Three individuals have been arrested for trying to defraud the taxman, in a case mired with non-fungible tokens (NFTs), a string of fake identities and £1.4million in tax avoidance; the first case of its kind in the UK.
Three individuals have recently been arrested for trying to defraud HM Revenue and Customs (HMRC) for £1.4million. The trio exploited a tangled web of fake companies, around 250 in total, to con HMRC in a case of value-added tax (VAT) repayment fraud.
Upon their arrest, a total of three NFTs were seized, alongside £5,000-worth of other crypto assets. Although the value of the NFTs has not been disclosed in their announcement, the capturing of NFTs, in this case, is a first for UK authorities involving the digital asset.
Although HMRC has not taken full control of the blockchain-stored NFTs, it has completed a court order to ensure that the digital artworks can’t be sold on.
The troubled trio allegedly used a complex process known in the industry as ‘wash trading’ to artificially inflate the price of the NFTs. Wash trading describes the process of trading between accounts owned by the same seller to purposely misrepresent its true value and liquidity.
The owner of the NFT essentially sells the digital asset to themselves, thus creating falsely legitimate sales records on the blockchain, and in turn, increasing its value and integrity.
It is through this dubious practice that the suspects – who have not been officially identified – were able to pull in vast amounts of value.
“This demonstrates that criminals are bringing tried and tested fraud techniques to the NFT space – which is marked by gaps in regulatory oversight that criminals are eager to exploit,” explains David Carlisle, the Head of Policy and Regulatory Affairs at Elliptic, a provider of cryptocurrency forensics and compliance solutions.
“However, this case demonstrates yet again that criminals can’t hide in the world of crypto. Enforcement agencies are able to track and trace criminals’ transactions, and seize NFTs and cryptoassets used in illicit activity, robbing criminals of their profits.”
NFTs and their mystifying nature emerged on the tech scene back in 2014, and have been utilised to certify ownership over virtual or physical assets. Although its counterpart, Bitcoin and the wider cryptocurrency field, has seen its fair share of fraudulent use cases, an announcement of this kind by HMRC is really a first of its kind for this very niche industry.
“The UK is demonstrating increased sophistication in its ability to seize cryptoassets,” continues Carlisle. “This is a major win for HMRC and shows that the agency is adapting rapidly and effectively to evolving criminal techniques in this space.”
How To Make Sure This Doesn’t Happen to You
The entry of avant-garde technologies opens the door to unfamiliar techniques of attack. It is something the industry witnessed with the introduction of contactless technology, and also within the growing popularity of Buy-Now-Pay-Later (BNPL) payment systems. And now, it appears that the claws of cybercrime have come rapping at the door of NFTs.
As public consciousness around NFTs begins to wake, the gains to be had of an attack are now greater than ever.
“Investors need to always be vigilant, as people are getting pretty smart with the sorts of scams they come up with,” explains Adam Morris, the co-founder of NFT Club. “And with the UK tax authority reporting the first NFT fraud case in the country, British investors need to be aware of how to look out for scams and how to avoid falling for them.
“Scammers look for individuals who are interested in NFTs or new to the market. They usually join Discord servers and mass-message their members, DM people on Twitter, Telegram, Reddit, or make connections on apps like Bumble Bizz.”
As Morris explains, an offer that looks too good to be true marks a major red flag for anyone who’s looking to put their money towards the digital asset, especially if doing so for the first time: “When approaching potential investors, scammers will try to make their scam sound like the best available marketing opportunity. People who have been investing in NFTs for a while will know how to ignore these messages, however, many of the newcomers are more likely to not recognise these types of scams.
“Among the techniques used by scammers to trick buyers is the one of making copy collections in the attempt of confusing investors into buying the wrong asset. ‘Phishing’ is also quite common: this involves fake portals asking for user login details and credit card information, like, for example, in the MetaMask phishing scam.
“The best way to verify the authenticity of the site you’re on is to use websites like ScamAdviser and Trend Micro Check. In addition, always make sure to check if the contact address of the NFT matches the one that appears on the website where the NFT is listed.
“When looking into investing in NFTs, remember to never send your assets to anyone directly and to use a marketplace instead. In addition, you should use a hardware wallet, not a web-wallet, in order to avoid all risks – if your browser is compromised, a skilled hacker could easily gain access to your assets and take them.
“When browsing for the top collections on websites like OpenSea, you should look for the blue ‘verified’ check to be sure that the item selected is a true NFT with value. Most importantly, never share your credit card information and always make sure you’re on a legitimate website.”