It takes a network to combat crypto crime. Lawyers, accountants, law enforcement agencies, banks, and more all need to coordinate when responding to break-ins or break-ups. This year brought full-scale hacks, collapses, and more. Henry Chambers, Alvarez & Marsal, along with Calvin Koo, Kobre & Kim LLP, introduce us to The Crypto Fraud and Asset Recovery Network. The group’s aim is to make digital asset adoption safer and more secure.
Walter Jennings: Welcome to Waves in the Finoverse. I'm Walter Jennings, the host of a podcast brought to you by Finoverse. We're talking with the wavemakers creating ripples, waves and tsunamis across finance, crypto, FinTech, Web3 and beyond. Listen weakly to hear the changemakers talk firsthand about their experiences in this dynamic industry. We're here at waves in the Finoverse with two guests. I've got Henry Chambers, who's the Senior Director at Alvarez & Marsal and Calvin Koo, who is a lawyer in disputes and investigation with Kobre and Kim. Gentlemen welcome to Waves in the Finoverse.
Henry Chambers: Thank you.
Calvin Koo: Thank you for having us.
Walter Jennings: Yeah, I understand that you two have a common passion. And that common passion is crypto theft and fraud. Henry, introduce yourself a little better, if that's your interest.
Henry Chambers: I think that's exactly right. Yes, both myself and Calvin do have a very vigorous interest in combating fraud, corruption in the cryptocurrency space and tracking down assets for recovery where we can.
Walter Jennings: And Calvin, you're a lawyer with disputes and investigation experience, but you also are engaged in the digital asset world.
Calvin Koo: That's right. Traditionally, going back more than a decade, we worked in fraud, asset tracing and recovery as well as other types of cross border disputes. And over the last few years, we've seen the rise in crypto related disputes in that space. So we've taken that on as well.
Walter Jennings: Okay. And Calvin, do the crypto disputes and investigations have any benefits over traditional fraud? Are there any difference in the investigation approach?
Calvin Koo: In some ways, there is a benefit from the vantage point of professionals like Henry and I trying to help victims of fraud, try and find out what happened to assets that might have been stolen or taken away and some other types of dispute. And that's the very sort of nature of the blockchain being transparent. And that's really been a benefit, at least at that initial stage of figuring out where the assets have gone.
Walter Jennings: Great. Now, Henry, you're with the firm Alvarez & Marsal. Can you introduce the firm and a little bit of the background and your experience in the worlds of dispute and fraud?
Henry Chambers: Sure, so Alvarez & Marsal is traditionally a restructuring firm. So we deal with companies in distress when they're running out of cash and so on. But I fit into quite a niche little part of that world. And I work in the disputes and investigations space. So I'm a forensic accountant, by training, and forensic means for use in court. So we undertake analysis investigation work, looking for details that we can use to prosecute or assist in civil remedies when it comes to fraud matters. Now, as it relates to cryptocurrency, it's very much something I've been focusing on over the last 18 months - 24 months, and trying to apply those forensic skills and forensic techniques that I've learned through my traditional finance background and applying them to this brand new world.
Walter Jennings: Okay, gentlemen, what are the types of fraud and who are the victims that we're talking about in digital assets?
Henry Chambers: So maybe I'll jump in with that one, we're seeing quite a varied type of fraud for lots of typologies. But the fundamental thing across all these frauds is it's about deception. It's about confidence tricks. And these are the kinds of things that we've seen time and time again in traditional finance world. But we're seeing fraudsters coming in.
They're professing to be love interests or promising giant returns in investment schemes, or even creating Ponzi schemes. And we're seeing this come up, and we're seeing poor victims individuals who are putting their life savings into these types of investments and subsequently coming away with nothing. So it's a real issue that we're trying to tackle here in Hong Kong with a group that both myself and Calvin have founded alongside a couple of others, which the Crypto Fraud and Asset Recovery Network.
Walter Jennings: While we're at it, you're talking about frauds, like you know, full in love or you've got a new relative, you've got a wealthy aunt and that died and left you. That sounds pre-crypto in some ways. How is it that? How does this all ramp up in the blockchain world?
