Fraud Risk Assessment: HashCoins and HashFlare

HashCoins & HashFlare
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  • HashCoins & HashFlare
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  • Last modified: December 10, 2015
  • Legitimacy
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HashCoins (hashcoins.com) was launched in 2013 as a manufacturer of mining equipment in Estonia. Subsidiary HashFlare (hashflare.io) was later added as a cloud mining platform. The company’s legitimacy has been evaluated based on the items listed below. Every individual item has been checked for the presence of obvious red flags or warning signals. If these are present, an explanation detailing what triggered them has been included. A detailed description of the reasons to evaluate each of the included items can be found below the table.

Persuasion
Total Flags: 5 (3 Warnings = 1 Flag)
Phantom Richesthumb-up-iconN/A
Scarcitythumb-up-iconN/A
Source Credibilityflag-iconThe business verification (see verified owner & verified address) triggered a deep dive into HashCoins' early days. It would appear that one of HashCoins' early staff members, Indeborga Kazlauskaite, might have never existed. There exists a facebook page for this person, but it has only ever been used to upload a photo and promote HashCoins once. There is no activity on the profile except for period that marks the early days of HashCoins (January 2014). There are also no other online records regarding this person.

Indeborga was subsequently replaced by Tatjana Bojashova, a similar mystery. There is only one LinkedIn profile with this name, but this profile is not related to HashCoins in any way. Furthermore, Ivar Tamm, another early day member, does not have a single bit of an online footprint either. Tamm is replaced by Vitali Pavlov, the first person added who is real. By this time, it is already November 2014.

Altogether, at least three staff members appear to have been faked for the purpose of adding credibility.
Social Proofflag-iconHashFlare is not completely clean either despite being founded at a later moment. One testimonial belonging to "Rita Burunova" is featuring an image belonging to Margarita Katchura. What's real and what's not isn't easy to determine though. It could be that Katchura is real, but the name was edited to hide the fact that Potapenko and Katchura are linked on Google+.

Having a friend write a testimonial nearly as bad as faking one entirely, as it is nothing but a deceptive trick to get others to invest as well.
Reciprocitythumb-up-iconN/A
Products
Guaranteed Returnthumb-up-iconN/A
High Return / Low Riskthumb-up-iconN/A
Overly Consistent, Positive Returnsthumb-up-iconN/A
External Risk Insurancethumb-up-iconN/A
Hardware Equipment
Public Mining Addressthumb-up-iconHashFlare users can select their mining pool.
Pictures of Mining Equipmentthumb-up-iconYes
Secretive or Complex Equipmentthumb-up-iconHashCoins' main source of revenue is the sale of mining equipment.
Service
Website Availablethumb-up-iconYes
Website Registration Detailsthumb-up-iconThe first website, HashCoins, was registered in December 2013 and will last until at least 2016.
Website Designthumb-up-iconGood
Grammar on Websitethumb-up-iconGood
Payments Optionsthumb-up-iconMultiple
Service Disruptions & Unbusinesslike Conductflag-iconThere are numerous complaints about HashCoins / HashFlare. Potential customers should check out this thread including multiple complaints about failures to deliver on time or at all. Orders are not refunded, and users are offered cloud mining contracts instead (potentially allowing the company to hide that the promised hardware does not exist). The characteristics of a hardware (pre-order) scam are certainly present in this case.
Contact Informationthumb-up-iconThe company lists both its address and a phone number.
Business
Verified Addressflag-iconOne of the first snapshots of HashCoins.com in February 2014 show that the official address used to be:

Teaduspargi 8, Tallinn, 12618, Estonia

A seemingly large location for a small startup. It is also problematic because the address belonged (and still does) to Inspecta Estonia OÜ (10543517) since June 2013, part of a group with 1500 employees in multiple countries.

The registration of HashCoins is updated with its current address in March 2014. The move was announced on the website as well stating: "Our company is really fast growing and our previous offices became too tight for us". Given the size of the location and the fact that it currently houses a large number of employees makes this seem like a poor excuse to correct a mistake. It is likely that when HashCoins was registered, the initial address was an empty one. Inspecta registered the address (on June 3 2013) just 10 days before HashCoins did (on June 13 2013).

In short, the first address was likely a false one. The current address may be valid, but it would imply that the company was set up as a scam.
Verified Ownerflag-iconSergei Potapenko is the registered owner of HashCoins & HashFlare, and has a LinkedIn profile here. What's interesting is that the history looks doctored. After finishing a Bachelor in 2010, no new experience is added until 2013 when Potapenko becomes CEO of HashCoins. This is a three year gap. When looking up Potapenko's personal identification code 38502012230, it is revealed that there is certainly more to add. In 2011 Potapenko founded Siberian Timber Osaühing (12139447), while Burfa Media (12495372) was established in 2013. In both cases, Potapenko is the sole board member.

Let's first examine Siberian Timber. The Wayback Machine takes us to a snapshot in 2012 for siberiantimber.eu which states "SIBERIAN TIMBER ltd has been exporting Siberian softwood timber worldwide since year 2004". It seems something worth mentioning. But there also seems to be something wrong with this company. The official registration date is 2011, hence the extended history from 2004 onward could have been faked for credibility purposes. The contact details are also a bit weird, as the contact details point to:

Paldiski mnt 177-34
Tallinn, 13518, Estonia
Phone/fax: +372 519 42 717

What's weird about this is that this concerns a residential area, while a global exporter of timber is going to need some more space than the average living room. By now, the website is gone and the company is about to be deleted from the Estonian company register. The last update was in April 2015, when the address was changed to:

Tartu mnt 43, Tallinn city, Harju county, 10128

This address is identical to that of HashCoins and HashFlare, which had their address updated around the same date.

