News

TikTok Lawsuit Highlights Potential Money Laundering Risks

A state lawsuit claiming TikTok operates as an unlicensed money transmitter spotlights the money laundering-related risks posed by online platforms where users can digitize and send cash to other users in any amount, analysts told ACAMS moneylaundering.com.

Utah Attorney General Sean Reyes alleged in a lawsuit on June 3 that the Chinese-owned social-media platform’s live-streaming feature, which allows viewers to buy and send “gifts” that appear as ice cream cones, hearts, teddy bears and other animated emojis—each of which hold a monetary value—to other viewers, financially incentivizes illegal sexual exploitation of minors.

“Because TikTok refuses to appropriately oversee virtual currency exchanges, every transaction that takes place on the platform avoids regulatory schemes designed to identify and stop sexual exploitation and other illicit activities, like money laundering, terrorism financing, drug sales, and illegal gambling,” Reyes alleged in the 54-page complaint.

The complaint cites an advisory issued by the Financial Crimes Enforcement Network five years ago that defines administrators of convertible virtual currencies, also known as CVCs, as money transmitters that must adopt anti-money laundering programs, identify their customers, assess the illicit finance-related risks they pose and screen their transactions.

FinCEN’s advisory exempts commercial platforms that handle payments “only integral to the sale of goods or the provision of services” from AML requirements. The exemption does not cover the transmission of tips or gifts for a performance that lacks an assigned price or value.

“Given the fact that you can cash out the [TikTok] diamonds, it seems pretty straightforward that that’s money transmission activity,” Eric Kringel, former senior adviser at FinCEN, told moneylaudering.com.

Representatives of TikTok did not respond to requests for comment.

The company has yet to reply to the civil complaint in Salt Lake City, Utah.

Token values

According to TikTok’s website, users can purchase up to 2.5 million “coins” for $26,500, which amounts to roughly 1 cent apiece, with their credit or debit cards.

During a live stream performance, viewers can use their coins to buy “gifts” to send to performers via chat messages. Gifts convert to “diamonds” upon entering the recipient’s account on TikTok.

Diamonds convert to half a cent each when users cash them out from TikTok to PayPal.

Banks and other AML-regulated financial institutions handle the deposits and withdrawals users conduct to and from TikTok, albeit indirectly, a source with the Utah Attorney General’s Office told moneylaundering.com, but PayPal does not know who among them then sends “gifts” to performers and for what amounts.

“Who is buying the gifts with coins? Who is sending them to the other user? That would all be inside TikTok,” said the source, who asked to remain anonymous.

Linden Lab, developer of the online role-playing game Second Life through which users can exchange in-game tokens called “Linden dollars” worth roughly one-third of a cent, runs a comparable model of money transmission.

The company acknowledged its AML program obligations in 2019, said Kringel, the former FinCEN adviser, now founder of SLK Compliance in Maryland.

Linden Lab’s San Francisco-based spinoff, Tilia LLC, a federal- and state-registered money services business, now handles customer-to-customer transactions for Second Life and other online games such as Upland.

The Utah Attorney General Office’s lawsuit alleges that criminals can use TikTok’s “gifts” to pay or entice performers, including minors, into engaging in provocative, sexualized poses and dancing without scrutiny of the transactions.

TikTok’s “virtual items policy” prohibits users less than 18 years of age from buying coins, cashing out diamonds, and performing or viewing performances through the company’s live-streaming feature. To convert diamonds accrued on TikTok into cash on PayPal, users’ names on their accounts with each platform must match.

“We reserve the right to verify your identity, age (by requesting a photocopy of your state ID card, or other proof as we may require) and eligibility qualifications to our satisfaction prior to making any payment,” the policy states.

Utah’s complaint alleges that to the contrary, records subpoenaed from TikTok show that the platform knows that many users of the live-streaming service have yet to turn 18.

Loophole

TikTok’s policy of ensuring that a user’s name matches the name they use on PayPal may suffice for tax-reporting purposes, said Sarah Beth Felix, chief AML officer at Acceleron Bank and head of AML at Palmera Consulting in Austin, Texas.

But the policy does not suffice for AML purposes because the origin of the funds used to the purchase the “coins” remains unknown to PayPal, as does the identity of the user or users who bought and sent them to the person now seeking to cashing them out, Felix said.

Utah’s lawsuit follows a series of alleged, profit-motivated abuses of social media platforms and their on-platform currencies.

In September 2023 Swedish news outlet Svenska Dagbladet reported that criminal gangs used Stockholm-based music platform Spotify to collect the proceeds of drug sales and other criminal activities by using their illicit funds to buy streams from complicit performers from whom they then collect the streaming revenue.

In a separate case, plaintiffs in the Northern District of California sued to recover funds from Roblox Corp., the corporate entity behind Roblox, after the company deactivated the virtual goods they had purchased with “Robux,” units of in-game currency worth half a cent apiece, without compensating them.

The plaintiffs agreed in March of last year to drop monetary recovery for 311 of the users because their pattern of purchasing the goods with Robux raised suspicions of money laundering.

“They [the suspicious accounts] appear to be using the Roblox platform to send money to one another by purchasing fake virtual items, a highly inefficient and costly means of transferring money which suggests they may be engaged in money laundering or other improper behavior,” plaintiffs alleged before settling the lawsuit in March of last year.

Contact Fred Williams at fwilliams@acams.org

Topics : Anti-money laundering , Money Services Businesses , Cryptocurrencies
Source: U.S.: Courts , U.S.: State Attorneys General
Document Date: July 30, 2024