Calvin Koo: Well, I think you hit the nail on the head on, a lot of the schemes broadly speaking are age-old types of fraud, age-old types of deception. The unfortunate reality is that bad actors always adapt to new technology and the new technology right now is crypto. Now neither Henry or I think that crypto and cryptocurrencies or blockchain by itself are bad, or instruments of fraud by itself. But there are bad actors that are using it for those bad purposes.
Walter Jennings: Are there any inherent protections that come with blockchain and crypto that makes it a little less malleable are likely to be tampered with?
Calvin Koo: While going back to that previous point, it's very helpful for those who unfortunately have been victimised by fraud, that it is a transparent technology. So then, at the outset, you are able to trace with the Henry's help and his colleagues help on the blockchain where those assets are. And then, depending on jurisdictions, and where you see those ads that have flown through, such as centralised exchanges, there may be tools and remedies that you can pursue, which are similar to traditional finance schemes, but in some ways, we have solutions that you can pursue even quicker.
Walter Jennings: Okay, now, I would imagine that the majority of clients for your firm's would be corporations and institutions. So how do they get engaged in fraudulent activity? And what are the types of scams or issues that you're involved in? Henry, can you give me a few examples?
Henry Chambers: Yeah, I mean, from a corporate perspective, I think what we see more is hacking and ransomware. And whilst this in itself isn't necessarily cryptocurrency, often what we see is the way in which they extort value from the company is via cryptocurrency, so use that to get the asset value out. So we'll come in, we'll lock all your files, and the only way to unblock them as you send me 100 Bitcoin. So at that point, again, the corporations are going to have to undertake something similar to an individual, follow the fund flows through the blockchain, and try and find out where they've ultimately gone so they can seek recovery.
Walter Jennings: Okay, now, I have in the room of forensic accountant, a lawyer, sadly, we're missing a law enforcement officer. But what are the roles of the various professionals involved in crypto recovery? Calvin, let's begin with you as a lawyer.
Calvin Koo: Well, you're right, though all three of those elements need to come together. So just taking a hypothetical example of an individual or a corporation that's been defrauded. Sometimes the first step is actually to reach out to law enforcement and make sure that they use whatever sovereign tools they have to more quickly try and freeze assets. For example, if we know that those assets have gone through a centralised exchange, I think just speaking on a Lawyer Park, we help coordinate those efforts with the law enforcement.
And then sometimes we will need to engage the help of forensic accountants to figure out where those assets are, and as Henry said earlier, to help develop the evidence we need to pursue civil remedies.
Henry Chambers: Yeah, I mean, there wouldn't be too much to add to that, I think Calvin's absolutely right. As a forensic accountant, we're looking to perform analytics across the blockchain and understand the fund flows to present in court because ultimately, for a court to make a decision and assist the victim of fraud, they need the evidence on which to base their decisions.
Walter Jennings: Right. So all of the evidence gathering and all of the tracking of the funds.
Henry Chambers: That's right.
Walter Jennings: Together, you have formed a new network called the Crypto Fraud and Asset Recovery Network or CFAAR. Can you better introduce that organisation?
Henry Chambers: Sure. So CFAAR well, we'll call it now we've introduced the acronym. It was formed in London, late last year. And it was a London based outfit of a forensic accountants, lawyers, barristers, who thought there must be a better way to deal with crypto fraud when it comes up. So they were there to share best practice, to share the legal tools they've used, share research across with a common goal of trying to better combat fraud.
Now fast forward one year, we, myself, Calvin, and a number of other barristers and lawyers decided, well, Hong Kong needs something like this itself. Hong Kong is an international financial centre, and it needs a place where they will be able to combat fraud in the same way we're doing so in London. Hong Kong, alongside Singapore and New York are all now founding Crypto Fraud and Asset Recovery Network. And so what we're going to be doing here is look to do one of three things. We're going to educate those who are investing and being part of the blockchain technology world.
So how do we stop fraud happening in the first place because that's the best way not to have to recover to, we want to engage with the regulators, engage with law enforce, engaged with participants in this entire market, and want to enhance our ability and enhance the adoption of crypto assets through this trust that's built, knowing there is remedies when fraud comes about.
