Crowdfunding: Fraud and Money Laundering Risks

Blog / Crowdfunding: Fraud and Money Laundering Risks

Crowdfunding is the funding of a project or initiative by a group of people via the internet.

Crowdfunding, one of the new investment trends in the world, has been introduced as a way to help small businesses and entrepreneurs looking for investment capital to remove their business ventures from scratch. Crowdfunding isn't actually a new concept. In the 18th century, writers and musicians were collecting money from many investors to spread their works worldwide. Like non-governmental organizations gathering aid to build schools or to carry out a social project, such local communities can now reach a larger audience with the Internet's contribution.  It can be said that it is an updated version of the traditional fundraising process, with a focus on fraud protection, ensuring the safety of financial transactions in crowdfunding campaigns.

Risks Rising by the Growth of Crowdfunding

Crowdfunding has become popular all over the world in recent years. Billions of dollars change hands every year through crowdfunding platforms. The fact that money changes hands over crowdfunding platforms raises some risks. In the case of financing with both donation and reward-based, and investment-based crowdfunding models, there are real risks perceived by investors. These risks can generally be classified as a failure of the investment, fraud, and money laundering.

Investment Failure

Within the scope of crowdfunding investments, the biggest risk faced by investors is the risk of investment failure. By the nature of the crowdfunding system, early-stage companies are invested. Investments in early-stage companies always involve more risk than investments in companies that have reached a certain level of maturity and have a certain level of cash flow data, have professional management, and have reached the appropriate structure.

According to global data, 50% of early-stage firms fail in the first five years. While experienced investors have sufficient information about the high level of this risk, crowdfunding investors should be informed about the level of this risk, and their awareness should be increased. Entrepreneurs who want to provide financing with Crowdfunding do not always have the necessary experience and knowledge to successfully manage an early-stage company. Therefore, the risk of investment failure increases. In order to reduce this risk, the culture of entrepreneurship should be supported, and wide educational opportunities and supporting institutions should be developed for entrepreneurs. In addition, obliging the participation of investors experienced in the management of the company, and professionals in the fields of finance, accounting, and law, may also reduce this risk.


Although qualified fraud is a rare situation within the scope of crowdfunding, the most common example of fraud is through false platforms and collecting money for counterfeit and fraudulent companies. Furthermore, at present, there are various types of financial fraud, such as investment fraud, payment fraud, or embezzlement. Investors should check for fraud before using a crowdfunding platform.

Fraud risk can be minimized by taking the following measures:

  • Investigation of past activities of fundraisers.
  • Compulsory audit, financial statements, and preparation of review reports.
  • To raise awareness about fraud by informing investors about past fraud examples.
  • Crowdfunding investments should be made only through platforms authorized by a national supervisory regulatory body for fraud protection.
  • Finally, Fraud monitoring is one of the necessary measures to determine the risk level by continually monitoring all transactions performed by users through their bank accounts, such as mobile banking accounts, IP addresses.

Money Laundering

Fraud and money laundering are interrelated concepts. Even it is not misguided to say that fraud is a premise crime for money laundering. As with all other investment platforms, crowdfunding platforms carry the risk of money laundering and have to be aware of fraud protection. AML measures and technological solutions support companies and investors to check fraud among projects and platforms. Also, electronic payment systems used in crowdfunding platforms can reduce this risk to a certain extent. The effective implementation of laws against money laundering and fraud protection in the country where the platforms are located can almost eliminate this risk.

In addition, this risk can be minimized by taking the following measures:

  • To set a maximum limit for the amount of money that can be collected within a certain time interval.
  • To set a minimum period between the fund's collection and the use of the fund to create time for further investigation for investors and regulatory authorities.
  • Applying anti-money laundering, Know Your Customer (KYC), and Customer Due Diligence (CDD) procedures to fundraisers and funders.

connection between fraud and AML Compliance can be solution for both.

Crimes Committed Through Crowdfunding Platforms Increase

The growth of the crowdfunding industry has been phenomenal in recent years, attracting the attention of investors and entrepreneurs alike. With the projection of performing financial transactions worth a staggering $300 billion by 2025, it's no surprise that the industry has become a new frontier for criminal activities such as money laundering and fraud.

These crimes are often committed by exploiting people's emotions and trust through unrealistic crowdfunding campaigns. For example, criminals might create campaigns that appeal to people's sympathies, such as claiming to raise funds for a terminally ill child or a natural disaster. Once they've collected the funds, they use the money for illegal activities, leaving the unsuspecting donors in the lurch.

In response to these threats, regulatory agencies have stepped in to regulate crowdfunding platforms and reduce the risk of fraud and money laundering. One such example is the Jumpstart Our Business Startups (JOBS) Act in the United States, which was enacted to promote entrepreneurship and protect investors from fraudulent activities.

The JOBS Act requires crowdfunding platforms to register with the Securities and Exchange Commission (SEC) and comply with a set of rules and regulations to ensure transparency and accountability. This includes disclosing information about the company, its management, and its financials and reporting any fraudulent activities to the SEC.

Crowdfunding Platforms Must Implement AML Controls

Crowdfunding platforms are subject to various risks related to fraud and money laundering due to the large amounts of funds involved in the industry. As a result, these platforms are required to comply with legal obligations and ensure their reliability in order to function effectively. This requires the implementation of various procedures mentioned above to prevent suspicious activities from taking place on the platform.

By implementing these fraud checks, crowdfunding platforms can detect potential threats and prevent potential crimes. This not only helps maintain the platform's reputation but also ensures compliance with legal and regulatory requirements and fraud protection. Failure to comply with these regulations can result in hefty fines and legal consequences.

To assist crowdfunding platforms in meeting their AML and KYC obligations, Sanction Scanner provides a comprehensive database of sanction lists, watchlists, Politically Exposed Persons (PEP), and Adverse Media data from more than two hundred countries. With Sanction Scanner, crowdfunding platforms can check funders and fundraisers against this database in a matter of seconds and detect potential threats before they become a problem.

Sanction Scanner's solutions for crowdfunding platforms are easy to integrate into existing systems and can help platforms comply with AML and KYC requirements quickly and effectively. By using Sanction Scanner's services, crowdfunding platforms can provide their users with a secure and reliable fundraising experience while also complying with legal and regulatory requirements.

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