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December 2024

Crypto Scams and Related Fraud
by Anthony DeVita, Lead BSA/AML Policy Analyst, Division of Supervision and Regulation, Federal Reserve Board

Over the past few years, there has been a proliferation of cryptocurrency investment scams. The purpose of this article is to increase community banks’ awareness of these scams. This article highlights existing regulations and relevant resources that may assist banks in identifying and mitigating the risks associated with this type of fraud, particularly the resources issued by the Financial Crimes Enforcement Network (FinCEN), as well as the requirements for suspicious activity reporting.¹

Confidence Scams Involving Cryptocurrency

According to the Federal Bureau of Investigation (FBI), losses from cryptocurrency-related investment fraud schemes reported to its Internet Crime Complaint Center (IC3) rose from $2.57 billion in 2022 to $3.96 billion in 2023, an increase of 53 percent.² For example, a state member bank failed in July 2023 because of fraudulent activity related to an apparent cryptocurrency scheme.³

Investment fraud schemes include confidence scams in which a perpetrator gains the confidence of individuals before eventually enticing them to make a fraudulent investment. Confidence scams related to cryptocurrency investments, colloquially known as “pig butchering,” are particularly disturbing because of their prevalence and the resulting financial devastation to victims. In September 2023, FinCEN published the FinCEN Alert on Prevalent Virtual Currency Investment Scam Commonly Known as “Pig Butchering,” which explains the scam methodology and provides red flag indicators to assist financial institutions in identifying and reporting related suspicious activity.⁴

These schemes often feature a connection to cryptocurrencies, either as a purported investment or manner of value transfer, along with wire transfers or other payment methods. A common pattern involves the victim being convinced that they are in a trusted partnership with the scammer, who may then suggest fraudulent investments or create an elaborate scheme to lure the victim into sending funds. Banks may encounter these and other scams through a variety of channels, for example, customer interactions with bank staff, wire transfer monitoring, and suspicious activity monitoring systems.

These cryptocurrency investment schemes often involve the victim sending payments to cryptocurrency exchange wallets benefiting the perpetrator. As stated in FinCEN’s 2019 Advisory on Illicit Activity Involving Convertible Virtual Currency, convertible virtual currencies (CVCs) may create illicit finance vulnerabilities because of the global nature, distributed structure, limited transparency, and speed of the most widely utilized virtual currency systems.⁵

FinCEN’s 2019 CVC advisory was issued to assist financial institutions in identifying and reporting suspicious activity concerning how criminals and other bad actors exploit CVCs for money laundering, sanctions evasion, and other illicit financing purposes. The advisory highlights prominent typologies and red flags associated with such activity and identifies information that would be most valuable to law enforcement, regulators, and other national security agencies in the filing of suspicious activity reports (SARs).

Suspicious Activity Reporting

Banks are required to file SARs for transactions related to suspicious activity and suspected criminal activity, which includes fraud and cryptocurrency investment scams.⁶ When filing an SAR in connection with FinCEN’s 2023 alert, FinCEN requests that banks and other financial institutions include the key term “FIN-2023-PIGBUTCHERING” in SAR field 2 (Filing Institution Note to FinCEN) and in the narrative to indicate a connection between the suspicious activity being reported and the activities highlighted in its alert. Banks should also select the “Fraud-Other” option under SAR field 34(z) and add “Pig Butchering” in the associated text box.

Customer Referrals and Information Sharing

Banks may refer customers to the FBI’s IC3 (www.ic3.gov), to the Federal Trade Commission (ReportFraud.ftc.gov), and to the Securities and Exchange Commission’s Tips, Complaints, and Referrals, or TCR, system to report investment fraud (www.sec.gov/tcr). In the case of elder fraud related to cryptocurrency investment scams, these customers may also be referred to the Department of Justice’s National Elder Fraud Hotline at 833-FRAUD-11 or 833-372-8311.⁷

Information sharing among banks may be instrumental in identifying, reporting, and preventing cryptocurrency investment scams and related activity. Banking organizations and associations of banks sharing information under the safe harbor authorized by section 314(b) of the USA PATRIOT Act are reminded that they may share information with one another regarding activities they suspect may involve possible terrorist financing or money laundering.⁸

• ¹ FinCEN is a bureau of the U.S. Department of the Treasury and administrator of the Bank Secrecy Act.
• ² See the FBI’s 2023 Cryptocurrency Fraud Report, available at www.ic3.gov/AnnualReport/Reports/2023_IC3CryptocurrencyReport.pdf.
• ³ See Evaluation Report 2024-SR-B-004, Material Loss Review of Heartland Tri-State Bank, Board of Governors of the Federal Reserve System Office of Inspector General and Consumer Financial Protection Bureau, February 7, 2024, available at https://oig.federalreserve.gov/reports/board-material-loss-review-heartland-tri-state-bank-feb2024.htm.
• ⁴ See the alert, FIN-2023-Alert005, available at www.fincen.gov/sites/default/files/shared/FinCEN_Alert_Pig_Butchering_FINAL_508c.pdf.
• ⁵ See the advisory, FIN-2019-A003, available at www.fincen.gov/sites/default/files/advisory/2019-05-10/FinCEN%20Advisory%20CVC%20FINAL%20508.pdf.
• ⁶ See Board of Governors of the Federal Reserve System suspicious activity reporting regulations 12 C.F.R. 208.62, 211.5(k), 211.24(f), and 225.4(f), available at www.ecfr.gov/current/title-12/chapter-II/subchapter-A.
• ⁷ See FIN-2022-A002, FinCEN’s Advisory on Elder Financial Exploitation, June 15, 2022, available at www.fincen.gov/sites/default/files/advisory/2022-06-15/FinCEN%20Advisory%20Elder%20Financial%20Exploitation%20FINAL%20508.pdf.
• ⁸ See section 314(b) of the USA PATRIOT Act, available at www.fincen.gov/section-314b.