Walter Jennings: Okay, and Calvin, what's the longer term vision of CFAAR?
Calvin Koo: We want to make sure that Hong Kong consistent with this convention maintains its place as part of the sort of international financial centre. And we know that those other jurisdictions that Henry mentioned, we're talking North America, New York, London, Singapore, are all paying close attention to how the crypto world is intersecting with the traditional finance world. And that means we need trusted systems and remedies in place. So our longer-term vision is to help support the Hong Kong community be part of that global network.
Walter Jennings: Well, and it's well time because this morning, Paul Chan, the Financial Secretary announced consultation just study better the retail adoption of crypto here in Hong Kong as part of its tilt towards a full on crypto economy. So I imagine you'll see more crypto trades, perhaps more mischievous characters, looking at their near do well, ways. So I imagine this is a preemptory to help prepare the environment to be a little better, ready?
Henry Chambers: Yeah, well, I mean, listen, you need to have the entire ecosystem there. You need to be able to as well as have a place for growth, a place for innovation. You also need to have the other side of the coin where, myself and Calvin fit right, the undertaker's, the ones who deal with it when it doesn't go quite the way you expected. And so we absolutely agree with him. We think this is a fundamental part of Hong Kong continued to face towards that virtual asset hub.
Walter Jennings: You know, along with regulation comes litigation and or precedent, court cases, how are we doing in Hong Kong with the legal framework developments with regards to digital assets?
Calvin Koo: I think one of Hong Kong's advantages is the fact that we have a common law system, which is proven to be flexible in regards to the development of cryptocurrencies, how do we recognise them? As far as property? Is it property and there was also an announcement today from the government about looking into how to define property almost from a statutory or legislative way. Right. So under the law, the combination of setting case precedents, and also having useful statutes or legislation helps define the existence of these assets, which are, of course novel, and then we can derive solutions from that.
Walter Jennings: And have you seen any kind of new tricks or evolutions in the attempts of fraud and corruption with the new technologies? Henry, it's been a year since you and I last met? What were some of the more surprising headlines from the last year?
Henry Chambers: If we look back through the year, I mean, one of the themes I think, actually is Chainalysis, one of the blockchain forensic tool providers, we've actually seen hacking, whilst that's not quite fraud, we've seen hacking as a big kind of nefarious activity that's happening. At the moment, lots of these DeFi protocols, these bridges have been exploited.
So that's certainly been one, where an area where we've seen an increase in this type of behaviour. I think that's for a couple of reasons. I think, you know, firstly, the effort to extract value from individual, it takes some amount of time, but the payload is smaller. If you exploit a bridge, you might well access hundreds of millions of dollars. So we've seen a lot of that over this last year. We've seen also other issues where people we've not necessarily seen exploits or hacks. We have seen quite aggressive strategies used with certain DeFi protocols.
Walter Jennings: Yeah, I think they've called last month, Hacktober. Which is fitting in nicely to Movember for those gentlemen concerned about male health grow a moustache during the month of November. And Calvin, what innovations in fraud and crime have you seen in the last years?
Calvin Koo: A part of it is sort of technology based, right. So we have bad actors that are using different features of the blockchain, whether it's mixers or tumblers, or other things that might obfuscate the trail.
And then we have software companies developing tools that are used to try and pierce through that. And we've seen sovereign governments including the US work with those companies to try and follow the trail and defeat those obfuscation techniques. And those are then being adopted by the Civil Asset Recovery community as well.
Walter Jennings: Everyone's talking about the metaverse, and I'm very excited to go in and what kind of crime is occurring in the metaverse? What can we look forward to there?
Henry Chambers: Yeah, actually, it's a really interesting topic. And I think very much a future gazing topic at the moment. I would say we've not seen this come across our desks yet, but I think it's only going to be a matter of time until we do. Now, the kinds of things I can envisage the kinds of disputes we're going to be seeing, going to be somewhat analogous to what we see in this world that we exist, tangibly.
