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Special Contributor Report: Income Share Agreements – An Avenue for Success or the Next Vehicle of Crime?

Man in a suit and tie holding a logo of a stack of money with a graduation cap

When it comes to organized criminal associations seeking to legitimize their illicit haul, an overwhelming commonality appears to have manifested over time: these groups have gained an astute understanding of the financial sector and the array of compliance defenses created to stop them.

Whether it be within the banking area, insurance industry, securities sector or a trade-based business, [1] the criminal of yesteryear has since adapted to ensure the prosperity of their [illegal] business activity. But what about the financial criminal of tomorrow?

With the rise in popularity of online commercial marketplaces – many of which remain unregulated, particularly if they reside on the darknet – privatized trading platforms must anticipate and prepare for all potential risks associated with creative and aggressive criminals attempting to move sullied proceeds through their operations.

Indeed, this would include developing and instituting adequate financial crime compliance protocols to respond to the mounting threat of economic malfeasance.

And there is one rising marketplace that could be a prime target for criminal infiltration. With the U.S. student loan debt crisis nearing its breaking point,[2] those seeking an alternative method to engage in financial criminal activity may have just found one: privately funded Income Share Agreements (ISAs).

In recent years, privatized ISA marketplaces have emerged as yet another way by which one can invest their money.

Provided that these platforms undoubtedly fall within the regulatory scope of U.S. policy related to trade, it is quite possible that privatized ISA marketplaces have systematically failed to realize the need for proper compliance programs.

Why is it so important to subject these platforms to something like the anti-money laundering (AML) programs required for brick-and-mortar banks, money services businesses – like remitters and currency exchanges – and, more recently in many jurisdictions, crypto exchanges?

Because of the other thing all criminal groups looking to launder their funds in a feigned attempt at legitimacy have in common: They are always looking for the path of least resistance.

In the case of ISAs, that means a medium where desperate students are looking for a funding mechanism and care little for its fiscal source – a dynamic that could be taken advantage of by criminal groups flush with cash and looking for ways to make it appear of legal origin.

Is an ISA safe?

Before expanding upon that notion, it would be helpful to briefly explain the characteristics and purpose of an ISA.

An ISA is an alternative method for a student to fund the cost of their higher education, a system also referred to more broadly as human capital contracts.

These types of human capital contracts are not wholly new ideas, originating as far back as the 1770s by Adam Smith and “The Wealth of Nations,” but more recently resurging in the public consciousness with Nobel Prize–winning economist Milton Friedman, detailing human capital contracts in a footnote buried in his co-written 1945 book, Income from Independent Professional Practice.

These ISA’s reside in a unique nexus between banking, lending, securities and higher education, having the attributes of some, but none of the requisite government oversight or burdensome financial crime compliance protocols in place at formal financial institutions.

They are not routinely run or administered by banks, but have a lending function, and while the funds have some of the hallmarks of a security as they can be funded by investors, they typically don’t come with the stringent counter-crime and anti-fraud tethers required for entities under the formal rubric of financial institution.

By entering into a contract with a money lender, whether they be a privately held business or publicly-funded research institution, the student essentially promises to satisfy the cost of their degree by allocating a portion of their future income to the money lender for a set number of years.[3]

While commentary on the potential societal and economic benefit of ISAs is widespread,[4] it is imperative for these new private money lenders to appreciate the magnitude of the risk that is associated with investor-funded ISAs.

Some tout these arrangements as a powerful way to turn the cost of college on its head, transferring the payment pressure from the student to the corporate and related investors – ostensibly because they have deeper pockets and spread and shoulder these costs more easily.

In an ideal setup, the corporate could also mentor the student and prepare them for a given field, rather than just provide for their future financially.

Others decry ISA arrangements as simply an updated form of indentured servitude which raises disturbing questions with nebulous answers: Does the corporation effectively “own” the individual until they have paid their pound of flesh in the agreed-upon time frame?  

But in order to better understand how ISA marketplaces could be infiltrated by savvy criminals, we must first look at the current framework of regulation – or lack thereof.

Before an individual can invest their funds with many of these ISA marketplaces, they must first satisfy the lax prerequisites needed to be considered an “accredited investor” under Section 413(a) of the Securities Act of 1933.[5]

Simply satisfying the requirements of this statute does not negate the implied responsibility of the ISA marketplace to screen “accredited investors” for unlawful activity.

In other words, “accredited investors”[6] seeking to invest their funds in students by way of a private ISA provider do not go through the same screening process as those seeking to invest their funds with a regulated financial institution.

Setting aside the sheer magnitude of trades, this, in it of itself, should be cause for concern.[7]

Where is AML when it comes to an ISA?

