Unlike Initial Public Offerings (IPOs), ICOs are not clearly regulated in the U.S. While some U.S. regulators have released guidance on compliant ICOs, they continue to be an attractive option for startup companies looking to bypass the rigorous capital-raising process required by venture capitalists or banks. While ICOs are increasingly a great way for legitimate startups to grow their business and for trustworthy investors to buy into projects, ICO campaigns present a considerable amount of risk for all participating parties to fall victim to instances of fraud.
For example, a cryptocurrency start-up recently vanished after raising funds totaling $375,000 through an ICO and is being dubbed an “exit scam,” whereby the founders of the company have suddenly absconded with the ICO proceeds. The firm’s website, Twitter account and Facebook page were erased, leaving investors scrambling to retrieve their funds.
In addition to fraud, ICOs are opening the doors to illicit financing to terrorist groups, money laundering opportunities for drug dealers, as well as sanctions-evading global payments. Given this risk, some global governments have begun taking matters into their own hands and are proactively cracking down on the handling of ICOs. For instance, The People’s Bank of China conducted its own investigation into ICOs, and is actively banning them in the country referring to token sales as “illegal and disruptive to economic and financial stability.” South Korea has also banned the use of ICOs.
The risk presented to startups and other businesses on the receiving end of ICOs arises from accepting funds from unknown and potentially risky participants. Many ICOs do not know the identity or character of their participants beyond early contributors who are friends, family and known business contacts.Yes, it’s true that ICOs are lightly regulated today, however it’s only a matter of time before regulators, auditors and tax authorities start asking companies that participated in an ICO how they ensured their venture wasn’t funded by dirty money.
Considering ICOs offer the purchasing of tokens with cryptocurrencies, it’s an enormous possibility that criminals will use an ICO to launder the tokens they purchased with illicit funds obtained by unlawful means. They can then sell the tokens obtained on a trading platform for cryptocurrencies in exchange for fiat currency such as U.S. dollars, and then have the money transferred to their own bank accounts with a clear and easy answer to the ‘Source of Funds’ questions typically asked by banks.
Today’s advanced data analytics and AI can help companies conduct KYC due diligence, in near real-time, on ICO participants to ensure their investors are who they say they are, and are not politically exposed persons (PEPs), or on an international sanctions list. While participant identification and verification is a good start, simply keeping documentary evidence of a legal document (such as a driver’s license) that matches the name of the participant does not determine if the person is a bad actor, connected to suspicious or illicit networks, or simply outside the risk appetite of the issuing organization.
A KYC analysis can also eliminate concentration risk for ICO offerors whereby they can limit the participation of individual investors by a pre-determined amount. This would eliminate the possibility of, for example, a Russian oligarch pretending to be 5,000 unique investors and buying out an entire ICO.
To conduct an effective KYC due diligence analysis, participant names, occupation, address, email, phone and IP address would be entered into the AI-based solution. Utilizing advanced data science and AI techniques, such as unsupervised learning, entity resolution and network analysis, coupled with private data providers, adverse media and public/government databases, a clear picture of the client and their context would be uncovered.
An AI-powered solution could then draw conclusions on possible risks, before giving companies a unified risk score with observables on each ICO participant. While there is inherent risk with ICOs, an AI-enhanced KYC analysis of participants can help companies decide, based upon their risk appetite, whether or not to deem investors as legitimate and accept them into their ICO campaign.
Packaged financial crime solutions are built from the ground up by proven AI experts working alongside experienced AML professionals. Unlike other AI for AML approaches, packaged AI solutions are quick to implement and are continuously updated by the solution provider based on input from multiple customers and regulators.
Serving almost 20 million customers, the bank was concerned about the risks associated with false negatives that its current AML compliance technology was missing. Intent on driving financial crime out of its operation, the bank began searching for a solution that could enhance its existing rules-based transaction monitoring system (TMS) and minimize the risk related to undiscovered financial crime.
While all agree the promise of AI for AML is great, taking the steps to select and implement AI within an institution is relatively new. So, what is the best approach for implementing AI and machine learning into your efforts to combat financial crime?