We're gonna see disputes, I think we're gonna see asset disputes and posing a particular thought experiment, imagine you've just bought your new house in the metaverse, you've done it all up, very nice. You put some nice furniture, you know, done the roof or lovely. And then someone comes in, they buys a piece by piece of land next to you, and the installer, rubbish dump right next to you, you know, how are you going to feel about that? Is that going to cause some kind of dispute between you two parties? Well, we need lawyers to come and step in to mediate that dispute.
Because quite frankly, that rubbish don't that's now next to your house might have devalued what will be real money that you've paid for your for your asset there? So that's one one thing, I think we're going to see lots of IP related issues that come in there. Gambling is going to come up as a concept with the loot boxes that the laws are associated with that are going to come up. And so there are a couple of things that have future gazing from my mind, Calvin, I don't ..
Calvin Koo: I agree. And I absolutely think it's a sort of future issue. But there's sort of the near term and the long term, right. And so in the near term, a lot of those issues might be addressed by coming back into, for lack of a better word, the real world if you like, right, especially if the metaverse that we're talking about happens to be a centralised Metaverse, right.
So there is a company or some entity that you might look to to resolve the issue or even try and go against that company. But in the longer term, if sort of the philosophy or the idea behind the metaverse holds, and it's completely decentralised. It's a very interesting and fascinating question. How will disputes be resolved there? Is it just going to be resolved completely by way of smart contracts, and there are people and organisations looking to develop and they've have released things where there's basically an arbitration based entirely on the smart contract. So it'll be interesting to see, you know, how things develop in the world of dispute resolution.
Walter Jennings: Okay, Henry, I want to go back to my house in the metaverse and I want to go back to my house where you built a rubbish dump next to it. Am I going to be entering arbitration in the metaverse with you over this rubbish dump you put next to my land?
Henry Chambers: I think it's entirely conceivable, right? What are your remedies against me in the metaverse without some kind of dispute resolution function without mediation, arbitration or litigation? So absolutely, I think if you're upset with me that I built a rubbish dump next to you, you're gonna have to come and sue me in the metaverse.
Walter Jennings: Well, I think whoever made Mark Zuckerberg avatar might have a case. Now, we all thought Nakamoto, this protocol was supposed to solve trust issues. Is this not working? Or is this just a human problem? The protocols work or they don't work, or it's humans?
Calvin Koo: Yeah. I mean, just to go back to that one of the original themes of this is that the transparency aspect of it, absolutely does work. You know, just as a quick anecdote on the sort of recovery aspect, if I'm working in traditional finance, and trying to track down fraud, I feel like I'm always six months behind the bad actor, because I have to go to the core and then go to the banks with an order to try and get bank statements to try and figure out where the money went. In the blockchain and distributed ledger technology universe, I can find that out within seconds. Right. So from that aspect, it totally works. The transparency works.
Henry Chambers: I think, if we think about what we meant by trust, what is trust? We're talking about trust in the system? Is your wallet your wallet, do you have the funds in it? Are there your funds? And are you the only person that can move them? And that remains the same? The trust issue remains about who's using the technology for what purpose? And I don't think he was there to solve that particular thing. Because there is always going to be bad actors, no matter where you sit in there, kind of the world of finance and assets in cash.
Walter Jennings: Okay, well, I just want to do a quick round robin of interesting cases or things that you've been paying attention to lately. Calvin, what's the most interesting fraud case you've been working on? Or you are aware of recently?
Calvin Koo: Well, you know, in some cases, that it's a close partnership, right, some individuals that have started a promising startup and then like, again, in the traditional finance world, the partnership ends up coming across disagreements. All right.
But now some of the assets that the partnership hold are crypto assets and cryptocurrency so how do you resolve that? Where are the cryptos stored, isn't stored on a cold wallet who has access to that cold wallet. So again, it's sort of traditional disputes, but then having to apply the fresh fact pattern of a novel technology.
Walter Jennings: Understood. And yourself Henry any cases ripped from the headlines that really attracted your attention?
Henry Chambers: Well, more from my own desk and what I've seen more and more of what we call sharp dupin frauds or pig butchering frauds. And it goes back to what hit by the pig butchering pig.
