Crypto Networks Connected to Increase in Reported Fraud

A federal law enforcement network has identified a surge of suspicious activity from San Francisco financial firms, including some of the world’s leading cryptocurrency trading platforms, according to a new report based on federal data.

The Bay Area, home to many crypto-trading platforms, also known as money services businesses, filed 206,527 suspicious activity reports (SARs) last year, according to Dynamic Securities Analytics (DSA), a Florida-based anti-money laundering (AML) metrics and interactive analysis firm.

That’s up from 73,959 in 2020 and 14,845 in 2019. In total, these San Francisco money services businesses accounted for about one in 15 of the nearly 3.1 million SARS reported nationwide in 2021, DSA reported.

A SAR must be filed by financial institutions (FIs) with the Financial Crimes Enforcement Network (FinCEN) when there is a suspected case of fraud or money laundering.

The SARs forms fail to include cryptocurrency categories. As a result, it is unclear whether the San Francisco crypto exchanges were responsible for the dramatic rise in filings to FinCEN.

But DSA Chairwoman Alison Jimenez and the report’s author, suggested the crypto network was the most likely explanation for the increase. She noted FinCEN issued guidance in 2019 asking convertible virtual currencies dealers to register as money services businesses and comply with AML laws, the Financial Times (FT) reported.

But Coinbase, a crypto exchange in San Francisco, suggested the surge in SARs filings only signals that more illicit activity is being reported. It does not mean there’s been an uptick in money laundering, the company said, per FT.

Still, compared to other financial industries, the cryptocurrency market is disproportionately subject to fraud, with a net fraud rate of 7.4% last year.

Read more: Fraud’s Impact on Crypto Is About More Than Money

The most common type of crypto-related fraud is identity fraud, accounting for 44% of fraud cases in the sector. There are dozens of variations of this fraud, but a large number involve leveraging stolen or synthetic identities.