The Need for Adaptive Due Diligence Rather than Due Diligence as a Checklist

During the first half of 2024, Americans lost approximately US $2.5 billion through investment fraud and scams. The payment method utilised most frequently for investment scams was cryptocurrency. According to The Federal Trade Commission, in the first half of 2024, US $679 million was lost to cryptocurrency fraud.^[1]

One example is a US $60 million cryptocurrency Ponzi scheme operated by brothers Jonathan Adam and Tanner Adam between January 2023 and June 2024. On 27th August 2024, the Securities and Exchange Commission (‘SEC’) charged the brothers and their respective companies, GCZ Global LLC and Triten Financial Group LLC, with running a Ponzi scheme.

The brothers promised their 80 victims returns of up to a 13.5% monthly and that, other than in a financial crisis, the investors’ funds would be safe. The brothers claimed that they had created a virtual robot that operated on a crypto-asset trading platform. This virtual bot was able to identify arbitrage trading opportunities. (An arbitrage trade is a short-term trading strategy which involves buying and selling assets simultaneously.) The investor funds would be used in a lending pool that would use smart contracts to complete arbitrage trades.

The SEC stated that the lending pool did not exist and, instead, new investors funded previous investors, creating a typical Ponzi scheme. The funds were also used by the brothers to live a luxurious lifestyle, such as, making the down payments and instalments for a US $30 million condominium. It’s reported that US $480,000 of the investor funds was used to purchase cars, trucks, and recreational vehicles.^[2]

The Adam brothers are not unique when it comes to using cryptocurrency to commit fraud. On 15th May 2024, Anton Peraire-Bueno and James Pepaire-Bueno were indicted for conspiracy to commit money laundering for reportedly exploiting the Ethereum blockchain to fraudulently obtain approximately US $25 million worth of cryptocurrency in 12 seconds.

Ethereum is a decentralized global software powered by blockchain. Ethereum is most known for its smart contracts’ functionality. After months of planning, the brothers fraudulently gained access to pending transactions which altered the movement of the currency. While planning the fraud, the brothers took multiple steps to conceal their identities. They set up multiple shell companies, used multiple private cryptocurrency address and foreign cryptocurrency exchanges. The money was stolen though a series of transactions that were designed to conceal the source and ownership of the funds. During the preparations for the fraud, the brothers conducted extensive research into the ‘Know your Customer’ (KYC) procedures for bank accounts and transactions as well as extradition procedures in attempt to move the money into bank accounts with as little checks as possible.

Investment fraud is not always conducted online. Many individuals choose to entrust their funds to friends, family or business partners. On 19th February 2024, Guy Flintham was found guilty fraud by false representation. Mr Flintham represented himself as a successful trader and over the course of five years persuaded 240 investors to invest approximately £19 million in his investment scheme.^[3] The fraud involved sending the investors false documents to convince them of steady profits. In some cases, Mr Flintham paid the investors profits or, capital withdrawn from accounts. However, this money was simply a portion of the investors initial investment sent back to them. During the sentencing, the judge in this case, Judge Milne, stated that not only did Mr Flintham commit fraud, but many of the initial investors were his friends and family whose lives have been irrevocably damaged by financial loss.

Due Diligence on the counterparties in any significant dealings, is critical to increase trust and safety and reduce the risk of fraud and/or reputational damage. Whether it’s potential investments, M&A, clients you take on, recruitment of key individuals, or friends that you think you can trust, Quintel offer a comprehensive range of Due Diligence services to reduce reputational and financial risk to you or your business.^[4]

Read more about Quintel’s Due Diligence services.

Article by Quintel Investigator, Liz Gahan.