Pig Slaughterhouse: The Growing Problem of Crypto Investment Scams

In recent months, law enforcement agencies in the US and elsewhere have been raising increasing warnings about a form of crypto-enabled fraud known as “pig slaughtering.”

Responsible for causing hundreds of millions or even billions in fraud losses, the piggery takes a devastating toll on its victims and also helps sustain organized crime.

Compliance professionals can play an important role in efforts to combat this accelerated form of fraud. By better understanding pig slaughter typologies, they can help identify and disrupt these frauds.

The basics of pig slaughter

Pig slaughter scams originated in China and got their name from the Chinese Shāz Hū Pánwhich was originally coined to describe them. The term refers to investment scams that use social engineering techniques to slowly coerce victims into parting with their money, much like an animal is led to slaughter.

In these scams, scammers contact victims online, often through dating apps or social networks, posing as a potential romantic interest or establishing an online friendship. Scammers will operate behind elaborate social media profiles they’ve created, claiming to be successful and wealthy crypto-asset investors. After cultivating a relationship with the victim, the scammer will persuade them to invest in cryptocurrencies as well.

The pig-slaughtering scammers then create fake websites designed to mimic legitimate cryptocurrency exchange platforms, convincing the victim to open an account with the supposed exchange. The websites direct the victim to transfer their funds to buy cryptocurrencies on the fake sites. These transfers can be made in one of several ways.

In some cases, the sites may instruct the victim to send funds via bank transfer. The victim then sends funds to a bank account in the name of a fake company that the victim believes belongs to the trading platform where they were instructed to buy cryptocurrencies, but which the fraudsters actually control.

In most cases, however, the victim is instructed to buy cryptocurrencies from a genuine exchange and then transfer the funds to a crypto wallet that they are led to believe belongs to another exchange, but which is actually controlled by the fraudster.

In this way, the victims are convinced to leave with their funds for weeks or even months. Criminals will send the victim fake account statements to convince them that their crypto investments are growing, which prompts the victim to send more money to the scammers. Eventually, after the victim has spent tens of thousands or even more of their own funds, the scammers will abruptly end contact, leaving the defrauded victim penniless – and often completely devastated.

After receiving the funds from the victim, the fraudsters will take steps to launder the digital assets they received. Where they have received cryptoassets from victims, this may include sending funds through crypto commingling services to obscure the trail of the funds or relying on money mules to convert funds into other currencies at virtual asset service providers (VASPs) located in jurisdictions with weak regulation on AML/CFT.

Estimates of the scale of the pig slaughter vary, but according to the FBI, investors in the US alone lost more than $3.3 billion to crypto investment scams in 2022. Most victims of pig slaughter are between the ages of 30 and 49, as scammers tend to target victims who are active on social media. However, an increasing number of elderly people are also being targeted by pig slaughter scams.

Pig slaughter has a negative impact on society that extends beyond the financial losses suffered by the victims. Frauds are ultimately run by organized criminal gangs, which primarily operate from Asia. They are often carried out by individuals from countries such as Burma, Laos and Myanmar who have been trafficked by these groups and forced to work in centers run by criminal gangs.

Preventing pig slaughter, therefore, not only helps stop fraud losses; it also goes towards preventing organized crime groups from profiting and committing further crimes such as human trafficking.

Key red flags and risks

Law enforcement agencies have had some important successes in the fight against hog-slaughter fraudsters, in part by using financial intelligence to track down and seize the perpetrators’ assets. On April 3, the US Department of Justice announced the seizure of more than $112 million worth of crypto-assets linked to pig slaughter cases.

Compliance teams at banks and cryptocurrency exchanges can therefore play an important role in spotting the warning signs of pig-slaughtering activity by paying attention to the behavior and transactional red flags commonly associated with these scams. A recent alert from the US Department of the Interior (HSI) and the Association of Certified Anti-Money Laundering Professionals (ACAM) highlights some of these red flags, as do industry typology studies like those published by Elliptic.

Pig slaughter red flags that a bank can identify include:

• customers who have no history of using their bank account to fund cryptocurrency purchases suddenly start buying large amounts of cryptocurrency from exchanges, potentially in large round amounts, such as four- or five-figure purchases;

• clients suddenly start withdrawing large amounts of cash, and when asked say they plan to make deposits at Bitcoin ATMs to finance crypto investments;

• the client states that they have been instructed to make wire transfers to crypto exchanges, but analysis reveals that the electronic transfers are being made to fictitious companies that do not appear to be affiliated with any legitimate crypto exchanges;

• clients who engage in the behaviors described above are vulnerable – for example, an older client or an individual who has recently gone through a divorce or other major life event;

• when surveyed, the same clients show little familiarity or understanding of cryptocurrencies.

Red flags of pig slaughter that a cryptocurrency compliance team can identify include:

• an individual who opens an account on a crypto exchange suddenly starts buying large amounts of rounded value and immediately transfers funds from the exchange to private wallets;

• vulnerable customers suddenly start using Bitcoin ATMs and making high-value purchases, despite having little or no understanding of cryptocurrencies;

• when asked, clients may indicate that they have been contacted by cryptocurrency investors;

• transactions involving wallets with frequent exposure to high-risk services, such as mixers or mismatched VASPs.

Fighting back against scammers

Identifying these red flags can present challenges, but there are three key steps that compliance teams in financial institutions and the crypto-asset business can take to enable them to detect pig slaughterhouses.

First, compliance teams should receive training on the typologies and red flags of illegal activity in cryptocurrency so that they are equipped to identify indicators such as those listed above.

Second, firms should include pig slaughter risk considerations in their financial crime risk assessment to understand the extent and nature of any exposure they may have to this activity, and design appropriate mitigation measures.

Finally, compliance teams should use the capabilities of blockchain analytics to detect and identify transactions associated with pig-slaughtering fraudsters’ wallets and any associated high-risk activities, such as the use of mixers or other cloaking services.

Swine slaughter is a devastating form of fraud, but compliance professionals can play a key role in stopping these frauds.

Originally published by Thomson Reuters © Thomson Reuters.

Read more