Category Archives: exchange fraud

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EY: QuadrigaX Owner Traded on Fake Accounts with User Deposits

EY_ QuadrigaX Owner Traded on Fake Accounts with User Deposits

Big Four audit firm Ernst & Young (EY) have found what seems to be solid evidence that the late owner of defunct crypto exchange QuadrigaX had been transferring user funds off the platform and using them to trade with fake accounts on other platforms.

The fifth report from EY, who was appointed court monitor in ongoing litigation, was filed with the Supreme Court of Nova Scotia yesterday. In it, EY has provided damning evidence that the exchange was “significantly flawed from a financial reporting and operational control perspective”.

Gerald Cotten, the deceased owner, is thought to have been the single individual in charge of most of the activites. There was also a shocking lack of segregation between job tasks and basic internal controls. Assets were also not kept separately from Quadriga itself or its users.

EY says that because of this, the exchange could not possibly know if it was profitable, since user funds were mixed together with the exchange’s wallets. In addition:

“Significant volumes of Cryptocurrency were transferred off Platform outside Quadriga to competitor exchanges into personal accounts controlled by Mr Cotten. It appears that User Cryptocurrency was traded on these exchanges and in some circumstances used as security for a margin trading account established by Mr Cotten.”

Falsified accounts were also detected on Quadriga under aliases, supporting the theory that unbacked deposits were used to trade on the platform, leading to inflated revenues, artificial trade volumes and user numbers, and the withdrawal of user deposits. The fees and commission, as well as trading losses on external platforms further impacted QuadrigaX’s crypto reserves.

Finally, EY could not confirm the identity of wallet holders where huge sums of Quadriga crypto was transferred to. Quadriga owes some 76,000 users an aggregated value of funds worth CAD 214.6 million (USD 162.2 million).


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FBI Warns of Crypto Exchange Fraudulent Support Staff

The Federal Bureau of Investigation (FBI) announced last week that a “problematic and widespread scam” using fraudulent cryptocurrency exchange support workers was currently active.

In its 28 March notice, the bureau’s Internet Crime Complaint Center (IC3) stated that consumers had submitted numerous complaints, claiming losses of USD 11 million connected to tech fraud in 2017. The statement went on to indicate that it was often individual investors who were targetted by the scammers. Individual losses were often in the thousands of dollars.

In a typical scam, the fraudulent support worker asks for access to an individual’s wallet having posted a fake support number online. The scammer then posts the funds to another “temporary” wallet. The virtual currency is never returned to the customer.

Recent moves by some search engines and social network companies including Google to ban cryptocurrency advertising were initiated in part to alleviate similar problems. The FBI warned that scammers will use exhaustive means to locate and target individuals and companies. The IC3 reported receiving an average of 800 complaints a day in the United States on one particular scam site. It also suggested that scams are heavily underreported.

FBI agent Eimiller reported that one scam can represent only 15% of active scams at one given time: “If only one percent of people send money to them, there’s no overhead for them. That is money is in the bank.”.

Some precautionary tips

Be especially wary of offerings where a digital currency is below its market price, double check using reputable sources such as CoinMarketCap.

1. Check URLs and web addresses carefully to avoid being taken to a copy of an otherwise trustworthy site and bookmark these for future use. Look for a small spelling difference which can be a giveaway.

2. Some wallets have been created by scammers. Always use wallets recommended by the developers of a cryptocurrency and downloaded from the official source.

3. In general, don’t send cryptocurrency to random people over the internet unless you are donating or paying for a service which you have checked is reputable.

The FBI’s IC3 site includes a news and press room dropdown where warnings about current scams are listed. This includes a section for internet crime complaints.

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