Blockchain or Cryptocurrency Fraudulent Investment Schemes

Blockchain or Cryptocurrency Fraudulent Investment Schemes

Blockchain or Cryptocurrency Fraudulent Investment Schemes

Blockchain or Cryptocurrency Fraud – Cryptocurrency Fraudulent Investment Schemes

The advent of blockchain technology and cryptocurrencies has resulted in sudden fortunes for more than a few individuals. At the same time, the technology and economics of the cryptocurrency space are confusing and not well understood by the general public. This creates an opportunity for scammers to exploit the public with a path to riches whose credibility is difficult to evaluate.

Apart from outright scams, our clients have also informed us of companies operating in the cryptocurrency space which have incorrectly requested funds on the basis of Canadian income tax or anti-money laundering compliance requirements. In addition to scams, investors in cryptocurrency need to be aware that the companies that they deal with may not understand Canadian tax or anti-money laundering compliance requirements.

Clients of our firm have received a request of this nature from Continental Marketing Czech Republic s.r.o., a company holding itself out as offering cryptocurrency investment services and operating under the name Nittrex. The clients had an account with Nittrex which was used for an investment strategy which involved buying and selling cryptocurrency based on Nittrex’s advice. The investment strategy was explained as being cryptocurrency arbitrage transactions. According to the client’s statements from Nittrex, this investment strategy was extremely profitable. When the clients attempted to make their first significant withdrawal of funds from the account, Nittrex informed them that they needed to make a substantial payment into an escrow wallet set up by Nittrex on account of the taxes that would be owing to the Canada Revenue Agency for Canadian income tax. Nittrex stated that this was required by anti-money laundering regulations and Canadian tax law. Our clients were also told that paying CRA themselves was not an option.

The claims made by Nittrex are false. As described below, this is not how Canadian tax or anti-money laundering law operates. There is almost never a requirement to make a payment on account of Canadian income tax to a private company or individual. Demands of this nature are a sign of fraud and you should exercise extreme caution in dealing with the company or person making this type of demand. We do not know whether in particular Nittrex  merely does not understand Canadian tax and anti-money laundering compliance but information given to our clients was wrong.

Fraud in the Cryptocurrency Context – Cryptocurrency Fraudulent Investment Schemes

One classic scam, called a Ponzi scheme, is to solicit funds from investors, send regular false reports of outsized profits to solicit additional funds, and then disappear with the funds received before too many investors try to withdraw their money. In the blockchain or cryptocurrency context, scammers can ask you to transfer Bitcoin to you so they can use your capital for a highly profitable cryptocurrency trading strategy. This type of approach has many advantages for scammers.

One problem is that in most cases transfers of Bitcoin or other cryptocurrencies are effectively irreversible. Once you have transferred Bitcoin to scammers, there is no mechanism available to reverse the transaction. In the ordinary financial system it is sometimes possible to reverse fraudulent or unintended transactions after the fact (e.g. credit card charge backs). Similarly, Governments are not able to intervene directly to reverse transactions on blockchain ledgers.

Another advantage is that since the general public knows that some individuals have genuinely become wealthy almost overnight with cryptocurrency investments. This makes it easier for a member of the public to believe the reports of outsized profits sent to them by the scammers are correct. Once you have provided funds to a scammer purporting to be running a cryptocurrency investment strategy, you will likely have no way to directly verify the performance of the alleged investments.

Canadian Tax Payment & Withholding – Cryptocurrency Fraudulent Investment Schemes

Our firm has been retained by clients who as investors are being told that they need to pay Canadian income tax to their purported cryptocurrency investment managers in order to withdraw cryptocurrency from their accounts. This is a red flag because it involves neither paying taxes to CRA directly nor witholding by the investment manager. If you pay a private entity on account of your Canadian income taxes you will not get credit for that amount from the Canada Revenue Agency and you may not be able to retrieve the amount from the private entity. On reciept of such a request you should consult with an expert Canadian tax lawyer before sending any funds.

Canadians normally pay income tax through one of two different methods. First is by paying CRA directly. The second is through witholding by the entity paying out the income (e.g. an employer witholding income tax from an employee’s salary). The first method is the default and used in essentially all cases except when the second method applies.

