The evolution of asset-tracing techniques

There’s a group of criminals who might target your clients one day, capable of pulverizing money through thousands of bitcoin accounts, using deepfakes to impersonate someone else in video calls or creating entirely fake individuals to serve as fronts for illegal activities, with tools at their disposal that you might not even have heard of, making asset recovery much more difficult. Nowadays, an NFT (non-fungible token), or a piece of land in the metaverse, can be used to launder money in a similar way as artwork was used in the past.

Tracing corporations, real estate, planes and boats and analyzing the use of protective layers of assets through holding companies and complex corporate structures, although still vital, is no longer sufficient for an advanced investigation, and is often not enough to successfully conclude a case.

Traditional asset tracing investigations

In Latin American countries, especially in Brazil, the financial recovery of losses is a lengthy, cumbersome and unproductive process, due not only to the slowness of the legal system but also to the challenge of actually finding the assets of their debtors. In many cases, the perpetrators are sophisticated fraudsters who, aware that their assets may be exposed to the legal system, create barriers to shield them.

But a robust asset-tracing investigation will deploy a range of data collection skills and analysis techniques, including interviews with victims, employees and relevant stakeholders, combined with data collected in open-source intelligence to build solid evidence.

Firstly, we have web intelligence, one of the most versatile and adaptable techniques, especially when combined with artificial intelligence tools. For example, in a social media analysis, which despite being public, has not been indexed by traditional search engines, if an investigator were to manually search, the process would take too long due to the amount of videos, voice and text data that is posted. Also, they would not be able to identify and analyze connections and cross-reference everything – it requires AI tools to expand and reveal valuable findings.

Moreover, there is account intelligence, which can identify bank accounts based on email addresses and phone numbers. Although we cannot access financial details that are protected by law, it is possible to see which financial institutions have records for a debtor and connect records between email addresses and phone numbers used by different people or entities, leading to evidence of hidden networks in situations in which targets supposedly do not know each other.

Lastly, when we look at geospatial intelligence, the dynamic gets even more interesting, because we can obtain historical information about how a certain location has looked over the years, a unique way of identifying evidence of fraud, irregular operations, front companies or shell corporations.

But what we can do when the assets are in digital world?

Cryptocurrency tracing

The US Department of Justice announced new cases involving cryptocurrency fraud offenses in June 2022; six people were charged in four different cases for cryptocurrency-related fraud, including the use of NFT scams. The form of concealment is always the same: the fraudster, after acquiring sums from their victims, begins to perform non-stop transactions, converting the cryptocurrencies across various blockchains and exchanging the coins so many times that it obscures the original trail.

Much of the population believes that cryptocurrencies are obscure, intangible and unreachable, which leaves the fraudster with a distinct advantage: knowledge. However, the fundamental basis of the blockchain is a type of shared ledger and this large, encrypted data protocol is, in essence, public, remote, unique and permanent.

Individuals and entities across the world have been damaged by fraudsters, losing bitcoins and other cryptocurrencies and finding themselves waiting for justice in long and usually unsuccessful lawsuits in which only a small percentage will get some kind of refund. However, one point that must be considered is that fraudsters who commit such illicit acts need to transfer illegally gained profits toward acquiring and contracting assets that can be seen by the public eye. To enjoy their luxury lifestyles, fraudsters must convert assets in the blockchain to assets such as cars, boats, private properties, helicopters and jets.

We will analyze two hypothetical scenarios. In the first, we are dealing with assets that are still on the blockchain and, in the second, the assets have been used to generate financial results in the public eye. In the first case, we have numerous people and/or companies that are involved in legal action to seek recovery of their losses. We will assume that the fraudster still possesses their illegal profits in cryptocurrency. A qualified investigator will trace the transactions starting from several public information points at which we know that victims have transferred cryptocurrency to this fraudster, with only one exception: cryptocurrency tumblers, also known as mixers or foggers.

These services allow users the opportunity to mix traceable cryptocurrency funds with other cryptocurrency funds, making it difficult to trace their original flow. They give criminals the ability to mix lawful funds with cryptocurrencies that have been acquired as a result of illicit practices. However, legislation around the world is expected to evolve and, in recent years, we are noticing an increase in news about the arrests of fraudsters who use this cryptocurrency tumbler tactic. Two examples are the cases of Roman Sterlingov and Larry Harmon, who were arrested and charged by the US Department of Justice for money laundering and using bitcoin mixers in their transactions.

In other words, since all transactions on the blockchain are public and permanently stored, even if there is a fraudster trying to benefit from a mixer, an accurate investigation will be able to determine precisely when it was used. This allows lawyers to present the necessary evidence in court to show the fraudster's intent to harm their victims.

Then we find ourselves looking at the second scenario: when the sums have already been laundered and mixed with legitimate cryptocurrencies and the fraudster is waiting for the moment to benefit from their spurious profits. That's when the traditional work of asset tracing comes together with cryptocurrency tracing to uncover all of the fraudster’s connections.

This sort of "reverse engineering" makes it possible to connect all the pieces of evidence from their origin, bringing to light how the fraudster lives and, for instance, how they acquired the house in which they live, the car they drive, the yacht owned by their figurehead, and even the family member who owned bitcoin wallets that were used to receive the cryptocurrencies that were mixed. No matter how sophisticated the crime committed, the traces are never completely hidden.

At Control Risks, we are able to conduct research from traditional asset recovery to cryptocurrency tracing, with reports providing rigorous evidence that can be used to bring cases forward to the authorities. We can coordinate with lawyers to identify relevant evidence in order to resolve situations, both reactively and proactively, preventing clients from getting involved in negotiations that could result in substantial financial losses. Supported by a team that crosses many fields of knowledge and with offices covering countries worldwide, there are no barriers that Control Risks is unable to remove in terms of asset tracing and recovery, both in the digital and physical worlds.

The Authors

Rodrigo Russo:

Rodrigo Russo is a Principal in the Global Risk Analysis and Business Intelligence practices of Control Risks in Brazil, focusing on ESG, business intelligence, political risks, and due diligence. Rodrigo leads the research and analysis team in a wide range of investigative and consulting projects in South America for multinationals, local companies and law firms.

Paula Leite:

Paula is an Associate Director in Compliance, Forensics and Investigations. She leads a team of consultants and researchers working on business intelligence projects for our clients. Prior to joining Control Risks, she worked in newsrooms, in different sections including city news, international news, business and technology, both online and in print, having worked for some of the largest media groups in Brazil including Folha de S.Paulo and Globo. She has a BA in Journalism from the University of São Paulo (USP) and a Master’s degree in Business Management from Insper, ranked amongst the top 60 business schools in the world by the Financial Times.

Renan Rocha:

Consultant in Control Risks’ Compliance, Forensics and Intelligence practice in Brazil, with solid experience in asset tracing & recovery, litigation support, corporate investigations and due diligence in South America, conducting risk management of third parties, analyzing financial and social information, providing support to the client’s decision making. Developed methodologies of investigations conducted through open sources, works in legal analysis of civil and criminal lawsuits, sanction administrative proceedings, national and international sanctions, and advises clients in various litigation situations.