NFTs provide loophole for Russian money laundering

31 March 2022

SmartSearch, the UK’s leading anti-money laundering solution, is warning of the dangers of Non-Fungible Tokens (NFTs) being used to get around sanctions.

“When new technology is launched, fraudsters and money launderers are never far behind.,” cautioned Martin Cheek, managing director at SmartSearch.

“Those looking to avoid sanctions may look to purchase NFTs to hide their money in unregulated assets.

“Therefore it is crucial that everyone involved in the process of purchasing NFTs is vigilant to the dangers they pose. Finding the source of funds will be critical and enhanced due diligence undertaken whenever a client is looking to buy an NFT.

“Shell corporations may be used to disguise who is actually attempting to launder money so identifying the ultimate beneficial owner is crucial.”

NFTs are unique digital tokens that represent ownership of items ranging from art to property. The NFT market generated $1.5bn in trading in the first three months of 2021 and grew 2,627% over the previous quarter, according to a February study by the US Treasury Department.

Because UK money-laundering regulations do not include NFTs, concerns have been raised that they could be exploited as yet another way to launder money anonymously and untraceably. These fears were underlined by the recent seizure by HMRC of three NFTs as part of a probe into a suspected a VAT fraud involving 250 alleged fake companies.

As a relatively new phenomenon, regulations are still catching up with NFTs. In general, if a business provides the services of exchange or custody of crypto, it will be subject to the Money Laundering Regulations (MLRs). These businesses must be registered with the Financial Conduct Authority (FCA), perform Know Your Customer (KYC) checks on customers and monitor their transactions, along with other AML requirements.

“That’s why it is important businesses are conducting the required due diligence,” said Martin Cheek.

“Whether it’s running a quick automated background check on a new client or investing in a monitoring service, it’s imperative that businesses take an active approach to anti-money laundering and sanctions.”

He added that trade-based money laundering, which is defined by the Financial Action Task Force as “the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to [legitimise] their illicit origins”, is already a problem in the art world, and that NFTs could also be ripe for exploitation.

For more information about anti-money laundering solutions in the UK, please visit www.smartsearch.com