But in order to better bring into relief the potential criminal vulnerabilities of the ISA marketplace, it’s vital to first understand the bevy of expansive and costly AML and compliance and sanctions screening rules in place at financial institutions now – with the realization that banks which have flouted these rules have paid penalties in the billions of dollars.

In the U.S., regulated financial institutions are required by the U.S. Treasury’s Office of Foreign Assets Control (OFAC), to design and implement effective screening programs to ensure that they do not do business with those considered to be specially designated nationals (SDNs) and other blacklisted entities.

The SDN list is made up of sanctioned entities considered to pose an immediate threat to the U.S. economy, foreign policy, or national security (e.g., terrorists, transnational criminal organizations, narcotics traffickers, etc.).[8]

Typically, if an individual or entity on the SDN list is trying to do business with a registered financial institution, the institution will block, reject, and generally prohibit those and future transactions.

Moreover, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) – the country’s financial intelligence unit and administrator of its AML rules – requires that all financial institutions file a suspicious activity report (SAR) immediately after identifying a questionable transaction and, upon further review, is deemed “suspicious” and is more than $5,000.

In that same vein, many banks subscribe to third-party “negative news” services that screen prospective clients across the Internet and bespoke databases to see if they have ever been formally tied to a crime, convicted or were part of a company with a high-profile criminal or compliance failure – something than an ISA marketplace firm should consider.

Due to the perception that they are not scrutinized to the same extent as a regulated financial institution, ISA marketplaces may soon become the next vehicle for criminals to “clean” illegitimately derived earnings.

The clandestine operations of those attempting to launder their money through seemingly legitimate sources must be met with ingenuity and swift action – even if you are a private corporate not subject to formal AML rules.

Regardless of their privatized status, it is imperative that each private ISA marketplace institute comprehensive compliance programs, analogous to that of a regulated financial institution (e.g., American Express, Bank of America, JP Morgan Chase, Wells Fargo, etc.).

Though the volume of investments that a major financial institution handles dwarfs those of an ISA marketplace, this does not mean that ISA marketplaces are out of reach for criminals seeking to integrate their illegitimate funds.

[1] Eric Lichtblau, New Hiding Place for Drug Profits: Insurance Policies, N.Y. Times, Dec. 6, 2002, at A1.

[2] Zach Friedman, Student Loan Debt Statistics in 2019: A $1.5 Trillion Crisis, Forbes (Feb. 25, 2019, 08:32 AM),

[3] Jillian Berman, New bill on students pledging future income ‘an open license for discriminatory financing’, MarketWatch (Aug. 5, 2019, 11:23 AM),

[4] Annie Nova, Income sharing agreements could mean interest rates for students above 18%, CNBC (Aug. 25, 2019, 09:30 AM),

[5] Securities Act of 1933, § 4(a)(2); 17 C.F.R. § 230.501(a) (1990).

[6] Id.

[7] David Canellis, Here’s how criminal use Bitcoin to launder dirty money, TNW (Nov. 26, 2018, 16:35 UTC),

[8] See, e.g., Transnational Criminal Organizations Sanctions Regulations, 31 C.F.R pt. 590 (2017); Terrorism Sanctions Regulations, 31 C.F.R. pt. 595 (2017); Foreign Narcotics Kingpin Sanctions Regulations, 31 C.F.R. pt. 698 (2017).


Breakout Box: What is an ISA and how can criminals take advantage of these funding arrangements?

To better understand the criminal risks at play for ISA arrangements, it’s vital to understand how they typically work in practice.

Here is a snapshot:

  • Step One: A for profit company as a full or part of its business decides to get into the ISA game.
  • Step Two: The company then solicits investors, or perhaps even uses some of its own funds, to create a fund to help a given number of students – depending on the total value of the investments collected – with their education.
  • Step Three: The student, or students, enter into a contract with the company to fund the cost of their education (either directly or indirectly) and, in return, the company negotiates a percentage of the person’s future salary to be repaid to the company, and subsequently, any institutional investors, over a certain number of years.

Seems simple enough, right?

But there are a panoply of potential criminal infiltration points in these arrangements, particularly if they have little government oversight and no formal financial crime compliance programs in place.

Here are some examples:

Corporate charade: Even if a company stated the funds it is using to pay off a student’s debt came from “investors,” how is a student going to know if that’s true or not?

The funds could have come from a drug dealer in Mexico who is working through a shell company in the Bahamas and has an account at a bank in Texas.

What happens if this corporation overpays the student’s debt and, as a favor, asks the person to wire the funds to other bank accounts or take the money out and deposit it at certain ATMs in certain amounts? That is classic money laundering and the unknowing student could be charged.

