At the end of last month, FATF (Financial Action Task Force) published a report on crowdfunding and the funding of terrorism. While the two sides of the discussion may seem to be unrelated, bad actors are always looking for a path to cover their tracks, and online capital formation may be used as a vehicle to pursue illicit activities.
FATF states that the vast majority of crowdfunding is legitimate but it still can be exploited. FATF uses an expanded definition of crowdfunding, which includes charity or online donations. While CI would not include charity as crowdfunding (nor rewards or e-commerce offerings), FATF incorporates it, adding that this is the sector that may be primed for the most abuse in regard to money laundering and terrorist financing.
Virtual assets or crypto (digital assets) are another sector that may be used to aid criminal activity. The report states:
“As digital forms of payment continue to evolve globally, the crowdfunding industry has also incorporated funding options tied to VA. While Bitcoin has been the most visible, other types of VAs such as privacy coins are increasingly noted and pose unique challenges for investigators. Anonymity enhancing services such as tumblers and mixers can also be used by threat actors to further conceal the origin and destination of funds linked to TF. However, the use of VA may also have some limitations for TF, as it is not always convenient to convert VA to fiat currency and the value of certain VA can fluctuate dramatically. The adoption of VA for TF crowdfunding campaigns can therefore vary and should continue being assessed by countries.”
FATF provides a list of recommendations that policymakers may incorporate to guard against abuses. These include:
- identify, assess and understand the terrorist financing risks related to the crowdfunding sector, and ensure those risks are effectively mitigated, while avoiding hampering legitimate financial activity.
- encourage a multi-stakeholder approach to risk mitigation, including representatives from national authorities, private sector, civil society and academia when designing and reviewing risk mitigation measures to ensure human rights due diligence.
- recognise the importance of public-private information sharing and put in place measures to do this effectively on a continuous basis.
fully implement the FATF Standards relevant to other sectors involved in the crowdfunding ecosystem e.g., virtual assets, non-profit organisations and money and value transfer services.
As the securities sector tends to be highly regulated with KYC/AML rules applied, investing is less likely to be a path for criminal activity. But as is always the case, as things change, like the digitization of finance, the crooks adapt. Same as it ever was.
If you are interested, you may download the report here.
