For the first time, a Dutch court has issued an order for a cryptoexchange to freeze a so-called “wallet” to prevent fraudsters from selling stolen crypto. This measure is an important step for victims of fraud involving cryptocurrency.
Fraudsters’ modus operandi
There are many different types of fraud in which crypto-currencies play the role of a means of payment. For example, there are so-called “boiler rooms” that demand payment in cryptocurrency. Boiler rooms are websites that sell fake investments, pressuring their victims to deposit as much as they can, with no balance to withdraw. The investments shown in the account are fake. Victims can lose many hundreds of thousands of dollars before they realize that a scam has occurred. The damage in the Netherlands comes to many tens of millions of euros a year. These boiler rooms are criminal organizations that cannot open bank accounts because they are legally ghost companies. Therefore, they ask their victims to become customers of a cryptoexchange. The victim buys crypto currency there, which is used as payment for the fake investments. The victim does see the deposit appear in the fake boiler room account, but this website is part of the scam and the balance in the account is fake, as are the investments. In reality, the crypto currencies were funneled away to the fraudsters. Boiler rooms may use multiple websites and often change names.
Lock away and cash out through the exchange
Boiler room criminals often book the crypto currency through to a foreign cryptoexchange in multiple steps. At exchanges registered in the Netherlands, we hardly encounter wallets from fraudsters. Many of these foreign cryptoexchanges are based in tax havens, such as the Seychelles, and are essentially a mailbox company – the offices are actually in a different location. These sometimes rogue exchanges are not serious about fighting fraud, but thanks to the first Dutch ruling on the obligations of an exchange that has a fraudster as a customer, there are now ways to recover damages. The fraudster uses the exchange to store the loot and cash out. Through the exchange, the boiler room (and the fraudster if it is another type of fraud, such as theft of crypto currency via a hack) can cash out by selling the stolen crypto through the exchange. Then the proceeds are transferred to the linked bank account of the criminal organization. Through the account, the criminal profits can be converted into cash via ATM or invested. Despite all the great stories about crypto currencies, it is not the case that fraudsters hold on to stolen crypto for a very long time, eventually switching to regular money.
Tracing through the blockchain
The good news for victims is that the stolen cryptocurrency can be tracked through the blockchain. Research can be done on these movements, which can be used to find the wallet address of the perpetrators of the fraud. This wallet is usually hosted by an exchange, which knows the name and address of the wallet owner. This person is apparently working with the criminal organization operating through boiler room fraud. So far, no attempt has been made through a Dutch court to force a foreign cryptoexchange to hold the stolen cryptocurrency to prevent the fraudster from cashing out through the exchange. This is different now because of the first Dutch freezing order, which we applied for a client of our firm.
Freezing order resembles preservation order
We have applied for a preliminary injunction for our client, who is a victim of boiler room fraud, which amounts to requiring cryptoexchange HTX (formerly Huobi) to freeze the criminal wallet immediately. Essentially, the cryptoexchange was not summoned in advance, whereas in a normal lawsuit, the opposing party should not face a surprise decision and must be summoned through a bailiff. The judge agreed, so the order was announced by surprise. This way, the cryptoexchange cannot warn the criminal customer in advance; it is important to lay the freezing order unexpectedly. This makes the procedure similar to conservatorship of a fraudster’s bank account. That also gets laid unexpectedly and forces the bank to immediately freeze the account to hold the money present for the victim. The peculiarity of the freezing order is that it is cross-border. An ordinary conservatory attachment can only be made in the Netherlands, but this measure affects a cryptoexchange in the Seychelles (Huobi / HTX). By the way, this exchange is also active in the Netherlands; you can download the HTX app from the appstore. In this way, even a Dutch fraudster can very easily set up a money laundering scheme before he makes his move: just by downloading a simple app, and making sure that the crypto ends up there, while deceiving the victim about something else in the meantime. Regulators are not yet really succeeding in keeping these illegal companies out of the market.
Fine of €2,000,000
There is no penalty for ignoring a bank garnishment because banks respect rulings by a Dutch judge. So victims’ lawyers in that situation do not have to ask for a fine in advance in case the bank disregards the order. With cryptoexchanges located in tropical islets, this is different. As it is, they make money from roadblocks and money laundering and apparently have criminal clients that they don’t really take action against. Therefore, the Dutch court placed a fine of €2,000,000 on the freezing order. This means that if the cryptoexchange does not respect the Dutch court’s order, the exchange itself – rather than the fraudster – must pay the damages. This “exchange” is relatively attractive to a victim of crypto fraud. After all, you then get a claim against a large company rather than a claim against a criminal; in the latter case, it may be more difficult to collect the amount.
Read the ruling here.
