EXCLUSIVE: Phone fraudsters exploit 'regulatory vacuum' surrounding so-called Bitcoin ATMs

There are new calls on the Federal government to close off a loophole that fraud investigators say is increasingly being used to rip off unsuspecting people through telephone extortion scams.

Police have been dealing with this type of fraud for years:

Culprits will call someone claiming to be with law enforcement, or an agent with the Canada Revenue Agency.

The target is often someone elderly, or otherwise easily confused.  Other times, the con artist is simply able to bully and berate them into submission.

The caller tells their target a story about a loved one in trouble and claims that the only fix is for the victim to take all of the cash they can get and load it onto a gift card, or pre-paid credit card.

The con is complete when the target dispatches the funds to the fraudster's account, often one that is based outside the country.

Authorities say this crime is evolving thanks to a relatively new technology and that a legal grey area helps the culprits cover their tracks.

The loophole exists within the networks that feed so-called 'Bitcoin ATMs,' which deal in virtual currency.

These kiosks are connected to the Internet and let users deposit cash in exchange for receipts for crypto-currencies, like Bitcoin.

While the machines typically look like the ATMs you might find at a concert venue or a corner store, they do not have links to bank accounts but rather are patched into markets called Bitcoin exchanges.

Within this system, users have the option to convert their conventional money into crypto-currency, or move it back to a regular bank account.

The trouble, according to Const. Fady Yacoub of the Peel Regional Police Fraud Bureau, is that these so-called ATMs do not fall under the same strict disclosure and reporting rules that govern Canada's banks and third-party operators.

"It is very difficult to lay charges, either because of the anonymity or because the suspects are operating outside of the country," Yacoub says.

He adds in those cases, it also makes it nearly impossible for the victims to get their money back, as there's no one under Canada's jurisdiction that they can seek redress from.

"The Bitcoin ATMs are operating in a regulatory vacuum right now," Yacoub says.

He says that while there are legitimate uses for these machines, the best bet for consumers to protect themselves is through awareness.

NEWSTALK 1010 listener Paul Pabla and his family could play a major role in shining a light on this murky area of Canada's finance sector.

They're locked in a courtroom fight to recover more than $10,000 of his parents' savings.

Its cash that could have been lost forever, after one morning last December, Pabla's 72-year old mother allegedly took a phone call.

It was from someone claiming that her son was under arrest and that she was to drop everything, gather all the cash she could, and deposit it in a Bitcoin ATM located at a Hasty Market convenience store near Highway 7 and Highway 50, in Brampton.

According to Pabla, a taxi was dispatched to take his mother to the kiosk to deposit the several thousand dollars she gathered in her condo.

Then, another cab was sent to take her to a bank to withdraw the rest of her savings, then back to the convenience store kiosk where she proceeded, bill-by-bill, to deposit the money into the fraudster's Bitcoin 'wallet.'

By that time, the Pablas had called the police and officers were able to trace his mother's movements as her calls registered on nearby cell phone towers.

Officers intercepted her before she got into another taxi.

"We're calling it a fraud ... but this was an abduction," Pabla says.

"My mother was threatened on the call and told not to call anyone, not even get off the phone," he says.

Their savings gone and their sense of security threatened, Pabla says his parents sold their condo and moved in with his family.

That's where he believes they'll stay.

What makes Pabla's ongoing court case possibly precedent-setting in Canada is what investigators did next.

Officers with the Fraud Bureau got a warrant to crack open the kiosk and seize the cash that Pabla's mother had deposited.

Its being held by the authorities until the courts decide whether the money rightfully belongs to Pabla's parents, or LocalCoin; the GTA-based company that operates the Bitcoin ATM.

"They've taken no steps to prevent (cases like this)," Pabla says of the company.

"They have a responsibility to stop it or own up to the fraud and compensate the people who are victims."

LocalCoin contends in its court submissions that users of its kiosks are preemptively warned to give their transactions a second thought before following through with them.

A screen that outlines terms and conditions of use tells a client that they are "highly likely the victim of a scam" if they are about to send money to organizations like Ebay, Kijiji, or the CRA.

The company argues it should not be on the hook for the allegedly fraudulent transaction.

LocalCoin declined an interview request from NEWSTALK 1010 but lawyers representing the company passed along a written statement that says the company is "actively working with our business partners, law enforcement and other agencies to investigate this industry-wide issue."

"Trust and safety are our top priorities, and we will continue to ensure our customers receive industry leading security practices."

Pabla says he finds the response from LocalCoin to be "disingenuous."

"They know what parameters they fall under and they know that frauds are being conducted," he says.

"Everyone's looking the other way."

Const. Yacoub points out that conventional ATMs in Canada fall under the country's Money Laundering and Terrorist Financing Act, which requires operators to maintain records, report suspicious transactions, and make reasonable efforts to know who is taking part in the transactions that they facilitate.

"None of that applies to Bitcoin ATMs," Yacoub says.

Yacoub's experience is that criminals have seized on that knowledge and over the past few months, have been increasing their returns on the people in Peel Region who they take advantage of.

"By the end of the year," he says, "it'll probably run into the hundreds of thousands of dollars."

Federal Finance officials declined NEWSTALK 1010's request for an interview but did provide a written statement.

It says the government published earlier this month proposed new regulations that would impose anti-money laundering and anti-terrorist financing rules on businesses dealing in virtual currencies, essentially compelling them to follow the same laws as other 'money services businesses.'

"These amendments will serve to mitigate the money laundering and terrorist activity financing vulnerabilities of virtual currency in a way that is consistent with the existing legal framework, while not unduly hindering innovation," the statement says.

The government points out that provinces like Quebec have already taken steps to regulate 'money services' that deal with crypto-currencies, but it stops short of saying how long it might take for the Federal government to pass legislation of its own.

Pabla says the move to new rules is a step in the right direction, but admits its frustrating that the law hasn't yet caught up to common sense.

"It isn't like terrorists or anyone else will wait until Finance Canada improves the law," he argues.

"Money is being funnelled in and out of the country without anyone paying any attention."

Last year, fraud investigators in York Region said 40 victims in that community had lost roughly $300,000 to scams that employ Bitcoin ATMs.

The police do not make arrests for overdue taxes, nor are officers deployed in any way to collect taxes.