25/08/2020

This article considers the risks of money laundering in the world of online games, and whether current anti-money laundering (AML) and counter terrorism financing (CTF) laws are sufficient to address these risks.

Introduction to money laundering

The term “money laundering” is used to describe the process of disguising or hiding the origin of illicit funds (dirty money) in order to make those funds appear legitimate (clean money). The objective of money laundering is to allow criminals to use illicitly obtained funds without the threat of interference by the authorities – for example, confiscation of the dirty money or being implicated in the crime that generated the dirty money.

At a high level, the process of money laundering can, in general terms, be conceptually broken up into three distinct phases:

1. Placement

The placement stage is where the dirty money (which is usually in cash) enters the financial system. AML/CTF laws are designed to make this stage as difficult as possible for criminals, by requiring AML/CTF regulated entities to “know your customer” and to detect and report on unusual transactions.  One common tactic employed to avoid these controls is to involve many individuals who each deposit a small portion of the dirty money into their respective bank accounts to avoid triggering alarms.

2. Layering

Layering is the process of obscuring the dirty money’s origins. This often involves a complex series of transactions – a web of obfuscation designed to stymie any attempt to trace the original source of the funds. This may include taking advantage of overseas jurisdictions which do not submit to foreign warrants or regulatory enquiries. Similarly, a large number of small quantum transfers reduces the likelihood that any individual transaction will be identified as being illicit in origin. 

3. Integration

Integration is the final stage, in which the now clean money is returned to its criminal owner through what appear to be legitimate sources. The now clean money may be invested in financial products (e.g. derivatives or shares) to further disguise the money’s origins. In this case, the investment income (or any realised capital gain) appears to be from a perfectly legitimate source.

Anti-money laundering in Australia

In order to combat money laundering, many countries, including Australia, have introduced laws requiring entities to identify, report and restrict activities that may be related to money laundering or terrorism financing.

In Australia, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act or Act) applies to entities that have been identified as having a high risk of being used for those activities.  Its requirements are designed to help those entities detect and prevent money laundering or terrorism financing. The entities include financial institutions (banks, credit unions, building societies, superannuation fund managers), those operating in the gambling sector (casinos, betting agencies, poker machine operators), remittance (money transfer) services, bullion dealers, digital currency exchange providers (bitcoin, ether) and other professionals or businesses engaging in services designated by the AML/CTF Act (reporting entities).

The Act imposes 5 major obligations on reporting entities:

  • enrolment - a reporting entity must enrol with Australia's AML/CTF regulator and specialist financial intelligence unit, the Australian Transaction Reports and Analysis Centre (AUSTRAC), and provide prescribed enrolment details
  • AML/CTF program – reporting entities must establish and maintain an AML/CTF program to help identify, mitigate and manage the money laundering and terrorism financing risks the business faces
  • customer due diligence – each reporting identity must identify and verify every customer’s identity, and monitor their transactions
  • reporting – a reporting identity must notify AUSTRAC and other authorities (such as the ATO and law enforcement agencies) of suspicious matters, threshold transactions and international funds transfer instructions
  • record keeping – reporting entities must keep records of transactions, customer identification, electronic funds transfer instructions and details of their AML/CTF program.

These measures are designed to make each of the money laundering stages as difficult as possible.

Money laundering and online gaming

As a result of global anti-money laundering and counter-terrorism financing measures within the banking, finance and real estate sectors, money laundering has experienced a “displacement effect” – a term coined to describe the way that “as some parts of the economy become ever more tightly regulated, tainted money goes elsewhere, like the air in a squeezed balloon”. One novel area experiencing this new “airflow” is the online gaming industry.

The online gaming industry is huge. There are currently over 2 billion e-gamers globally, generating approximately $140 billion per year for the industry. It is predicted that this amount may reach $300 billion by 2025. Much of this turnover is derived from purchases that players make when playing the relevant game - such as when they buy in-game currency or an in-game item (e-currency). In general terms, there are two types of e-currency:

  1. Convertible e-currency – e-currency is convertible when the game allows the gamer to sell the e-currency to other players in-game for real-world currency. Convertible e-currency is not common.
  2. Non-convertible e-currency – e-currency is non-convertible when the game does not provide an in-game mechanism for the sale and purchase of the game’s e-currency between players. Often, the game’s terms and conditions will specifically prohibit gamers from selling the e-currency on to other gamers, or otherwise redeem the e-currency, for real-world currency. Non-convertible e-currency can be found in many games.

In some cases, where a popular online game has non-convertible e-currency, secondary markets have evolved for trading its e-currency. These secondary markets are run by third parties providing exchange or escrow services outside the game platform itself.  These include the ability for players to buy and sell accounts (i.e. an entire player profile with all the associated e-currency for that profile).

As the Financial Action Task Force (FATF) (the international anti-money laundering standard-setter) notes, the ‘development of a robust secondary black market in a particular non-convertible [e-currency] may, as a practical matter, effectively transform it into a convertible [e-currency]’.

One of the better known examples of one of these secondary markets is PlayerAuctions, a website that allows gamers of over 280 games to buy and sell e-currency for those games. PlayerAuctions facilitates orders and holds the buyer’s funds until they confirm that the seller has transferred the e-currency in-game.

So, how is e-currency used to launder money?

Example 1 – cleaning money

A 2013 research paper reported that criminals may be using massive multi-player online games, such as World of Warcraft, for money laundering. According to this paper, stolen credit cards were used to purchase e-currency from the official in-game store. The illicitly obtained e-currency was then sold to other legitimate gamers through a third-party site, often for bitcoin or other untraceable crypto-currencies. Using this method, neither the buyer nor the seller is aware of each other’s identity.

Example 2 – moving money

Transferring dirty money via electronic funds transfer (EFT) is likely to be picked up as a suspicious transaction by financial institutions (for example, amounts of AU$10,000 and over are automatically reported to AUSTRAC). Even if the criminal attempts to structure their EFTs so that they are under the AU$10,000 limit, there is still a high likelihood the EFT may be flagged as suspicious activity given the sophistication of monitoring methods. However, if they purchase e-currency with the dirty money (see example 1) and transfer this to an in-game account anywhere in the world, they are then able to sell the e-currency for real-world currency in their local jurisdiction – avoiding the monitoring methods of reporting entities.

What’s next?

Guidance on future law reform in this area can be drawn from FATF’s Recommendations on ‘virtual assets service providers’, which was developed in response to the rise in cryptocurrencies.  FATF’s Recommendations suggest that a risk-based approach be applied to emerging virtual assets.

Based on this, it is possible that any future online gaming anti-money laundering obligations will be implemented gradually, perhaps based on the developers’ revenue (in order to target those entities with the greatest capacity to meet AML/CTF obligations) or based on the amount of e-currency traded in connection with a developer’s game (which would target those games with the greatest risk profile).

Given that e-currency is now a medium for the storage and exchange of value, operators in the online gaming industry should consider taking steps to inhibit and prevent their platforms from being used as a means for money laundering.  It is reasonable to expect that calls for online gaming platforms to be subject to obligations similar to those of reporting entities under the AML/CTF Act will only increase over time, and any steps taken by the online gaming industry in this regard can only help its cause. 

 

Authors: Andrew Hii and Jack Corcoran

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