KYC AML Guide: the Clock shows the average reeding time of the blog14 min Read


KYC AML Guide: the Clock shows the average reeding time of the blogJune 23, 2023

Crowdfunding Fraud & Money Laundering Risks: How KYC Protects The Funding Circle

The Fraduster’s greatest liability is the certainty that the fraud is too clever to be detected” (Louis J. Freeh)

M Abd'al Bari

Research Associate

What is Crowdfunding Fraud?

Crowdfunding Fraud is an activity to collect money or funds through different means for a scam or illegal cause. Crowdfunding is a solicited financial funding approach where new and unique project ideas, businesses, and organizations are facilitated to raise capital via multiple and manageable resources in less time. Investors or people who source the funds or money to a crowdfunding scheme are commonly known as ‘backers’.

Mostly criminals target people with crowdfunding money laundering scams to collect hefty amounts of money. Fraud Mitigation is an imperative element of the KYC/AML compliance system.

Also Read: The Role of AI-powered ID Verification in Combating Digital Fraud

A Brief About Working Of Crowdfunding

Generally, it starts with the project creation stage where a unique idea is formulated, and a description of the project including a business plan, timeline, goals, and budget is explained. Crowdfunding websites normally have a section to create a profile in this way. Once the project is created and the platform is selected, a Fundraising campaign is devised to attract the backers. It can have a social media campaign or other online marketing techniques.

Main Goal of Crowdfunding

The main goal is to pitch the idea to the target audience. When the project is accepted and contributors agree to participate in the campaign, the funding and project execution are started. Crowdfunding is done through the Internet and it is a trending investment trend in the global markets. Some doubt crowdfunding is illegal but it is legal and not a criminal activity itself. It is the money launderers and criminals who use it for their bogus causes.

Types Of Crowdfunding

Types of crowdfunding are vulnerable to Money Laundering and Fraud schemes at different stages. Just like any other fundraising system, crowdfunding has systemic limitations for identifying fraudulent activities.

1. Donation-Based Crowdfunding:

Requesting a large number of backers to participate in charity through small donations. Usually, the project funded by this type of crowdfunding is trusted.

2. Peer-to-Peer:

Startup businesses collect money from their online friends and peers and return them once the project is completed.

3. Purposeful Lending:

A periodic Loan scheme is created by Entrepreneurs to set up their businesses and pay back the loans under a timeline.

4. Reward-Based Crowdfunding:

Devising a reward campaign for the backers online. Different levels of rewards are set for the contributors of money.

5. Equity Model:

In exchange for the shares of the company, investors invest in non-listed companies on the stock exchange.

Here are some of the common ways of crowdfunding fraud that occur in these types.

    1. Fake Backers and Self-Backers deceive people through fake profiles and multiple accounts to create an impression of authenticity about their crowdfunding scams.
    2. Identity Theft is a handy way where fraudsters to use the stolen/ hacked IDs of people to run their fake campaigns. They target well-established and publicly famous profiles to show the credibility of their crowdfunding fraud scheme.
    3. Phishing and Scams are also common where deceptive emails and messages are used to gain the confidence of backers and steal funds from them.
    4. Failed or No Delivery of Rewards is another common fraud through crowdfunding where fraudsters deliberately offer fake rewards to the backers. Once the funds are collected the promised rewards are never delivered to the backers.
    5. Fake Projects or Misrepresentation of Projects are also common ways of committing crowdfunding fraud where fake business profiles, ideas, and campaigns are shown to the backers to deceive them and steal funds from them.

How is Crowdfunding Money Laundering carried out?

Crowdfunding is linked to Money Laundering in several ways. Sometimes, crowdfunding itself is used to hide the illicit money where backers fund different projects through illegal money and bring it into the legit financial circle.

1. Layering:

Money Laundering involves layering as its core stage where multiple transactions make it difficult to trace the actual owner of the funds. Crowdfunding is used to layer such funds where backers can exploit the system as well and the fund collectors can also hide these funds later.

2. Mixing of Funds:

It is easier to mix funds from different sources through a crowdfunding campaign as a large number of backers invest money in it. Their money is from different sources making it difficult to trace back and sort the legal and illegal cash.

3. Crowdfunding as a Legal Channel:

Fraudsters use Crowdfunding as a legal channel where they can commit fraud and then utilize the collected funds in legal entities.

4. Shell Companies and Crowdfunding Fraud:

People collecting funds from crowdfunding campaigns often set up shell companies and fake entities to legitimize their illicit funds.

