How the IRS Investigates and Combats Metaverse Fraud  

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IRS Criminal Investigation Chief Guy Ficco, CFE, described the metaverse as “ripe for criminal activity” in his session at the 35th Annual ACFE Global Fraud Conference. He explained that criminals exploit the anonymity, pseudonymous transactions and lack of regulation intrinsic in the metaverse’s makeup to engage in theft, investment fraud, tax evasion, money laundering and other schemes.  

“The metaverse is new, and the government takes a long time … to police and come up with regulations,” he explained. “The amount of people out there looking to prey on vulnerable people is sick and scary.” 

IRS Criminal Investigation Special Agent Marco Dias joined Ficco and presented a non-fungible token (NFT) rug pull scheme case study. 

A Haven for Crime 

Defined as an interconnected, immersive virtual universe, the metaverse is a haven for those who want to avoid paying taxes on income generated from virtual property, digital currencies and virtual goods trading. Ficco characterized the metaverse as blurring “the line between virtual and physical worlds.” Transactions in the metaverse take many forms, including virtual asset purchases, NFTs, gaming and gambling, virtual collectible trading, and virtual crowdfunding. 

“Online gambling platforms have opened all over the world. We’ve [the IRS] been involved in international and domestic investigations. It has a significant footprint and is going to get bigger in the future,” he advised.  

Tracking down criminals in the metaverse is no easy feat. The IRS uses these tactics to target those who enable fraud in the metaverse:  

  • Special investigative techniques. 

  • Data analysis. 

  • Web scraping. 

  • Human sources of information. 

  • Whistleblower programs. 

A Case Study in Metaverse Fraud

Dias began his real-world example of crime in the metaverse by defining an NFT as “a digital asset broadcast on the blockchain,” adding that “anything you can think of can be digitized and placed on the blockchain.”  

During the coronavirus pandemic, specifically in 2021, Dias recalled the growing hype and popularity surrounding NFTs, which were “so highly sought after.”  

In early 2022, the IRS received a tip about an NFT rug pull (a type of exit scam that involves a team raising money from investors and the public by selling a token only to quietly shut down the project or suddenly disappear, stealing the raised funds and leaving victims with worthless tokens). The million-dollar scheme, advertised as “Frosties,” defrauded NFT purchasers. According to Dias, after selling 8,888 NFTs for more than $1 million, the developers shut down the Frosties website and social media account. The fraudsters moved Frosties onto the blockchain and pocketed the money. 

“We identified the criminals and arrested them two months after we started the investigation. All the resources we had in the agency to get to that point were helpful,” Dias said.  

Dias summed up the COVID-era fraud schemes running rampant in the metaverse.  

“Criminals are opportunists. They’ll take the opportunity to promote something they know will attract the eye of investors and then not deliver on it. From 2021 to 2022, that was the scene: Create these NFTs, promote them on the metaverse and then never deliver,” Dias recalled. 

Fighting Metaverse Fraud 

To combat fraud in the metaverse, Ficco said the IRS uses automated tools to comb through vast quantities of data, to identify potential anomalies that may indicate fraud and to focus on areas for enforcement.  

To be effective in the metaverse, investigative strategies must be adapted, Ficco emphasized. He said the IRS has begun partnering with leading financial technology companies, blockchain analytics firms, academia and international law enforcement agencies.  

When dealing with crime in the metaverse, legal roadblocks stand in the way. Ficco pointed out that many legal frameworks aren’t built for virtual environments. Although theft, investment scams, tax evasion and money laundering in the metaverse run parallel to real-world crimes, Ficco stressed the need for ongoing communication between the Department of Justice and criminal investigators. The Metaverse, Web3 and artificial intelligence (AI) continue to challenge legal aspects of real versus AI-generated material. 

With the future in mind, Ficco encouraged organizations to prioritize metaverse training, expand personnel and programs to leverage automated tools, and focus more on partnerships.