Crowdfunding: Yet Another Unconventional Means to Launder Money

Having transformed many ideas into profitable businesses, crowdfunding, a new-gen investment trend enabled by the internet, has become the first resort for many entrepreneurs and small businesses. There are various crowdfunding platforms in play, involved in different models such as donation-based crowdfunding, equity-based crowdfunding, debt-based (P2P) crowdfunding and reward-based crowdfunding. Today, several billions of dollars are being changed hands through crowdfunding platforms, making them easy channels to launder ill-gotten money. According to research by Fundly.com, crowdfunding has raised US$34 billion globally and the industry is expected to grow to US$300 billion by 2025.

Crowdfunding platforms, especially those dealing with investment, donation and reward, have inherent fraud and money laundering risks. “Crowdfunding service providers that collect funds for later onward transmission are particularly vulnerable to money laundering, including business models where the funds are collected for an undetermined project and consequently held in the investor’s account until the project is determined,” says the European Banking Authority (EBA) in its biennial Opinion on risks of money laundering and terrorist financing (ML/TF) affecting the European Union's financial sector. “Donation platforms can also be misused to disguise the illicit origin of funds or for TF purposes.”

Criminals’ Abuse of Crowdfunding Platforms

Given below are some of the ways in which criminals abuse various types of crowdfunding platforms for money laundering.

1. Collusion of project owner and investor

This happens primarily with platforms intended for attracting investment. Here, an investor uses illegally obtained money to fund an investment project, for which the project owner has set an unrealistic funding target. Once the project fails to meet the target, the investor gets clean funds as returns.

2. Sale of illegal goods

A fake investor seeking to purchase drugs or (illegal goods) in bulk could crowdfund a sham company owned by a distributor of those illegal goods.  The investor/buyer would receive the intended goods plus equity (of no use). In turn, the distributor would receive funds legitimate electronic funds, which can be easily integrated into the financial system.

3. Donation campaigns for terrorist financing

Crowdfunding campaigns can be created asking individuals to donate amounts for seemingly lawful charitable causes, such as humanitarian initiatives. The received funds are later used for terrorist financing purposes. Criminals can also launch projects that aim to support associations with potential links to terrorist organisations or activities.

4. Creating charity firms for terrorism funding

In this scheme, many fake investors crowdfund a sham company that does charitable work on paper. It allows the investors to transfer funds to the company by purchasing its equity, and the company can then transfer the money abroad under the guise of its business.

What are the pitfalls?

Given below are the pitfalls that aid criminals in the abuse of crowdfunding platforms.

1. Legislative divergence

In many jurisdictions, crowdfunding service providers are not included in the AML/CFT regime, making them attractive for money launderers. If they fall out of the scope of relevant AML rules, they are not required to set up any measures to monitor and detect possible suspicious transactions.

2. Absence of a harmonized legal framework

The ambiguity surrounding the inclusion of crowdfunding platforms and crowdfunding service providers into the AML/CFT regime is a problem in many jurisdictions. For example, in the European Union, crowdfunding platforms are not considered obliged entities under the AML Directive, while the crowdfunding service providers using the crowdfunding platforms may be supervised for AML/CFT purposes when they provide services that are regulated under other legal instruments.

3. Cross-border nature of crowdfunding platforms

Many crowdfunding service providers are not located in the territory in which they operate, hindering the supervision by authorities. Customers and project owners can also be located anywhere in the world, including high-risk jurisdictions. This impacts the effectiveness of the platforms’ policies and procedures for the identification and verification of customers and beneficial owners.

4. Lack of adequate systems and controls at platforms

In jurisdictions, where crowdfunding platforms are fully or partially subject to AML/CFT supervision, there have been concerns about the AML/CFT internal controls and systems, implemented by the crowdfunding service providers to detect suspicious transactions and activities. The service providers may lack a clear understanding of sources of funds used to fund projects and the purpose of funding projects. Platforms that allow less transparent means of payments such as anonymous electronic money or virtual currencies may increase the AML/CFT risk.

How to prevent money laundering via crowdfunding platforms

Being new-gen funding channels, crowdfunding platforms are either not regulated or inadequately regulated in many jurisdictions. Therefore, the platforms need to be subject to AML laws in the countries where they are located. Both fundraisers and funders should be made subject to rigorous AML, Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures at the time of onboarding and in regular intervals.

While setting up a maximum limit for the amount that can be collected at a point in time and setting up a minimum period between the collection and the use of funds can help in the short run, there are chances that criminals might circumvent these rules and thresholds in the long run. To understand criminal behavior in a holistic and futuristic manner, it is important to make use of next-generation AML solutions powered by artificial intelligence and machine learning.

Tookitaki’s end-to-end AML operating system, the Anti-Money Laundering Suite (AMLS), powered by AML Federated Knowledge Base is intended to identify hard-to-detect money laundering techniques. Available as a modular service across the three pillars of AML activity – Transaction Monitoring, AML Screening for names, payments and transactions and Customer Risk Scoring – the AI-powered solution has the following features to aid in the detection of money laundering.

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