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International Tax Consortium Lists ‘Red Flag Indicators’ of Fraud in NFT Marketplaces

An international tax consortium has issued a list of “red flag indicators” of fraud in non-fungible token (NFT) marketplaces to help banks, law enforcement and private industry crack down on criminal activity.

The guidance is the first of its kind from the Joint Chiefs of Global Tax Enforcement, also known as the J5. Founded in 2018, the J5 is made up of representatives of tax agencies from Australia, Canada, the Netherlands, the United Kingdom and the U.S., and is tasked with sharing information and coordinating operations to fight international tax crime.

Scams and fraud abound in the crypto markets, and NFTs are no different. Various crimes and bad behaviour, from forgery to money laundering to straight-up theft, have become increasingly common in the NFT markets.

In the document released on Thursday, the J5 listed 24 “red flags” for NFT marketplaces, split between “strong” and “moderate” indications of potential fraud some of which are:

  • Clearly overpriced/underpriced NFT that is traded frequently in short time windows.
  • Wash trading — artificially increasing sale value with each sale, between linked accounts.
  • Incorrect Mint Address — contract address doesn’t match address provided on project website.
  • Requiring seed phrase from Ethereum wallet in addition to the MetaMask wallet address for a transaction to be executed.
  • Phishing scams: fake offers on NFTs, sent via email.

In the J5’s “strong” indicators of potential fraud, law enforcement is encouraged to watch out for phishing scams, fake token giveaways, social media impersonation and other signs of potential wash trading and money laundering, such as “NFTs being sold for large sums and reacquired from the same party or a third party for smaller amounts.”

The “moderate” indicators include things such as non-existent contract addresses, missing information in the project’s description fields and re-used code within the NFT. The document notes that all these indicators have appeared in real projects, and are not alone indications of crime. However, they should be taken into consideration when deciding whether a project is legitimate.

Increased tax authority scrutiny, as highlighted by the J5 Release, suggests that tax stakeholders within companies need to be “at the table” for digital assets discussions beyond providing input on direct and indirect tax issues. Tax participation is a critical factor in all phases of product development and launch in the digital assets space; tax regulators expect such involvement as part of a company’s compliance procedures.

The J5 Release highlights government concerns over tax crime, financial crime, and sanctions risk management for digital assets, and the relevance of tax authorities to such investigations. Although NFTs share many of the technical features of other digital assets, as an asset class they have yet to be broadly brought within the oversight of any financial regulator. The J5 Release seeks to remind market participants that, although the regulatory classification may differ, NFTs can give rise to many of the same risks as other digital assets.