Challenges in investigating frauds related to virtual currency investments

Debit entries in the bank statements containing names of Bitcoin Exchanges pose challenges for Certified Forensic Accounting Professionals

Crypto Currency exchanges

Forensic Accounting is becoming a dynamic domain and understanding the challenges with the new technology instruments play a significant role in the assignments conducted by the Certified Forensic Accounting Professionals. These days, virtual currency investment is becoming the top choice of the investors as the real estate and gold have yielded negative returns for the investors.

One of the most known frauds in the virtual currency space was witnessed by a small nationalised bank based out of Pune, when the Unified Payment Interface system was tweaked to pay the money without checking the balances was found to be transferred to the Bitcoin Exchange.

Understanding Virtual Currency Exchanges

During the forensic audits conducted on behalf of the large multi national banks, many forensic auditors observe the debit entries in the bank statements containing names of Bitcoin Exchanges. There are two types of Virtual currency Exchanges.

  1. Exchanges which convert the fiat currency in bitcoin
  2. Exchanges which convert Bitcoins to other virtual currencies such as Ethereum and Waves etc.

When the fiat currency is converted to the virtual currency, most of the exchanges complete the KYC process and obtain the requisite documents from the customers. Now the real challenge is to retrieve the information from cross border exchanges.

Virtual Currency Exchanges in India

The entries in Bank account statements pose critical questions about the end-use of the funds. Most of the times the Narrations in the bank account statements contain the names of the Virtual Currency Exchanges in India such as

  • Unocoin Technologies Private Limited

Challenges related to Virtual Currency Exchanges Transaction

  • Tracing money: Once the fiat currency is converted to virtual currency, it is very easy for the account holder to keep moving the money across the countries. Virtual currency exchanges requires confirmation of the email addresses in most of the cases. Traditional financial institutions (such as banks) often are not involved with Bitcoin transactions, making it more difficult to follow the flow of money.
  • International scope:¬†Bitcoin transactions and users span the globe. Although the government authorities and large market intelligence companies regularly obtain information from abroad (such as through cross-border agreements), there may be restrictions on how the same can be used. However, in cases related to the virtual currency transactions, even the government agencies and law enforcement may be unable to obtain information located overseas.
  • No central authority:¬†As there is no central authority that collects Bitcoin user information, the information need to be sought from the Bitcoin exchanges or users, for this type of information.
  • Seizing or freezing bitcoins: Once the forensic auditor submit the report and the bank of Law enforcement officials are required to trace the assets it may face difficulty in seizing or freezing illicit proceeds held in bitcoins. Bitcoin wallets are encrypted and unlike money held in a bank or brokerage account, bitcoins may not be held by a third-party custodian.

It is important to consult the experienced professionals who have handled the virtual currency related transactions and understand the nitty gritties of the forensic accounting related to the virtual currency related transactions.

If you are facing the issues related to the transfers of money to bitcoin exchanges kindly feel free to call us on +91-9766594401

Mayur Joshi
CA Mayur Joshi is award winning fraud examiner and foremost forensic accountant. He is regularly quoted in various news papers and is author of atleast 7 books on Forensic Accounting, Money Laundering and Compliance.