Syed Rahman and Ulrich Schmidt explain the reasons why the US and UK are conducting a joint operation against Chen Zhi.
The US government has seized approximately $15 billion in Bitcoin and charged a businessman with running a gargantuan forced labour cryptocurrency scam.
UK and Cambodian national Chen Zhi has been charged in New York with involvement in a wire fraud and money laundering conspiracy. The founder of the Cambodian business giant, the Prince Group, has also had his businesses sanctioned as part of the joint US-UK operation.
US prosecutors have said the action against Chen Zhi is one of the biggest such operations in history and the largest-ever seizure of Bitcoin. If convicted, he faces a maximum penalty of 40 years in jail.
Chen Zhi, who is yet to be detained by the authorities, is accused of being the person running a cyber fraud empire operating under the Prince Group. The Prince Group promotes itself as a company providing property development, financial and consumer services. But the US Department of Justice (DOJ) says the Group runs one of Asia's largest transnational criminal organisations.
Compounds
According to the DOJ, the Prince Group has built and operated at least ten prison-style scam compounds in Cambodia. From these, trafficked workers were forced to contact potential fraud victims online and convince them to transfer cryptocurrency by making false promises that the assets would be invested to generate profits. Many of those working in the compounds were foreign nationals lured by the promise of a legitimate job but then forced to work on the fraud schemes after being threatened with torture.
Chen Zhi’s accomplices allegedly procured millions of mobile phone numbers and set up "phone farms" to carry out call centre frauds. Two of these phone farms contained 1,250 mobile phones that controlled around 76,000 social media accounts that were being used to carry out fraud. Prosecutors have said that Prince Group documents included tips on how those being made to carry out the frauds should gain the confidence of victims.
The DOJ has alleged that Chen Zhi and his accomplices used the proceeds of their crimes for luxury travel, entertainment and expensive purchases such as watches, private jets and rare artwork; including a Picasso painting. In Britain, they are accused of incorporating businesses in the British Virgin Islands and investing in UK property. The UK government has said it has frozen assets owned by Chen Zhi’s network, including 19 properties in London; one of which is an office building on Fenchurch Street in the City of London, worth almost £100 million.
This case has been made public just weeks after reports of another multinational operation involving massive fraud and a huge seizure of Bitcoin. In that case, Zhimin Qian has now admitted her role in a scheme that defrauded 128,000 Chinese investors and she will be sentenced in the UK in November. The £5.5 billion Bitcoin hoard that she amassed with her criminal proceeds looks set to be the subject of a dispute. There are likely to be arguments over ownership of the Bitcoin between UK authorities who seized it as part of their investigation and China, where the defrauded investors are saying the assets should be given to them. The situation is complicated because the Bitcoin has more than tripled in value since Zhimin Qian bought it with the money she had taken from her victims.
Largest
The Chen Zhi criminal operation is one of the largest investment frauds in history, if not the largest. It is unique due to a number of factors, not least the organisation involved and its scale. The Prince Group operated as a global conglomerate, forcing thousands of trafficked workers into carrying out its schemes, with the assistance of local networks all over the globe.
Criminals and bad actors such as Chen Zhi are attracted to crypto as it can be transferred easily across the world in an instant. Compared to physical cash or other products that are often favoured (such as gift cards), crypto weighs nothing ($15 billion would weigh approximately 150 tons!) and the pseudonymous nature of it can provide enough protection for criminals not wishing to disclose their identity.
In such situations, interaction between nations (in this case the US and UK) can be vital in ensuring criminals do not have access to the global financial system. As the Prince Group operated a scam that directly involved fraudulently inducing investors into transferring cryptocurrencies, it may be easier to return the funds in this case than in the case of Zhimin Qian.
However, the international nature and sheer scale of the Prince Group operation may complicate matters. The US has already launched civil forfeiture proceedings against the Bitcoin that was confiscated. It also remains to be seen whether the US will attempt to retain any of the Bitcoin for its Strategic Bitcoin Reserve. And it is worth pointing out that the US authorities announced in April this year that the last of the funds of the Bernie Madoff scam had been paid to victims, more than 16 years after Madoff pleaded guilty.
The UK will have an easier job than the US, as the properties owned by Chen Zhi and the Prince Group have been identified and confiscated. But we are yet to find out how the UK aims to liquidate the properties, and whether the funds will be retained, returned to UK-based victims or transferred to US authorities to distribute to victims worldwide.