The witholding method is used only in a relatively small number of types of situations. When the witholding method applies, the withholder will provide a statement of some kind to the recipient of the income showing the amount withheld. The withholder will then remit the amount withheld to the CRA. The taxpayer who had the amount withheld will be credited with having paid a corresponding amount. In the event that the total amount withheld from a taxpayer exceeds the taxpayer’s amount owing, the CRA will send the taxpayer a refund. This witholding only applies to a relatively small number types of situations in the Canadian tax system, most prominently:

  • Employers witholding from payment of salary, wages or employment benefits to their employees;
  • Financial institutions witholding from RRSPs withdrawals;
  • Payors witholding from payments of rent, interest, dividends or certain other types of passive income to non-residents;
  • Witholding from fees or commissions charged by a non-resident rendering services in Canada; and
  • Witholding from proceeds of sale paid to a non-resident selling Canadian real estate, Canadian resource properties, or timber resource properties.

In most legitimate cryptocurrency investment scenarios, none of the above witholding mechanisms will be involved. There are some exceptions however, such as investing in securities designed to give investors cryptocurrency exposure through an RRSP. If you are in doubt regarding your situation, consult an expert Toronto tax lawyer.

Canadian Anti-Money Laundering Law – Cryptocurrency Fraudulent Investment Schemes

Our firm has been retained by clients who have received requests for funds incorrectly justified on the basis of anti-money laundering law and regulations. Demands for additional money on the grounds of Canadian anti-money laundering law are a fraud red flag as these demands are not contrary to how Canadian anti-money laundering law operates. If you have received such a demand, you should seek out legal advice from an experienced Canadian tax lawyer. You may not be able to recover funds transferred in response to such a demand.

The primary statute implementing Canadian anti-money laundering law is the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). This statute is administered by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

The primary approach taken by Proceeds of Crime (Money Laundering) and Terrorist Financing Act to combat money laundering is to impose record keeping and reporting requirements on financial service providers and other persons or entities that engage in businesses, professions or activities that are susceptible to being used for money laundering. Regulated entities are required to run a compliance program, implement “know your client” protocols, keep records, and report certain types of transactions.

FINTRAC monitors entities regulated by the Proceeds of Crime (Money Laundering) and Terrorist Financing Act to ensure compliance. It also receives and analyses the reports sent by those entities. When appropriate the Financial Transactions and Reports Analysis Centre of Canada interfaces with law enforcement and other government agencies which may then take further action in suspicious circumstances.

None of these activities would require additional payment on behalf of a cryptocurrency investor to someone purportedly running a cryptocurrency investment service.

Entities which operate money services businesses are also required to register with FINTRAC, and this registry is searchable by the public on the Financial Transactions and Reports Analysis Centre of Canada’s website. A money services business is a business that offers at least one of the following services to the Canadian public:

  • foreign exchange dealing,
  • remitting or transferring funds,
  • issuing or redeeming money order or similar negotiable instruments, or
  • dealing in virtual currency.

This means if you are a Canadian using some form of intermediary to purchase cryptocurrency, that intermediary should be registered. If that intermediary is not registered, it is cause for extreme caution. Nittrex is not registered with FINTRAC as of the publication of this article despite allegedly operating a platform which allows for Canadians to buy and sell virtual currencies.

Pro Tax Tips – Cryptocurrency Fraudulent Investment Schemes

Beware of investment opportunities with the following red flags of fraud:

  • promises of high returns with low risk,
  • the investment is only available for purchase for a short period of time,
  • the investment promoter uses high pressure sales tactics,
  • the investment is described as normally only being offered to an exclusive group (e.g. normally only to the very wealthy),
  • the investment promoter is not registered to sell investments.

The website of the Canadian Securities Administrators offers a national registration search that is helpful for verifying whether a promoter is registered.

If you are ever requested to make a payment to someone other than the Canada Revenue Agency on account of Canadian income taxes, you should consult an experienced Canadian tax lawyer to verify that the request is genuine.  It is almost certainly not a valid request.

If you suffer losses due to a cryptocurrency related fraudulent investment scheme, you may be able to claim a loss for Canadian income tax purposes that will help offset your other Canadian income tax liability. Canadians who have been defrauded should also report the fraud to the government through the Canadian Anti-Fraud Centre and through the RCMP.

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