page white paper replete with details regarding the digital currency s potential. The white-paper doesn t provide a lot of insight on the business model, leadership s profiles, or the company s financial position. Do you see any red flags? 14

16 14. Tax implications of cryptocurrencies How might cryptocurrency transactions run afoul of federal tax regulations? Cryptocurrency is treated as property. General tax principles applicable to property transactions apply to transactions using cryptocurrencies. Does a taxpayer who mines virtual currency realize gross income upon receipt of the virtual currency resulting from those activities? When a taxpayer successfully mines virtual currency, the fair market value of the virtual currency as of the date of receipt is includible in gross income. 15

17 Thank you questions? Kris Swanson, CPA/CFF, CAMS, CFE Vice President and Practice Leader, Forensic Services Chicago Patricia Peláez, CPA/CFF, CFE, CPC, CAMS Principal Chicago Louis Scharringhausen, EnCE, GCFA Principal Dallas This presentation was prepared by Charles River Associates exclusively for the benefit and internal use of Association of Corporate Counsel (ACC) Chicago Chapter and/or its affiliates or subsidiaries. No part of it may be circulated, quoted, or reproduced for distribution outside these organization(s) without prior written approval from Charles River Associates. This presentation is incomplete without reference to, and should be viewed solely in conjunction with the oral briefing provided by Charles River Associates.