Crowdfunding has become on of the major sources of investments and online financing in the recent years globally. Every year thousands of businesses seek backers for their projects through online crowdfunding mediums and billions of dollars are invested in this course. But this massive and collective investment activity raises risks of financial crimes as well. In this article, we shall discuss about Crowdfunding Money Laundering and why it has become a rising risk in 2023.
What is Crowdfunding Money Laundering?
Crowdfunding Money Laundering is an illicit practice of hiding illegal cash through crowdfunding schemes. The origin of funds is hidden and the money is integrated in the legal financial system through the stages of Money Laundering.
Steps of Crowdfunding Money Laundering
Crowdfunding Money Laundering is a complex yet sophisticated crime. It is difficult to identify without a clear understanding of the steps involved in it. Here is a brief explanation of the steps of Crowdfunding Money Laundering:
Initiation of Crowdfunding Fraud:
Firstly, Money Launderers need to devise a fake or fraudulent crowdfunding campaign to attract the potential investors/backers. They make a concept and devise an appealing story for it.
Establishing Trust & Credibility:
Most importantly, Crowdfunding Money Laaundering requires a high level of trust & credibility. Money launderers create fake profiles and give self-positive reviews and testimonials to establish credibility.
Launch of Fake Campaign:
Popular crowdfunding platforms like GoFundMe, Patreon or Kickstarter can be used to add to the credibility of the project and then launch the campaign having fake rewards for backers.
Promotion of the Campaign:
Social media, email marketing & other online mediums are aggressively used to market the fake campaign for attracting backers and receiving funds.
Layering & Mixing of Funds:
Once the backers invest their money and Crowdfunding Fraud is executed, the illicit collected money is layered into multiple untraceable transactions. Afterwards, it is then mixed with the legal funds through different investment channels. Though this step is challenging for money launderers due to strict KYC and AML regulations.
Funds Withdrawl:
When the campaign is ended, funds are transferred to the launderer’s accounts and illegally then layered into secondary or multiple accounts for further layering. This makes it difficult for the regulators to identify the origin of funds and the exact Money Launderer.
Crowdfunding Money Laundering Through Legitimate Campaigns
Crowdfunding Campaigns are highly vulnerable to fraud and money laundering. It is due to the nature of the online investment and the low level of scrutiny involved. Money Launderers exploit the Anonymous Crowdfunding platforms and ease of online transactions. Nowadays, Money Launderers also compromise the genuine crowdfunding campaigns as well. Mostly fraudsters blend in with legitimate backers and use the campaign for hiding their illicit funds.
Crowdfunding Money Laundering, A Rising Risk In 2023
In 2022, there was a significant surge in Crowdfunding Money Laundering and Crowdfunding Fraud, causing a notable increase that caught attention. So, Fintechs, Regulators and Compliance professionals have warned against the risk of Illicit crowdfunding. The increased participation of online frauds and ever-evolving Money Laundering tactics pose a greater risk in Crowdfunding sector.
What are Crowdfunding Platform Doing to Prevent Money Laundering?
We must know that most of the legal Crowdfunding platforms strive hard to remain compliant with KYC (KNow Your Customer) and AML (Anti-Money Laundering) regulations and they do it to prevent financial crime. Yet the advanced Money Launderers find new ways to penetrate their system and adapt to newers ways of committing the crime.For example, GoFundMe is a world’s leading crowdfunding platform and it ensures full regulatory compliance and backer’s fund protection which is also mentioned in their website.
What Are Fintechs & Regulators Doing To Mitigate Crowdfunding Money Laundering Risk?
Following are recent examples of Anti-Fraud and Anti-money Laundering activities in Crowdfunding.
- Plaid, a Fintech firm recently introduced an Anti-Fraud network named “Plaid Beacon” to facilitate the financial institutions in fighting Money Laundering.
- FATF’s Third Plenary has recently concluded and members were updated on the issues of Identity Theft that is related to cyber-fraud and crowdfunding terrorism funding.
How KYC Helps In Preventing Crowdfunding Money Laundering?
One of the main purposes of Know Your Customer (KYC) is to prevent Money Laundering through any means. Therefore, Crowdfunding platforms with a robust KYC system have lesser risk of Money Laundering and Fraudulent Activities. This is because of the Identity Verification and other Due Diligence checks that are necessary in KYC. Now, it is one of the basic requirements for any Money-related business or investment channel to have a strong KYC AML system. This ensures that all individuals and entities involved in transactions are legitimate and compliant.