I imagine that someone could create an NFT, then use their illegally acquired money (from selling drugs, or whatever) to buy the NFT pretending to be someone else, then claim their income is from being an artist, rather than, say, a drug dealer.

I mean I'm sure it takes place, but I'd claim it's the minority. There are actually a lot of 'legit' people into NFTs, be it to collect them, or just speculatively buy them to flip them at a profit.