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From Fraudsters to Artists – The Dire Need of AML Compliance for NFTs

Richard Marley
August 23, 2021
6 minutes read
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Over the past few years, NFTs or Non-Fungible Tokens have become popular in the crypto sector. According to Statista, 51,227 primary sales were recorded worldwide, whereas secondary sales of these assets were 38,024. However, it has become a channel in money laundering as well. Why? Since law enforcing bodies are regulating the art market, fraudsters are switching to NFTs for their illicit activities. No regulations, no Know Your Customer (KYC) or Anti-Money Laundering (AML) requirements, and anonymity makes it the perfect outlet for laundering money, identity theft and other crimes. Many cases for money laundering through these digital assets have been reported; therefore, there is a dire need for AML compliance in the NFT marketplace too.

What are Non-Fungible Tokens (NFTs)?

A wide range of tangible and intangible objects like art, in-game items, music, and videos can be represented as a digital asset called NFTs. Each NFT has units of blockchain representing an item. This item could be:

Art
Collectibles
Games
Tweets
Licenses and certifications
Music
Fashion brands
GIFs

Coindesk reveals that $174 million has been spent on NFTs since 2017.

Money Laundering through NFTs

Sounds unreal but NFTs can be used for laundering black money. They are anonymous and have no central body that governs any activity in the market, so why not keep illegally earned money as an NFT. Let’s look at an example by a former USA Today journalist to understand money laundering through NFTs better.

“If you have $1 million in illegal money, you would spend $1 million on your own NFT. You can do this yourself or use a trusted third-party account. Then you resell the trash for nothing and bank the profits.”

The Need for AML Compliance in NFT Marketplaces

Given the significant switch in channels for laundering money, the NFT space requires rigid AML rules like all other sectors. KYC and AML protocols like those of the finance sector must be enforced to non-fungible tokens as well.

Experts say that it is all rainbows and unicorns for bad actors in the NFT market but it will all end soon. When Bitcoin was first introduced, it had no laws and money laundering numbers increased rapidly. After some time, regulators jumped in to save the day. The same is going to happen with NFTs. A regulatory crackdown backed by KYC and AML laws is all set to change the game for fraudsters appearing as artists.

FATF’s Stance on Regulating NFTs

The Financial Actions Task Force (FATF) issued new guidelines for virtual asset service providers (VASPs) a few months ago. Also known as the Travel Rule, the FATF has included non-fungible tokens for the first time in its guidance. Although how to execute the plans is not clear, the global regulator considers the burgeoning space a FinCrime threat until it operates without laws in an anonymous manner.

FATF and other authorities across the globe are aware of how art is being used for laundering money and tax evasion for a long time. Criminals are continuously coming up with new ways of executing their ill plans so NFTs will soon be widely used to for financial crimes.

Since digital assets can be anonymously bought and sold, the time is not far when Know Your Customer (KYC), Counter Terrorist Financing (CFT) and Anti-Money Laundering (AML) measures to combat perpetrators will be in action.

The Travel Rule suggests that non-fungible tokens must be considered as Virtual Assets (VAs) depending on the method they are traded on secondary markets.

How Can Shufti Pro Help?

Shufti Pro’s AI-driven AML solution is perfect for the emerging NFT space. Within 30 seconds, the marketplace can make sure legitimate people are issuing digital assets. The identity of every individual is screened against 1700+ global watchlists. Furthermore, the verification results are 98.67% accurate and stored in our back-office for later use.

Apart from Anti-Money Laundering (AML) screening, the FATF also suggests businesses to employ Know Your Customer (KYC) solutions for more efficiency in the customer onboarding process. The remote identity verification solution has seven comprehensive steps that take less than a minute to complete.

End-user registers on the marketplace
End-user and KYC expert get in touch on a live video call
End-user is interviewed for liveness detection
End-user shows government-issued identity document during the call
The ID document is verified for forgery and tampering
Face of the end-user is matched with the photo on the ID document
Verification results are delivered and stored in the back-office

This is how easy it is to remotely verify any client in the NFT marketplace using video KYC.

