Crowdfunding – Old-Fashioned Potato Salad or New-Fangled Money Laundering Tool?

Have you ever been depressed when a Kickstarter project to make potato salad proceeded to rake in more than your annual salary?  Felt a sense of despair as an Indiegogo campaign to develop an X-rated card game went on to attract tens of thousands of dollars in funding?  The October edition of the SAR Stats bulletin may make you feel (a little) better.

According to FinCEN, financial institutions have filed seventy-nine Suspicious Activity Reports on crowdfunding activity in the past five years.  Although small, the number of crowdfunding SARs filed has increased significantly year over year.  While some of the SARs were based on classic fraud scenarios, such as deliberate abandonment of funded campaigns, a majority flagged the use of crowdfunding campaigns as a money laundering or terrorist financing tool.  FinCEN’s SAR analysis indicated that crowdfunding sites have been used as a layering and commingling mechanism to conceal the criminal origin or destination of funds, before the funds are withdrawn or moved further through the financial system.

Given FinCEN’s observation that “[w]ide accessibility, ease of use, and limited fraud controls can make rewards-based crowdfunding platforms susceptible to financial abuse,” it should come as no surprise that although securities crowdfunding platforms will not be required to register as broker-dealers under the crowdfunding rules finally adopted by the SEC, FinCEN plans to close the resulting gap in Bank Secrecy Act regulatory coverage.  According to a recent speech by Director Calvery, FinCEN plans to issue a notice of proposed rulemaking “in the very near future” that will require such platforms to comply with Bank Secrecy Act requirements applicable to broker-dealers.

Although it appears that skepticism may well be justified in some cases, don’t give up on crowdfunding just yet: the $55,492 potato salad was apparently put to good use.