Uncovering the Red Flags of NFT-Related Money Laundering
Uncovering the Red Flags of NFT-Related Money Laundering
With the increased acceptance of artwork using Non-Fungible Tokens (NFTs), comes the increased risk of money laundering and terrorism financing, induced by anonymity around the origin, mode of transfer, and payment. With this, awareness about the risk indicators associated with NFTs is very pertinent amongst NFT users and society as a whole.
Recently, the Joint Chiefs of Global Tax Enforcement (J5) issued a list of red flags that financial institutions, business organizations, and individuals must be aware of. The document released by J5 is the ‘J5 NFT Marketplace Red Flag Indicators’, which highlights how criminals constantly develop new ways to exploit emerging technologies.
NFT Critical red flags suggesting high ML/FT risk
- Collection or organization of the NFTs from the high-risk jurisdictions
- Collection of similar kinds of NFTs in large numbers to launder money between related wallets
- Distribution or giveaway of fake or forged NFTs
- Manipulation of the NFT values (unreasonably high) by the frequent buy-sell transactions between connected wallets (also known as “Wash Trading”)
- High turnover of low-valued NFTs
- Sell of newly minted NFTs at a very high value, contradictory with the other NFTs and a general trend
- A high volume of trading of overpriced/underpriced NFTs within a short time gap
- Mismatch in the NFT minting address and the contract address appearing on the exchange portal
- A high volume of trading for the NFT collection purchased from a mixer or tumbler
- Transaction value exceeding US$ 100,000 for newly minted or secondary market tokens without any apparent community
- Request to share the seed phrase (translation of the private key) from the virtual asset wallet to execute the transaction
- The same tokens were reacquired from the same party or the third party at a lower price, to whom earlier the said tokens were sold at a higher value
- Phishing – flooding the inbox by sharing fake NFT offers
- The unreasonably high price gap between the legitimate marketplace and a particular site
- Unverified social media presence, with no apparent followers
- Unnecessary exchange of NFTs between the same group of people or network
Other Risk Indicators suggesting medium ML/FT Risk related to NFTs
- NFT with re-used code
- NFT without any thumbnail appearing on the marketplace
- No information is available about when and where the NFT was minted
- Minting an NFT or buying it at an inflated price and immediately selling it off at a significant loss
- The absence of the contract address makes the tracing of NFT difficult in the marketplace
- High-volume transactions of the tokens purchased from the same wallet or network of wallets
- Unverified accounts on the market profile
- Details of the NFT not clearly captured – properties and description of the token missing
- High value structured into smaller valued multiple transactions, over a short period, with no observable community
It is essential to understand these red flags and stay alert towards the same to reduce the chances of exploitation of the NFTs for laundering money or financing terrorism.
This list will enable the market participants to improve their fraud detection policies and deploy the necessary mitigation measures. They must implement customized compliance programs to avoid becoming victims of money laundering or other financial crimes.
Let us all fight the risks of the execution of financial crimes using cryptocurrency and virtual assets.
How can AML UAE assist you in AML NFT Compliance?
Awareness of the NFT-induced red flags is critical to safeguard yourself from being vulnerable to financial criminals exploiting the technologies.
AML UAE is a firm offering end-to-end AML consultancy services to Financial Institutions, DNFBPs, and the VASPs. We offer assistance in implementing the AML framework, training the compliance officer and team, offering AML software, managing customer onboarding, etc.
Partner with AML UAE and understand your AML risk better
Safeguard your business now!
Our recent blogs
side bar form
Share via :
About the Author
Jyoti Maheshwari
CAMS, ACA
Jyoti has over 7 years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.