Key Takeaways

All in all, the rising NFT space is becoming the new target of financial criminals. Money launderers are hiding illegally earned money in the form of non-fungible tokens making it nearly impossible for anyone to trace. The identity is hidden and these digital assets are transferable. The lack of regulations is another major reason behind the rise in FinCrime through NFTs. The FATF issued guidance on the virtual asset service providers and for the first time non-fungible tokens are also a part of the global regulator’s guidelines.

Experts are predicting that the NFT space will be regulated soon and KYC/AML requirements will be fundamental for the marketplace. Robust Know Your Customer (KYC) and Anti-Money Laundering (AML) screening will become essential.

Want to know more about KYC/AML compliance for NFTs? Get in touch with our experts.

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Disclaimer: No warranty is herein provided that the information contained in this document is accurate, up-to-date, and/or complete. In no circumstance(s), does such information constitute legal or any other advice. Any person who intends to use, rely, pass-on, or re-publish the information contained herein in any way is solely responsible for the same. We suggest to verify the information and/or obtain expert advice independently if required.

Latest News

News
Danish Gambling Operator Reports Tipwin to the Police for AML Failings
Money Laundering through NFTs
The Need for AML Compliance in NFT Marketplaces
FATF’s Stance on Regulating NFTs
How Can Shufti Pro Help?
Key Takeaways
Then danish gambling operator Spillemyndigheden has reported Tipwin to the police for violating the Danish Money Laundering act

According to the sources, Spillemyndigheden, the government office based in Odense, Denmark, has reported to the police that the business has failed to create risk assessments of retail bets with a lack of written policies on its retail offerings.

It is also worth mentioning that the operator also lacks complete business procedures and controls for the offerings based on land or in regards to money laundering until 25 May 2022.

In the official statement of the regulator to the police, it stated all the shortcomings of Tipwin in compliance with the anti-money laundering standards. It stated: “Spillemyndigheden notes that the rules on risk assessment, policies and business procedures are absolutely fundamental in the Money Laundering Act. By failing to prepare a risk assessment, Tipwin has not had a useful tool that has provided an overview and understanding of where and to what extent Tipwin is exposed to money laundering or terrorist financing, and what measures are in place are necessary to mitigate the risks involved.”

This clearly states that the german based gambling operator, Tipwin is exposed to the illicit crimes of money laundering and terrorist financing and has failed to comply with the AML regulations. The Danish regulator also focused on the lack of preparation from the operator on assessments of risks which are fundamental components of the anti-money laundering act.

Spillemyndigheden also added: “Preparing a risk assessment of the company’s business model is a very fundamental means of limiting the risk of money laundering. Tipwin has thus also not had policies and operational procedures that stem from the risk assessment. By failing to prepare a risk assessment, the Gambling Authority has therefore handed over the case to the police investigation.”

The authority also launched an injunction on the breach of rules and procedures in regard to the online casino and betting operations. With the main emphasis on money laundering, the regulator released a statement last month which reminded businesses in the industry of the obligations. It mentioned the regulations most firms are complied with, which are in order to prohibit the financial interactions with individuals, groups, legal bodies or countries.

In addition, Spillemyndigheden issued a 3 months deadline to Tipwin to sort out the situation.

Suggested Read: Danish Gaming Regulator Sanctions Unibet Over AML Violations

From Fraudsters to Artists – The Dire Need of AML Compliance for NFTs

What are Non-Fungible Tokens (NFTs)?

Money Laundering through NFTs

The Need for AML Compliance in NFT Marketplaces

FATF’s Stance on Regulating NFTs

How Can Shufti Pro Help?

Key Takeaways

Crown and Star Casinos – A Stain on Australia’s Reputation

Australia’s Anti-Money Laundering Regime

How Casinos and Businesses Can Secure their Operations

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