Crowdfunding: A Cover for Money Laundering?
April 29, 2020
Criminals are aiming their fraudulent or money laundering activities at frightened and grieving people, especially with crowdfunding scams.
A fraud investigator said tragedies are ripe for exploitation after the crowdfunding platform GoFundMe removed a bogus campaign page that claimed to be a fundraiser for two boys orphaned by a recent shooting rampage.
A woman had shared on social media what she thought was a legitimate GoFundMe campaign by a member of the boys’ family whose parents were among the 22 people killed in the deadly mass shooting. GoFundMe confirmed the fake campaign has been removed and a legitimate one launched.
Illegitimate campaigns can raise lots of money
While the majority of crowdfunding accounts are legitimate, there are always some that are created by criminals, or hijacked by criminals who create fake schemes to appear legitimate.
- A fake fundraising was attempted after the tragic bus crash in Canada that killed 16 members of a junior hockey team. That account raised almost $4,000 before a man was arrested on fraud
- An American homeless veteran charged with engaging in a GoFundMescheme has been taken into custody. The bogus crowdfunding campaign made news headlines when the veteran and his co-conspirators raised $400,000, which authorities say was spent on luxury items and casino trips.
- In the UK, an inspiring story of a 99-yer-old man raising £28 million for health care workers looking after those affected by COVID-19 has resulted in fraudulent copycat sites.
Crowdfunding to grow to $300 billion
Crowdfunding, which can also allow entrepreneurs to take their pitch to the public and avoid bank loans and angel investors, has raised $34 billion globally with 191 platforms in the U.S. alone and is expected to grow to $300 billion as an industry by 2025, according to research by Fundly.com.
Some of the biggest names in this sector include Kickstarter, Indiegogo, Causes, Patreon, GoFundMe, and others.
The University of Pennsylvania conducted a study of Kickstarter, surveying almost 500,000 supporters. The study looked at failures and found:
- 9 percent of Kickstarter projects did not deliver rewards;
- 8 percent of dollars pledged went to failed projects;
- 7 percent of backers did not get a chosen reward; and
- 65 percent of backers agreed or agreed strongly that “the reward was delivered on time.”
Bank expert reveals fraud complexity
An expert from Scotiabank wrote in a recent article for ACFCS that the number of types of fraud are growing.
“In most cases, these initiatives are legitimate and the crowd-sourced funds are used to benefit those who have encountered illness or a personal, familial or regional tragedy or those who are determined to finance their next big project – without going through credit checks, a rigorous bank loan process or begging at the feet of venture capitalists.” Ahsan Habib of Scotiabank wrote.
“However, in a growing number of cases, crowdfunding websites are being used for illicit purposes – including money laundering.”
Habib wrote that the fraud usually includes well-known red flags:
- Structured settlement: Deposits from crowdfunding sites being followed by structured cash withdrawals.
- Funnel tunnel: Deposits received from multiple accounts and then payments immediately submitted to crowdfunding sites.
- Personal attention: Personal accounts receiving deposits and checks from unidentified people and foreign businesses, with funds then being transferred to crowdfunding sites.
Habib wrote that some crowdfunding aimed at money laundering is growing in sophistication.
Two ways of defrauding public and money laundering
“Equity crowdfunding platforms could be used to facilitate money laundering in at least two ways: The distributor of an illegal product – narcotics, unregistered firearms, etc. – could create a fake company and market that company’s securities on an equity crowdfunding platform,” he wrote.
“Buyers could “legitimately” buy worthless shares via the platform, while also receiving the product on the side. Distributors would thus be able to receive funds electronically, rather than in cash, and could also aggregate multiple payments into one capital stream.”
The online component of the payments makes them easier to integrate into the financial system.
“In a second scenario: The distributor could create a fictional venture, and market its securities via a crowdfunding platform. Through an online alias, the same distributor could also invest illicitly received money into its own venture.”
Habib said the second scenario would be an easier way to move illegally gained money across borders.
While these types of schemes require some level of sophistication, the current COVID-19 pandemic has opened up many more areas where scammers can easily target larger numbers of people who are frightened and worried about the possible effects of the disease that has infected millions.
Although the stats are from a different year, the anecdotal reports in FinCEN’s SAR Stats from 2015 show there are common themes in money laundering with crowdfunding sites:
- Personal bank accounts funded by cash deposits from unidentified individuals and checks from foreign businesses. The funds were then transferred to crowdfunding sites.
- Wire transfer activity from the U.S.-based account of a foreign political party to a foreign country. This account was funded by personal checks drawn on foreign banks, online money transmitter transfers, out-of-state cash deposits, and deposits from crowdfunding sites.
- Individuals received deposits from crowdfunding sites, followed by structured cash withdrawals from the accounts.
- Customers received electronic deposits from multiple checking accounts, then immediately made payments to crowdfunding sites.
- An account relationship (personal and business account) funded by a high volume of personal checks, money transmitter payments, and crowdfunding payments was sending a large volume of wires to a high risk country
Charity-focused crowdfunding sites often use third party payment facilitators to fund donations from contributors Those funds are then transferred to a financial institution where the money can be withdrawn.
FTC warns of scams
In the U.S., the Federal Trade Commission (FTC) warns people to be vigilant for scammers.
If you are thinking about contributing to a crowdfunding campaign, take a minute to research the creator’s background and reviews before you pay, they wrote.
For example, they suggest you ask yourself if the creator of the fund has engaged in previous campaigns. If so, how did those campaigns turn out?
If you learn about a crowdfunding scam, report it to the Federal Trade Commission and your state Attorney General. Also, warn other people by commenting on the creator’s profile on the crowdfunding site.
Entrepreneur.com wrote recently: “For years, crowdfunding has been a bit like the Wild West of finance. But as the industry continues to grow, state and federal authorities are catching up to abusers of the system.”
About Andrew Simpson
Andrew Simpson (LinkedIn | Twitter) is Chief Operating Officer at CaseWare RCM and has more than 20 years of experience building businesses in the fields of information systems audit and security, data analytics, Anti-Money Laundering and forensics. He is a regular contributor to conferences and a recognized thought leader in financial crime management.