Walter Jennings: That's new
Henry Chambers: So is there the historically associated with traditional finance, whereby you were approached by someone online, your relationship is cultivated, and it's got nothing to do with cryptocurrency at that point. And then slowly, the idea of cryptocurrency investment is introduced. Now, at that point, you've, you end up transferring huge amounts of money to the individual, and they disappear without ever being seen again.
Now, the reason they call it pig butchering, is because you have to invest in fattening the pig. Once you fatten the pig guy, you built that relationship, that's when they cut off the head, and kind of feed the family as it were. And we've seen a number of these in recent times, and quite where they stem from as well. There's quite organised groups, it's organised crime, and it's almost run like a company, everyone has their own delineated positions. And the way how sophisticated it is, is really quite something to behold.
Walter Jennings: So that West African Prince that's looking to park money is not perhaps really be trusting.
Calvin Koo: Actually, it's a really good point. Because when you see what these bad actors are doing, it's not the email with the typos, and that you would think some people at red flags are going off. These are highly sophisticated operations, targeting sophisticated individuals, people that have worked in, for example, the investment community for decades, and they sort of trust themselves to be able to spot these issues out.
But then you go on to the website, they use legitimate centralised institutions to conduct their business, and all the things seem good and legit. So to Henry's point, very sophisticated operations.
Walter Jennings: Okay, well, look, I've heard now about CFAAR, the Crypto Fraud and Asset Recovery Network. I want to sign up, what do I do?
Henry Chambers: Excellent. So we have a LinkedIn group with over 2000 members. It's all you just go and go on to LinkedIn. Hashtag CFAAR. You can join us there. There is also a website, which is www.cfar.com. We'll have to double check that, but I think that's right.
Walter Jennings: Maybe at . org. You never know.
Henry Chambers: And we just want people to be part of the conversation. This works when everybody has a stake in it. It's not just for me and Calvin to sit here and tell you how it's meant to be done. We want people from across the entire spectrum of the cryptocurrency world to join in that conversation about how we deal with crypto fraud.
Walter Jennings: Okay, and I guess if just going back to the corporation, we do have some digital assets and I'm beginning to suspect something might not be going on right. Who do I call first? Do I call Alvarez and Marsal? Do I call my lawyer? Do I call the police? Who's you're gonna call?
Henry Chambers: I'd say first off, call your lawyer, right? Call the lawyer and that they're the best place to get advice, right? If you need the asset recovery analytics, the blockchain, you know, review. That's when we come in, but most of I think when you have a problem like that, call Calvin. He will then assist you with whatever the next steps are probably going to report it the police, he might well get involved experts like myself. That's where I'd go with that.
Calvin Koo: Thanks, Henry. Thanks for that shout out. I think that's right, contact your lawyer. Sometimes the issues require sort of a quarterbacking role to try and figure out what the holistic issues are where the most appropriate jurisdiction or jurisdictions to pursue this issue are. And then we engage Henry or the relevant local police to move forward. So you want to have a focused plan in terms of resolving the issue.
Walter Jennings: Very good. Well, and I'm sure there are assets and information available on the CFAAR website that will help you if you're got any questions. Now, gentlemen, we want to know your music tastes. We have a regular feature we called tracks in the Finoverse. And if you're going to take music with you to navigate your way through the metaverse, what's the song that would be playing in your background? Let's start with Henry Chambers of Alvarez & Marsal.
Henry Chambers: I'd be taking Pompeii by Bastille
Walter Jennings: Okay, well, we're gonna play that now. And let's see how that sounds. Calvin, what song would you take in the metaverse?
Calvin Koo: Oasis, Slide Away
Walter Jennings: Oasis, Slide Away. Those are very good choices. Gentlemen, we look forward to avoiding disputes, to learning more about CFAAR. And thank you, Henry Chambers of Alvarez & Marsal, Calvin Koo of Kobre & Kim, for joining us today on Waves in the Finoverse.
Calvin Koo: Thank you very much.
Henry Chambers: Thank you
