Officials from the Internal Revenue Service’s Criminal Investigation division met with tax officials from four other countries this week in an annual “cyber challenge” as they explored ways to cooperate across borders on uncovering tax evasion and money laundering schemes using cryptocurrency and other digital technology.
The Joint Chiefs of Global Tax Enforcement, also known as the J5, includes representatives from the U.S., Canada, the Netherlands, the U.K. and Australia. The challenge was hosted this year by Canada and focused on data mining and crypto reporting. Using different analytical tools, members from each country are put into teams and tasked with generating leads and finding tax offenders, based on the new data available to them through the challenge. The tax authorities have developed more than 50 leads by working together this week, they told reporters during a press conference Thursday.
“Since the inception of the J5, events known as challenges have been held that are aimed at tracking down those who are making a living out of facilitating and enabling international tax fraud,” said Eric Ferron, director general of the Criminal Investigations Directorate in the Canada Revenue Agency. “It brings together investigators, crypto experts and data scientists from all five countries to work together in a collaborative fashion with our private sector partners. This year’s challenge focused on data mining and financial reporting relating to crypto assets and technology-enabled financial threats.”
He noted that this year’s challenge is unique because it marks the first time that the financial intelligence units have been involved in a J5 challenge and also the first time that the Royal Canadian Mounted Police have participated in a challenge. “Having them all here with the J5 groups and our private sector partners is a great opportunity to bring together more tools and resources to combat international tax evasion,” said Ferron. “Although the week is not yet over, and there is still much to be done, I’m very proud of the work that has been accomplished to date.”
The private sector was also represented by the blockchain analysis companies Chainalysis, BlockTrace and AnChain. Collectively, the J5 member countries, financial intelligence units and blockchain analysis companies scoured their data to spot the most promising cryptocurrency leads related to tax evasion and money laundering.
“This year’s challenge focused on digital assets within the financial institution reporting documents and public data sets revolving around digital assets,” said Jim Lee, chief of IRS Criminal Investigation. “During this challenge, public and private partner experts from each country come together. Think about investigators, data scientists, analysts, men and women from around the globe in each of our jurisdictions with very unique skill sets. They gather with a mission of leveraging real data from a variety of open and investigative sources available with a specific focus on producing results.”
He noted that last year’s challenge focused on nonfungible tokens, or NFTs, and decentralized exchanges, and it uncovered a number of operational leads, including a $1 billion Ponzi scheme because of the collaboration. That case is currently ongoing, but this year’s challenge has unearthed dozens of possible leads.
“This group produced well north of 50 investigative leads,” said Lee. “In general with that number of investigative leads, not all leads turn into full-blown investigations, but just know that a number of quality leads, well over 50, have been produced, and these are what I consider, after a briefing, high-dollar, high impact leads that have cross-jurisdiction representation. We’re here to develop tax cases, but this group also identifies other investigations as well, involving darknet marketplaces, child exploitation cases and pig-butchering schemes.”
In “pig-butchering schemes,” victims invest in supposedly legitimate cryptocurrency investment opportunities, starting with modest amounts to gradually build their confidence, before they are scammed out of large amounts of money. BitClub Network, a multimillion-dollar Ponzi scheme where thousands of people were scammed into buying into a bogus crypto mining pool, is one of the first J5 successes that stemmed from the challenges.
Accounting Today asked whether the participants in the challenge were not only using data-mining technology to ferret out relationships between the schemes, but also whether some criminals are using data-mining tools as well to find victims from the information they’ve gleaned.
“What we’re seeing is in certain data gathered from the criminal side ‘airdrop’ scams, in which people produce tokens and kind of shop them out to many addresses as a way of phishing or trying to draw in people,” responded Philip Werlau, an engineering manager at AnChain. “The targeting of those are based off of blockchain information, so they’ll find people that are using platforms that are more likely to fall for these types of scams, to already be involved in sketchier tokens. We’ve seen for a while criminal data gathering on targeting when they’re going largely out to many, many victims.”
Cyber criminals may well be exploiting the same large data sets as investigators. “On that data-mining project, each country will have multiple cases in the past,” said Oleg Pobereyko, J5 Cyber Group lead and U.S. J5 project lead. “We see a significant amount of different data sets from search warrants, from any of the enforcement operations, but also we’ve got to take into consideration there’s a lot of different data sets. Obviously everyone will have access to these data sets, including the bad actors, and they do explore the data sets to find and target victims.”
Both the public and private sector work together during the challenges.
“At this challenge, we had a team of about a dozen investigators working around the clock on operational lead generation,” said Ryan Ryder, manager of investigations at Chainanalysis. “Here in Ottawa, we have five of them onsite to assist. In my opinion, we have an opportunity to make crypto the safest financial system, thanks to its inherent transparency. It’s truly collaborations like these that bring us closer to that ideal. The J5 allows us to collaborate and work from the same data sets as law enforcement agencies and regulators. We can really work toward shutting down illicit activity, something that really isn’t all that possible in traditional finance.”
The information gathered during the challenge will be used for investigations in the tax authorities’ various countries.
“One of the most important things for us in the field is also that we can share the knowledge and that we can retrieve the knowledge, not only working on the leads in the investigations, but also that we make friends and that we can build up a network, so after this challenge, we can also call them and reach out to them and work with them,” said Ron Willemse, strategic advisor to the Dutch Fiscal Intelligence and Investigation Service. “That’s one thing we are always very excited about. We don’t stop after this week. We have a lot of leads with a lot of information, and then we take it back home and work on it further. “