5. Cryptocurrency Hideout:

Cryptocurrencies offer a high level of anonymity in fundraising. Anonymous Crowdfunding can be done by converting the collected funds into crypto assets and hiding the actual ownership. Thus, money laundering becomes easy with crowdfunding through cryptocurrency.

What is Anonymous Crowdfunding?

Anonymous crowdfunding is done where the real identity of the project initiator is not disclosed and is kept anonymous from backers. It is carried out in three ways:

  • Pseudonyms: Project creator can use pseudonyms instead of their real identities to set up a crowdfunding campaign. However, it involves a high risk of crowdfunding fraud.
  • Third-Party Crowdfunding Platform: These are the platforms that mostly act as an intermediary between the project initiators and the backers. GoFundMe, Patreon, and Kickstarter are globally recognized names among third-party crowdfunding service providers.
  • Encryption and Privacy Settings: Crowdfunding platforms offer the option of privacy settings and encryption that allow project creators to keep their identities confidential.

Anonymous Crowdfunding Fraud Risks

Even though anonymity is beneficial to the project creator, crowdfunding poses some threats to the trustworthiness of the campaign itself and the backers. Here are a few concerns that backers need to be aware of while investing in an anonymous crowdfunding campaign:

    • Transparency Level
    • Increased Fraud Risk
    • Limited Accountability
    • KYC AML Regulatory Compliance issues

How KYC Reduces Crowdfunding Fraud?

As mentioned earlier, the crowdfunding campaign has limitations in detecting fraud or illicit activity like money laundering at both the backer’s and the creator’s end. Implementing a robust KYC (Know Your Customer) / AML (Anti-Money Laundering) system will not only enhance the financial integrity and credibility but also secure the crowdfunding campaign from Money Laundering and other criminal activities, especially Crowdfunding Fraud.

Following are the 8 ways in which KYC/AML implementation can help in mitigating Crowdfunding Scams.

1. KYC Identity Verification:

When a crowdfunding campaign has a KYC ID verification, it will require the project creator as well as the backers to declare their identities and necessary information like legal name, address, and date of birth. This will ensure that the crowdfunding campaign held is legit and no fraudster is taking benefit out of it.

Also Read: KYC Outsourcing by KYC AML Guide

2. Increased Transparency:

KYC Procedures discourage anonymity and encourage transparency in information sharing about the individuals and entities involved. It helps in maintaining a risk-free environment by preventing fraud and money laundering. Individuals who pass through a KYC process have to disclose their true identities and cannot commit a crime without getting caught.

3. Screening of Crowdfunding Fraud:

Regulatory compliance checks such as AML watchlist screening and KYC ongoing monitoring ensure that individuals involved in crowdfunding fraud shall be identified & caught well before time.

4. Increased Backer’s Trust:

When Backers see a robust KYC process implemented in a crowdfunding campaign, their trust in the campaign will automatically increase. There are high chances of a KYC-screened and authentic campaign to get responses from backers quickly.

5. Regulatory Compliance:

KYC helps crowdfunding platforms to remain compliant and adhere to the KYC/AML regulations. Moreover, regulated platforms collect and verify the data of creators, investors, and other associated members which makes their system secure.

6. Increased Accountability:

KYC established a traceability system for financial transactions. In this way, it becomes easier for law enforcement to track down money launderers and fraudsters.

7. Detection of Suspicious Activities:

KYC enables the detection of suspicious activity and reports it at the early stages of the crowdfunding fraud scheme. Suspicious activity reports ensure timely reporting of suspicious transactions to the authorities for swift legal action.

8. Removal of Duplicate and Fake Accounts:

KYC procedures are stringent and ensure the removal of account duplication and fake accounts. Crowdfunding scam becomes nearly impossible when backers and creators interact through a KYC-regulated platform with genuine and single identities that are verified.

Final Word

Crowdfunding Fraud is a rising concern for KYC and AML regulators. Fraudsters are on the prowl, constantly seeking new ways to loot people by exploiting the vulnerabilities of crowdfunding platforms. Their deceptive and sophisticated fraud tactics pose a serious threat to the integrity of the crowdfunding ecosystem. With the advancement in technology and platforms, KYC regulators, backers, and project creators must ensure due diligence. Implementation of a robust KYC/AML system with proper guidelines and training will ensure the proactive detection of fraud and money laundering. This will not only benefit genuine crowdfunding platforms but also the hardworking creators and visionary backers by creating a safe ambiance for them.


KYC AML Guide: the Facebook share KYC AML Guide: the Linkedin share KYC AML Guide: the Twitter share
M Abd'al Bari
KYC AML Guide: the Linkedin share

Muhammed Abd'al Bari is a certified Research Professional of KYC/AML Guide. Connect with Muhammed on LinkedIn