Blockchain Or Cryptocurrency Fraudulent Investment Schemes
Rotfleisch & Samulovitch P.C.
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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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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