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They Lost Millions To Crypto Scammers. This Prosecutor Is Helping Them Get It Back.

Forbes 1/17/2023 Cyrus Farivar, Forbes Staff

A deputy district attorney in California has emerged as one of the country’s experts in successfully recouping money swindled by crypto criminals.

On a chilly Tuesday in December, a man who'd lost over $1 million to a cryptocurrency-fueled scam broke down in tears in front of a Santa Clara County Superior Court judge. Between sobs, he described his "living nightmare."

In 2021, he'd gotten a text out of the blue from a woman who ultimately sweet-talked him into spending ever-increasing amounts of money on cryptocurrency, telling him his purported investments would mean he never had to worry about money again. The man, who Forbes has previously identified as Cy, was in an emotionally vulnerable place at the time: His father was on his deathbed, and he felt an intense amount of pressure to care for his family.

“This money was supposed to be for my child’s education — I did my share of due diligence,” Cy haltingly told the judge.

Then, the scammer disappeared with his money, more than $1 million — the bulk of his life savings plus more in borrowed money. Cy was so despondent he almost took his own life. “Every day, my heart feels so heavy, my heart will palpitate for no reason," he said in his testimony. "My stress becomes anger and it’s been a nightmare.”

He was pleading before the judge for the chance to recover a fraction of these funds, with the help of Erin West, a deputy district attorney in Santa Clara County. The veteran prosecutor was present to formally ask for the judge’s approval to release previously government-seized cryptocurrency belonging to two different Bay Area scam victims, including Cy — a rarity for those hit by a scam largely perpetrated by overseas criminal gangs.

Photo by GABRIELA HASBUN FOR FORBES © Provided by Forbes Photo by GABRIELA HASBUN FOR FORBES

Santa Clara County Superior Court Judge Deborah Ryan approved West’s motion, without hesitation, releasing the equivalent of $113,000 in USDT (a stablecoin pegged to the U.S. dollar called Tether) to Cy. For the 52-year-old lifetime Bay Area resident, that figure represents just over 10 percent of his losses. She also released $170,000 in USDT to another victim who Forbes has previously identified as ASR — a software engineer for a major Silicon Valley company — recovering half of his losses. On January 13, Judge Ryan also approved another motion from West to return $39,000 to a San Jose woman who lost a total of $180,000 via a pig butchering scheme. To date, West and her team have seized over $2 million across 19 victims, and have already returned $1.15 million to 10 of those victims.

Even as federal agencies like the FBI and DOJ ramp up their efforts to catch crypto criminals, West, as a local prosecutor, has been able to do what few members of law enforcement at any level are publicly known to have done – claw back funds that innocent Americans have been swindled out of.

The recovery represents an extremely rare instance of financial fraud victims being able to mitigate their losses. The scam has been dubbed “pig butchering” as it involves overseas scammers who “fatten” up victims – making them believe they have made boatloads of money in cryptocurrency using manipulated apps and websites – before slaughtering them, or absconding with all their money.

CipherBlade, a cryptocurrency investigative analysis firm, estimates that worldwide losses from pig butchering scams are in the “tens of billions” of U.S. dollars in 2021 alone, adding that the presumed losses are “incredibly high.” (The closest type of scam the Federal Trade Commission tracks is romance scams, and losses from these scams reached an all-time high of $547 million in 2021, the most recent year that data is available.)

According to the Global Anti-Scam Organization (GASO), a victims’ advocacy group, most pig butchering criminal gangs are believed to be controlled by Chinese nationals operating in Cambodia, Laos, and Myanmar – generally difficult for American law enforcement to reach.

West’s successes come at a time when, in recent months, local and federal law enforcement across the United States have begun to ramp up efforts to combat pig butchering. In New Jersey, a man was accused by federal prosecutors of “laundering the proceeds of internet-enabled fraud, including pig butchering,” to the tune of $2.5 million in “fraudulent proceeds” from 2019 through 2022. In October 2022, twelve individuals in New York were accused of illegal money transmitting and related laundering in connection to creating the illusion that victims' “investment portfolios would appear to increase.”

“I think it’s a major international issue in that we are draining the economic viability of individual citizens and we are funneling it across the ocean to likely Chinese organized crime — billions and billions of dollars,” she told Forbes.

Federal prosecutors have also seized assets that they say were obtained via this scheme, including a North Carolina woman who sold her house in order to invest the proceeds in what she believed to be a legitimate investment opportunity in cryptocurrency. Meantime, in November 2022, the United States Attorney’s Office for the Eastern District of Virginia obtained a seizure order to target seven domain names that it says are part of a broader pig butchering operation.

