Jurisprudence

How the Federal Government Allowed Coronavirus Scammers to Flourish

I used to prosecute financial fraud. The DOJ didn’t take these scams seriously.

William Barr looks down.
Attorney General William Barr at the White House on Monday. Drew Angerer/Getty Images.

In recent weeks, there have been troubling but predictable reports about a wave of scammers capitalizing on the public’s fear and uncertainty surrounding the coronavirus. These scams are going to get much worse. They will ruin and possibly end the lives of many of the most vulnerable members of our society. And they were preventable: They are the result of a yearslong, systematic failure by the federal government to combat frauds that have been in plain sight and increasing at alarming rates.

Last week, CBS News reported that there has been a “significant spike” in coronavirus scams perpetrated online and in telephone calls. These include “scams in which criminals try to hijack government relief checks, sell fake vaccines and test kits, or pose as charities claiming to help victims.” Last Wednesday, the Federal Trade Commission and Federal Deposit Insurance Corporation issued notices to the public warning them about scams in which people offer to help get them relief checks that are in the works from the government, or in which they pretend to be representatives of federal agencies soliciting sensitive personal information to help them access their financial accounts.

Until recently, I was a federal prosecutor based in D.C. who prosecuted financial fraud, so I know very well how effective these scams can be. As part of my job, I led an effort to prosecute people abroad who perpetrated a crude but highly effective scam—using email and telephone communications—defrauding people by marketing obscure financial instruments known as “binary options.” That effort, largely conducted with the hard work of two excellent FBI agents, resulted last year in the conviction of the CEO of an Israeli-based company that defrauded tens of thousands of people across the world out of about $145 million.

The new coronavirus scams use familiar tactics. These sorts of scams are extremely easy to perpetrate using software that obscures email addresses and phone numbers. They have a low yield (the rate of people who are successfully victimized), but because of the ease with which they can be executed on an enormous scale, they can be very lucrative—and very harmful to the victims, who are often elderly people with less technological facility. In the binary options investigation, I spoke with many victims who lost their entire life savings. One of them was left destitute and died shortly before the trial.

The current wave of coronavirus scams—which is likely to persist, at least as long as the public is unable to get consistent and reliable information about what is happening in the country—is partially the result of the government’s failure to prosecute these sorts of crimes on a mass scale, even as its own data has shown them rising at a startling rate. The Wall Street Journal reported last month that estimated losses “have soared in the past five years from scams known as business-email compromises, in which swindlers con victims into directing money into accounts controlled by criminals.” Just last year, estimated annual losses attributed to that form of fraud reached $1.7 billion.

For its part, the Department of Justice has done little to deal with a crime that has proliferated in plain sight. Attorney General William Barr has pledged to do more to crack down on coronavirus-related scams, but so far these efforts are modest. On Sunday, the Justice Department announced its first enforcement action pertaining to coronavirus fraud, but that action highlights the limitations of the government’s capabilities. The action was a civil case in which the DOJ persuaded a judge in Austin, Texas, to issue an order that shut down a website marketing access to supposed coronavirus vaccines. The department announced that it had brought the case “against operators of a fraudulent website,” but that is only half-true: The complaint identifies the defendant as “John Doe,” which strongly suggests that the DOJ does not yet know who was actually behind the website. It may never figure it out. The attorney general also announced on Friday that he had directed U.S. attorneys across the country to prioritize cases involving coronavirus scams, but there is no indication that they will receive any extra resources to do so. Such a decentralized approach is a recipe for ineffectiveness. On top of the lack of resources, most U.S. attorney’s offices lack significant experience prosecuting complex international fraud schemes.

The federal government has steadily lost interest in these types of crimes. The DOJ’s work prosecuting financial fraud is at its lowest point ever, according to data maintained by Syracuse University.

The historically low volume of work in the area of financial crimes has also been devoted to questionable initiatives. For example, while working at my old office, I contributed to a systematic crackdown on “spoofing” in futures markets—the placement of fake orders to move prices—but the ongoing, programmatic emphasis on this conduct as an enforcement priority cannot be justified based on any reasonable cost-benefit analysis. The DOJ has spent more than $4.5 million alone on outside data analysts working on spoofing cases since 2017—a stunning figure—even though no one has yet to go to prison for the misconduct, the “victims” include algorithmic trading firms, there has been no demonstrable relationship between spoofing and the real economy or the average person, and market losses are small and diffuse.

The anti-spoofing initiative is, however, emblematic of the professional incentives that drive the decisions of many white-collar prosecutors—and those incentives work in the other direction for online and telephone scams. Ambitious prosecutors like to build their public profiles, and one way to do that is to try to prosecute people on Wall Street, even if the prosecutions are of questionable social utility. Those are the sorts of cases that get covered in the press and that you can cite if you then go on to try to get lucrative work at a large law firm defending the people you once prosecuted.

By contrast, crude online and telephone scams are marked by features that drive prosecutors away. They are tedious and can take years to investigate. Much of the evidence—like bank records—may be overseas, and obtaining it is a bureaucratic slog that may never end. Once you have the universe of relevant material, untangling it all requires intense and difficult work by FBI agents. The perpetrators are abroad, so one of the standard routes to building a criminal case—apprehending someone and flipping them—may be unavailable to you. And even if you build a good case, your best-case scenario may be years dealing with extradition matters, while your worst-case scenario is that they turn out to be in non-extradition-friendly countries.  Last month, the FBI released its annual report on “internet-enabled crimes and scams” and reported that 2019 “saw both the highest number of complaints and the highest dollar losses reported” since it started tracking the data in May 2000—receiving an average of nearly 1,300 complaints a day with “more than $3.5 billion” in reported losses to individuals and businesses.

We are not doing nearly enough to combat these scams, and the coronavirus fraudsters will bring that into stark relief. The Department of Justice urgently needs to prioritize its resources toward aggressively pursuing these schemes across the globe, and it needs to be backed by a large investment of financial and human capital and with the coordination of international law enforcement partners. The work will be long and difficult, but the government is way behind, and the most vulnerable members of our society are paying the price.