Ponzi Perils: Another scenario that could be ripe for abuse in this area is if the corporate itself is the illicit party.

What is stopping a fraudster, similar to how a Ponzi scheme works, from stating it will be engaging in ISA arrangements to help students, solicits investors, captures millions of dollars and then only actually hands out a mere pittance of the funds to students.

And then, after weeks or months of paying off some or all of the debt for a few students, the person simply disappears, pockets the money and decides to squander the investor funds and leave students in the lurch with a luxury house, car and posh vacation in the Maldives.

A criminal major: Criminals are already duping students into laundering their money for them as recent global headlines attest. But what if the criminal network infiltration went even further, all the way down to the “student” level?

The creativity of major organized criminal groups and the lengths they will go to launder their money is boundless. What if a narco cartel created a shell company in the U.S. and stated the operation would function like an ISA?

The company could then take in donations from “investors” from companies working through banks all over the world – only the “investors” in this case would also be cartel flunkies operating through shell companies in offshore secrecy jurisdictions with opaque, impenetrable ownership structures.

In this case, some lower ranking cartel groups could enroll in schools and act as if they were students. The corporation could then pay for these individuals’ purported tuition – or pay off a student loan taken out by a young cartel stooge – to mirror a real ISA arrangement.

The students could then start “paying back” the corporate in the ensuring months and years with drug money that would appear to come from their new careers with nary a glance from the banks involved because this was the expected, even predicted, account activity.

Breakout box: ISA criminal vulnerabilities

In ISA funding chain, who should screen for OFAC?

In fact, the lack of industry-wide regulation makes ISA marketplaces a target.[1]

Over the past decade, new online transactional marketplaces have evidently revealed their overtly vulnerable state.

That is, without comprehensive compliance protocols in place, transactional platforms continuously engage in an economic game of Russian roulette (i.e., a game of chance); the likelihood that these businesses engage in what OFAC would consider to be a sanctions violation is nigh inevitable without adequate screening procedures.

Going further, even if a company has the best intentions in being part of the ISA marketplace, it may find itself under unintentional law enforcement scrutiny for engaging in suspicious activity it wasn’t even aware of – chiefly because the due diligence and transaction monitoring that could have yielded insight into the possible criminal tendrils of investors is still firmly in the wheelhouse of its banking brethren.

Just as Bitcoin and other cryptocurrencies have proven to be an attractive way for criminals to launder funds,[2] unregulated ISA marketplaces may soon spearhead a criminological revolution – educational funding with “dirty” money.

Provided that the process of money laundering is not as complex as one might think, ISA marketplaces must identify and screen every potential investor before allowing them to engage on their platforms.[3]

Those engaging in an illegal activity that generates substantial revenue may seek to “clean” these funds through an intermediary source (e.g., ISA marketplace) in order to make it appear as if the money was derived from a legitimate source (e.g., return on initial ISA investment).

In order to combat the ingenuity of a skilled money launderer, ISA marketplaces must proactively react and identify the above mentioned institutional risks associated with the distribution of revenue – in essence to voluntarily take on AML-lite duties.  

This would include an enhanced managerial commitment to ensure institutional compliance, the periodical auditing and risk-ranking of all “accredited investors,” cross-referencing every interested investor with OFAC’s SDN list prior to engagement, scouring for negative news hits tied to companies and individual investors and training staff to mitigate any and all potential criminal infiltration(s).

Though ISA marketplaces have just emerged onto the U.S. scene, they carry the same (if not greater) risk of a much senior financial institution. Provided that the return on these new ISA investment opportunities may, indeed, prove to be quite lucrative, compliance must be made a priority to protect the financial wellbeing of both the ISA provider and the student.

Why put this nation’s youth at risk of engaging in questionable economic gain?

Every business engaged in the handling and distribution of monetary and non-monetary funds must be concerned about the vulnerabilities of their control framework.

Pursuant to that rationale, ISA marketplaces must act before they subject themselves to economic harm. Or worse, allow money launderers to infiltrate the prized establishment of higher education.

About the author

Eian Weiner is a third-year law student at the Benjamin N. Cardozo School of Law in New York, NY. As a law student, Eian has gained experience in the fields of institutional risk management, insurance litigation defense, as well as complex civil litigation. Eian has also received international recognition for his mediation skills.

Further links, acknowledgements and resources:

[1] See supra note 7.

[2] Agencies, Ten arrested in Netherlands over bitcoin money-laundering allegations, The Guardian (Jan. 20, 2016, 1:28 PM EST),

[3] Neer Varshney, ShapeShift’s new identity policy is tearing the cryptocurrency community apart, TNW (Sept. 5, 2018, 13:57 UTC),

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