“There was a time when a fool and his money were soon parted, but now it happens to everybody on crowdfunding sites.” I modified this quotation from Adlai Stevenson to fit our modern times. The late statesman who died in 1965 would have no way of knowing the overwhelming challenges we face in dealing with internet fraud today.
Fraud is rampant in the crowdfunding world. Forensic accountants describe crowdfunding as a scammer’s utopia. Some web sites like GoFundMe have become notorious and even synonymous with online scams. In fairness to GoFundMe, the Federal Trade Commission says that it is not yet able to identify one crowdfunding platform as being more susceptible to fraud than another. We have no way to gather real relevant data (it’s like trying to measure the volume of illegal drug sales), the anecdotal evidence indicates that the majority of online funding campaigns to involve some disreputable if not illegal aspects.
Alleged crowdfunding fraud falls into three categories:
- The promoter is not who they say they are; the campaign is designed as a scam from the start.
- The promoter may have been well-intentioned but the money was not used as the funder intended.
- The crowdfunding site itself is negligent by participating in or benefitting from inappropriate actions in its business.
The available third-party evidence suggest that the majority of campaigns on the Gofundme site involve some type of fraud, deception or mismanagement. The scams reported target both the project sponsors and those who fund the projects. Simply put, if you engage on the Gofundme site you can expect to be the target of a scam.
If you plan to be involved in crowdfunding either as a promoter or a funder, I suggest taking this approach:
First, recognize and accept that you have little ability to detect, avoid or prevent fraud in this environment. Fraud hits both sides of the funding equation: campaign promoters as well as the funders are likely to be victims of fraud. If you are involved in crowdfunding then you will be involved in fraud.
Second, either accept that risk as it stands and ‘go it alone’ with an expectation of losing some amount to fraud (consider the similar mentality that millions of people willingly accept the reasonable prospect of losing money at the casinos every year) or, alternately, build a plan to manage the risk. The latter approach likely requires bringing in help from a person trained to deal with fraud risk, i.e. a CPA or forensic accountant who have training and work experience in this area. I anticipate that engagements focused on crowdfunding issues like this will be in great demand for myself and other small business accountants in the future.
[contact-form-7 id=”3893″ title=”Boilerplate Contact”]