However, even at the federal level there have yet to be any high-level convictions, much less arrests of the masterminds of the global criminal enterprises behind these scams. Often, the best that victims can hope for is for federal or local authorities to seize stolen crypto, and get at least some of it back.

Even then, many local law enforcement agencies are unfamiliar with how to investigate crypto-related crimes. Often the first step is teaching cops and prosecutors’ offices how to create a government-controlled wallet, so that when a cryptocurrency exchange is ordered to hand over ill-gotten crypto holdings, investigators have a way to receive it.

While West was only able to recover a fraction of two victims’ losses, she hopes that these wins are the first of many more to come – even though her efforts are a drop in the bucket in comparison to the vast sums that have been lost.

“I think it’s a major international issue in that we are draining the economic viability of individual citizens and we are funneling it across the ocean to likely Chinese organized crime — billions and billions of dollars,” she told Forbes.

Given the transparent nature of the blockchain, where all transactions are public, one might think that uncovering where a pig butchering victim's money has gone would be as simple as following its path on the blockchain. But for a number of reasons, it's extremely rare to recover victims' funds.

Experts say there are multiple factors: First, by the time someone realizes they’ve been scammed it may be too late to help them – the crypto may have been transferred multiple times and ultimately cashed out. Second, even if the victim does report the crime promptly, local law enforcement may not know exactly what to do or how to trace the funds. Third, even if law enforcement can identify where the stolen crypto is located, the exchange that holds it may not comply with American law enforcement.

U.S.-based pig butchering victims are generally told to file a report with their local police and with federal law enforcement’s universal website, IC3.gov. But of the nearly two dozen pig butchering victims that have spoken with Forbes, in nearly all instances, they say that federal law enforcement are often slow to get in touch, if they do at all. Even then, they’re typically informed, there’s often little chance that lost funds can ever be recovered.

But West is trying. Jeff Rosen, the district attorney of Santa Clara County, and West’s boss, sees a connection between her background in prosecuting sexual assault crimes and her desire to advocate for pig butchering victims.

“If that’s how you're thinking about things – people that have had their life savings or their house taken from them through this kind of fraud – you would have the same kind of empathy for them,” he told Forbes.

When Cy reported the scam in late 2021 to his local San Francisco Bay Area police department, he told Forbes that his local cops explained to him that they “lacked the resources” to trace the cryptocurrency. After learning about West’s work through Forbes’ reporting, Cy reached out to West directly on July 1.

After Cy provided his financial statements, correspondence with his scammer and cryptocurrency records showing the transaction IDs and the wallet address, she summoned her team at the REACT Task Force, a Bay Area tech-crime-focused law enforcement alliance founded in 1997. The group uses software commercially available to law enforcement, primarily applications made by blockchain analysis firms including Chainalysis and TRM Labs.

By using cryptocurrency’s public ledger – the blockchain – these tools allow investigators to trace precisely how, where and when the stolen crypto moved from one account to another. They eventually can determine where the stolen cryptocurrency has ended up: on a known commercial exchange, like Binance, or on an unknown address.

If some funds are on Binance, as was the case with Cy, an exchange that will comply with American law enforcement and US court orders, West and her team then will submit a formal “request to freeze.”

With the funds halted, she can then go to a judge and seek a seizure warrant. Then the Santa Clara District Attorney’s Office can hold the crypto in custody, while going through the judicial process of making sure that no one else has a claim on those funds. Once those notification procedures are exhausted, and a judge signs off on the final transfer back to the victim – as happened with Cy in December – all that remains of the recovery process is for West’s office to transfer the crypto to the victim. Cy got his money back in early January 2023, 14 months after he’d lost it.

Federal authorities certainly use similar methods as Santa Clara authorities did in Cy’s case, in order to track stolen crypto, as has been the case in some crypto-fueled ransomware and other related crimes. However, there are few, if any, publicly-known instances where a federal investigation has been able to recover crypto attributed to a pig butchering scam, let alone at the county level, where not many law enforcement agencies have even tried.

“The perfect storm has to be going your way,” West said.

Despite the headwinds, West is trying to teach others how to use her playbook by convening an ever-growing group of law enforcement partners that she’s dubbed the “Crypto Coalition.”

A recent meeting that Forbes was invited to briefly attend had over 200 law enforcement representatives from various locales, including Oklahoma, New York and even Taiwan.

In late January 2023, she will invite that online group to nearby Palo Alto, for a few days’ worth of in-person training sessions and conference-style talks.

“I think there is a real possibility that this momentum continues,” she said.

“Learn a method to assist victims – that’s what’s been missing all along. Santa Clara County has proven that this method works. Teach it, replicate it, and move it across the country.”

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