The latest figures from the US FBI IC3 show that scams are on the rise, with an estimated $16.6B in losses in 2024. Cryptocurrency fraud accounts for $9.3B of the total. The most egregious form of crypto fraud is termed “pig butchering”, where fraudsters “fatten” up victims with increasing confidence such that they are willing to put all their assets into the scammers’ accounts.
Pig butchering often starts with seemingly innocuous SMS texts or messages in social network apps, purporting to be accidental contacts or acquaintances. Scammers do this in the hope that the message recipient will kindly reply, and from there the scammers will try to build a friendly online relationship. They may ask the intended victim to start messaging on other platforms, such as WhatsApp or Telegram. Over time, the scammer will build confidence in their intended victims. At some point, the scammer will casually mention a wildly successful investment opportunity, and encourage their new friend to try it. Usually it’s a small amount of money suggested at first. The victim is sent to a (fake) investment site that looks legitimate and modern, like a real crypto exchange. Some even have multifactor authentication (MFA).
After the victim transfers some money, the fraudster will show that their accounts have had impressive gains. This, of course, incentivizes the victim to put more money in. Once the victim has gone “all-in”, then the scammer walks away with everything. Unfortunately, many individuals have lost substantial amounts of money – even millions. Some have been coerced into selling houses and property, taking money from retirement accounts, and even borrowing money to put into these schemes. Moreover, many of the operators involved in these scams are themselves victims of human trafficking. Late night show host John Oliver did an enlightening video on this last year.
In January 2024, the US FBI started Operation Level Up to help identify scams in action and to alert victims. They report they have saved potential victims upwards of $285M so far. However, the numbers reported by the FBI are likely lower, since many victims do not come forward or may understate their losses. Other government agencies, included state agencies in the US, have some means to help. The California Department of Financial Protection & Innovation has an active crypto scam tracker.
Fraud Reduction Intelligence Platforms (FRIPs) are specialized security services designed to detect, analyze, and mitigate online fraud across various industries, particularly in high-risk environments such as finance, insurance, retail, healthcare, and telecommunications. These platforms integrate advanced data analytics and machine learning to assess the legitimacy of digital identities and transactions in real time. FRIP components include JavaScript and/or SDKs for client telemetry, and backend evaluation services accessed via APIs. The six main functional areas of FRIP are identity verification (IDV), compromised credentials intelligence, device intelligence, user behavioral analysis (UBA), behavioral biometrics, and bot detection.
At KuppingerCole, we are currently updating our research on FRIP solutions. In this cycle, we will publish two different Leadership Compass reports on FRIP: one for finance and one for eCommerce/merchants.
During the course of this research cycle, we’ve been pleased to learn that several of these commercial solutions have built advanced functionality to help their customers (banks, FinTechs, and other financial institutions) detect signs that their consumers are in the process of being scammed and provide facilities to alert them during the scams. To detect scams in progress, these solutions leverage their UBA over past and current transactions, examining locations, payees, amounts, and more. Behavioral biometrics telemetry can be analyzed for signs that a user is being manipulated; for example, when they hesitate in entering payment details. Some SDKs allow for active call in progress detection, which can be another sign of coercion.
The most sophisticated FRIP solutions can intervene during suspected scams ops and ask questions of the user such as: “What is the purpose of the transaction?”, “How did you meet the person?”, “How long have you known them?”, “Did they communicate by WhatsApp or Telegram?”, “Did they ask you to visit a website or download an app?”, or “Were you given a wallet ID into which to transfer funds?”. When suspicious answers are given in return, these FRIP solutions help shut down crypto/investment, romance, and even pig butchering scams.
According to the Financial Times, regulators in the EU are considering placing more responsibility on banks, card issuers, FinTechs, and other financial institutions such that scammed victims could get immediate reimbursement when scams are detected. This would make the adoption of leading-edge scam detecting FRIP solutions an imperative in the EU. Moreover, the FT article states that the Irish Finance Ministry has proposed an amendment that would require social media sites to assess the legitimacy of ads before posting.
Thus, individuals have to keep a wary eye on all unexpected contacts and be on the lookout for scammers. Banks and other institutions in the finance industry should use whatever technical means necessary to protect their customers from these ever-evolving scams as well. It is in the best interest of the finance industry to prepare for changes in regulations that may shift responsibility to their institutions.
In the weeks ahead, KuppingerCole will release these comparative reports on Fraud Reduction Intelligence Platforms. We encourage you to look for them and contact us with any questions.