Burfa Media is no exception (12495372). Registered in 2013, Burfa Invest Group (as it is called on the website) is active in trade (Timber), real estate and construction. It was initially on the same address as Siberian Timber, and later moved to HashCoins' current address as well. It is even mentioned there is also an office location in London.

When checking the wayback machine, the story just gets more weird. A 2013 snapshot reveals that Burfa was a "full service provider of digital advertising solutions" founded in 2010. Again, this does not match the official registration date. The contact details confirm the company's address is identical to Siberian Timber. Between July and November 2014 Burfa Media becomes Burfa Invest Group. Several featured images under Burfa Trade (part of the new group) can be reverse looked up to originate from Runforest OÜ, a timber manufacturer founded in 2004 unrelated to Mr. Potapenko.

Burfa Media has its official address changed on March 17 2014 to Tartu mnt 43, several days after HashCoins' address is changed to the same location on March 5 2014. An image posted on HashCoins shows the names of companies in the building of the new location. Burfa, despite still being active even today and the website explicitly stating the address as Tartu mnt 43, is not among them (and neither is Siberian Timber).

At the very least, it must be concluded that Sergei Potapenko has a very suspicious history that involves faked data on multiple occasions, whilst actively trying to hide this history. Then there's also the mysterious company Burfa Media, which only seems to exist on paper, that makes it look like Potapenko is running at least one active scam (not to mention its predecessor Siberian Timber).
Business Registrationthumb-up-iconCompany registration numbers can be found under Verified Owner
Independent Auditsexclamation_warningNone

Note that items with a warning instead of a flag indicate that these could occur at a legitimate company. For example, legitimate companies will normally try to persuade you into buying their products. Multiple warnings will, however, still trigger a flag. A description for the listed items is provided below. This list is meant to assist with identifying obvious scams, and therefore does not provide any guarantees that a company is truly legitimate.

Phantom Riches
The most common tactic used by fraudsters is called “phantom riches”. By dangling the prospect of wealth such as “big payoffs”, the scam artist tries to get you to stop thinking logically.

Scarcity
Using the fear of missing out, fraudsters create a false sense of urgency with statements such as “last chance” or “only so few available”. This causes people to agree hastily, before even having the opportunity to think about what they’re doing.

Source Credibility
Persuasion is more likely when the source presents itself as being credible, expert and trustworthy. Common tactics used by scammers to make themselves look legitimate include using fake websites or hacked emails and pretending to be someone they are not. Alternatively, sources can also be external with claims such as “Warren Buffet has already invested in this”.

Social Proof
Fraudsters take advantage of herd behavior by creating the illusion of consensus or social proof that the investment is legitimate with claims that “everybody is already doing it”, or referral programs in which members encourage their friends and associates to invest as well. This automatically triggers something in the head that says: “if everybody [or someone from the inner circle] wants it, it must be good”.

Reciprocity
A business is likely to receive far more of our trust when it provides a lot of free value, because of the rule of reciprocity which causes us to tend to feel obligated to return favors after people do favors for us

Guaranteed Return
All investments carry some degree of risk, so a guaranteed profit is a clear red flag. A valid question would be why an organization would try to sell such a scheme instead of using it to get rich themselves.

High Return / Low Risk
Like a guaranteed return, a high return / low risk investment opportunity also defies the common risk-return relationship. The best advice is an old one: “if it sounds too good to be true, it probably is”.

Overly Consistent, Positive Returns
Cryptocurrency markets are among the most volatile markets, hence the performance of any related product or service is also expected to fluctuate.

External Risk Insurance
The fraudster may present some external risk insurance for the investment in order to add to its credibility. In reality, insurance is only seldom acquired and guarantees typically lack substance. Dummy companies are often used to act as the guarantor or insurer.

Public Mining Address
A cloud mining company must have a public cryptocurrency address in order to participate in the mining process. There is no reason for a legitimate company not to disclose this.

Pictures of Mining Equipment
Cloud Mining companies should be able to provide some pictures of the products they are selling besides any textual descriptions.

Secretive or Complex Equipment
Even in the world of cryptocurrencies one should be skeptical about special competitive advantages without any proper disclosure, or when the information is incomprehensible or incomplete. Too often only the positive elements are accentuated.

Website Available
Considering the importance of  domains and websites in the internet age, there is almost no reason for a legit company not to have one.

Website Registration Details
Very few scam websites survive longer than one year, so domains are generally registered for just one year unless otherwise required for the specific domain. For the same reason, websites created less than one year ago should be considered suspicious.

Website Design
Amateurish, cluttered and disorganized websites can point to a scam as many scam sites use text and images from legit websites and other sources which may not work together very well.

Grammar on Website
Many scammers have limited English proficiency.

Payments Options
Even though cryptocurrency payment options are logical for a cryptocurrency company, it is also very convenient for scammers as the recipient essentially remains anonymous. The same goes for services such as Western Union and Moneygram. Hence a lack of alternative payment options should still be considered a warning signal.

Service Disruptions &  Unbusinesslike Conduct
Especially Ponzi scheme promotors will encourage participants to “roll over” their investment. These schemes are not very fond of investors cashing out, which may lead to difficulties receiving payments and a non-responsive or difficult to reach customer service.

Contact Information
Legitimate companies have very little reason not to list their contact information.

Business Verification
First, you should never hand your hard-earned money over without knowing where it is going. Second, you should do a background check to avoid handing it to a known scammer. Be weary of people without an online identity. Scammers will typically try to hide their identity or conceal their true identity to avoid being easily discovered.

Independent Audits
Audits certainly do not root out every instance of fraud, but auditors do have a responsibility to detect errors or fraud in the company’s financial statements.

  • Skeptical Trader

    I found this very useful but it is a bit outdated. Could you update the evaluation once it was done in 2015?