Global Tax Fraud Group Provides Guidance on NFT Red Flags

Key points to remember

  • The Joint Chiefs of Global Tax Enforcement (J5) has released its first intelligence bulletin providing guidance to banks, law enforcement partners and private investigators regarding indicators of potential misconduct related to non-fungible tokens ( NFT).
  • The J5 report on NFTs and the US Department of the Treasury’s February study highlight the time and attention that regulators devote to NFTs and the potential fraud risks faced by market participants.
  • NFT market participants must know what to ask of potential partners and customers by implementing comprehensive compliance programs to comply with anti-money laundering and know-your-customer requirements and securities rules and regulations securities, commodities and taxation.

Responding to the call for advice regarding potential issues with popular NFT cryptocurrency assets, on April 28, the J5 issued a first-of-its-kind intelligence bulletin warning the public about the dangers of dealing with NFTs. Titled “J5 NFT Marketplace Red Flag Indicators,” the bulletin provides actionable advice for banks, law enforcement partners and private investigators to improve their fraud detection measures. The guidance is based on information obtained by members of the global task force and shared as part of its mission to prevent tax evasion. “This space is changing so rapidly, and technologies and products have the ability to become the ‘next big thing’ without any due diligence or regulation from the creator of the product,” says Special Agent Oleg Pobereyko, head of the group. D5 Crypto. . “We tried to develop a product that would help keep people safe while law enforcement catches up with those particular concerns.” The J5 NFT Report follows a study released by the Treasury Department in February highlighting the use of the NFT market to facilitate money laundering and terrorist financing, highlighting the time and attention that Regulators Spend on NFTs and the Potential Fraud Risks that Market Players Face.

Some of the “strong” fraud indicators listed by J5 include:

  • A network of sending and receiving parties for the same transaction or group of transactions.
  • Clearly overvalued/undervalued NFTs that trade frequently within short timeframes.
  • Artificial increase in sale value through a series of transactions between linked accounts, called “washout trading”.
  • Newly created NFTs immediately sell for high prices that do not match other NFTs in the collection.
  • NFTs sold for large sums and repurchased from the same party or a third party for smaller amounts.

Jim Lee, IRS Chief of Criminal Investigations, hopes “this is the first of several such intelligence bulletins that the J5 puts out… [the J5 is] doing incredibly innovative things…and the lessons we’re learning are cutting edge. Sharing this information with the public and private sectors can only help stop various types of fraud before they become the next case in our investigative inventory.

Now that the J5 has issued clear guidance for players in the virtual currency industry, it will be critical that those involved in NFTs respond to this bulletin by incorporating the guidance into their compliance policies and due diligence. within reason. Specifically, companies would be well advised to establish comprehensive compliance programs aimed at ensuring that those with whom they do business comply with all applicable laws, including anti-money laundering and anti-money laundering requirements. knowing your client, as well as securities, commodities and tax rules and regulations. Additionally, some businesses in the industry are required to register as money services businesses. Using best practices in knowing what to ask of who is key to proper due diligence on potential partners and customers. While the digital asset space is known for its anonymity, sufficient compliance programs and due diligence require a “trust but verify” approach.

Next month, the J5 will hold its fourth edition of “The Challenge”, a series of meetings in which members from each country (Australia, Canada, England, the Netherlands and the United States) will use analytical tools to Generate leads and find tax offenders. use cryptocurrency to evade tax laws globally.

BakerHostetler’s tax team provides clients with sound and practical advice on federal, international, tax controversy, employee benefits, private wealth, tax exemption, and state and local taxation issues. Their experience extends to structuring transactions and representing clients in IRS review. The Criminal Tax Defense Team helps individuals and institutions assess and identify issues of concern and implement measures to reduce potential exposure. The team has successfully represented clients at every stage of criminal tax proceedings in IRS administrative investigations, joint IRS-DOJ grand jury investigations, and indictments and prosecutions by American law firms. The Blockchain Technologies and Digital Assets team has members in all of our major groups, and our attorneys have extensive experience in all areas of the blockchain and cryptocurrency markets, including investigations, securities law , commodities law, BSA/AML compliance, tax, privacy, transactions, advertising law, intellectual property and technology design as well as government affairs, public policy and advocacy in federal departments and agencies and Congress.

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