The risk community noticed virtual money laundering
So there’s this site called World-Check. It basically runs a business related to managing risk for well-heeled institutions. From its site:
World-Check’s proprietary database and tools have direct uses in financial compliance, anti-money laundering (AML), Know-Your-Customer (KYC), Politically Exposed Person (PEP) screening, enhanced due diligence (EDD), fraud prevention, government intelligence and enforcement, and other identity authentication, background screening and risk-prevention practices.
In addition to the financial industry other client sectors include, insurance, legal, gaming, aviation, real estate, consultancy, natural resources and accounting to name but a few.
Well, today they have an article entitled Virtual money laundering now available on the world wide web.
The premise is of course the (by now) old chestnut in the VW community of buying in-game currency, transacting it a bit, then cashing it out. Their concern, of course is not for the operators of the MMO; rather, it’s for the banks that then may incur liability for accepting laundered funds.
Money launderers can now move illicit cash through the growing number of virtual reality role-playing games, and convert that cash into real currency before withdrawing it from ATMs worldwide. One wonders just how many laundrymen have tumbled to this cyberlaundering opportunity. Compliance officers at financial institutions please note that their banks may be guilty of money laundering if it faciliitates deposits or payments in these virtual worlds, for there is no functional due diligence on players or recipients.
The article concludes by speculating that virtual worlds that permit cash-in and cash-out may fall under the Patriot Act’s definition of a “financial institution.” Here’s a helpful article on the subject.
According to the Act, financial institutions include: an insured bank; a commercial bank or a trust company; private bankers; an agency or branch of a foreign bank in the United States; any credit union; a thrift institution; a broker or dealer registered with the SEC under the Securities Exchange Act of 1934; a broker or dealer in securities or commodities (whether registered with the SEC or not); an investment banker or investment company; a currency exchange; an issuer, redeemer, or cashier of traveler’s checks, checks, money orders, or similar instruments; an operator of a credit card system; an insurance company; a dealer in precious metals, stones, or jewels; a pawnbroker; a loan or finance company; a travel agency; a licensed sender of money or any other person who engages as a business in the transmission of funds, formally or informally; a telegraph company; a business engaged in vehicle sales, including automobile, airplane and boat sales; persons involved in real state closings and settlements; the United States Postal Service; an agency of the federal or any state or local government carrying out a duty or power of a business described in the definition of a “financial institution”; a state-licensed or Indian casino with annual gaming revenue of more than $1,000,000; and certain other businesses designated by Treasury (collectively “Financial Institutions”).
An anecdote: at a conference a few years back, talking with some policy-types who weren’t familiar with virtual worlds very much, Cory Ondrejka and I were telling them about the volume of gray market transactions in virtual goods, which at the time was somewhere in the $150m range.
“Well,” said the policy types. “It’s not drug money, but it’s sure terrorist money.”
We can add this to the possibility of virtual worlds being treated as gambling sites — particularly when they directly embed gambling, and permit cash-outs. There’s a deep pit of fresh and interesting problems here for the industry.
19 Responses to “The risk community noticed virtual money laundering”
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speculation, embezzlement, kickbacks, blackmail, bribery, ponzi- and pyramid-schemes. They still do, only now the FBI and CIA follow them. Nowdays, in 2007, we see the same thing beginning to happen, this time in virtual worlds. At the very least, people are alert to the possibility and are considering what to do about it. There are people getting rich. Both inside and outside of the law. As articles appear (”Real Money!” shouts Anshe Chung), there are people laughing into their moustachios (
Maybe it’s all the attention SL has had lately in the blogosphere, but I couldn’t help think that Linden is going to have to severely change the way some things work if they want SL to keep going much longer.
On the other hand, I don’t see too much of an impact on (western) MMORPGs that don’t explicitly allow currency exchange – since these games do have the ability to track transactions between characters and don’t provide an official method to cash in or cash out, so to speak. Likewise, even games that allow someone to buy in, like the way the Iron Realms games work, are probably safe as long as people can’t really legitimately cash out.
If the problem is perceived to be widespread enough (which it seems like is where things are headed), I can definitely see government agencies tasked with enforcement asking the game publishers to make changes which allow them to track in-game financial activity more easily when conducting an investigation. Most western publishers are probably already prepared for this possibility and thus the impact won’t be big. I’m not so sure about asian publishers, because RMT seems to be generally more accepted and used as a business model in asian games.
My prediction: Within a few years various governments will establish offices or agencies to track financial activities in virtual currencies. Laws will be written that require operators of virtual worlds to provide access to in-game transaction data to these offices or agencies. A few games which are grossly in conflict with the new laws will end up having to shut down or substantially change in order to continue operating; most games will simply implement whatever features might be lacking with minimal downtime (because if publishers haven’t been thinking about this type of thing ahead of time then their legal counsel isn’t doing its job). In the end average impact to players/users will be minimal, and most publishers will at most have to spend some extra development time and money making sure they’re in compliance with the new regulations.
[…] Thanks to Raph for the pointer to this article. […]
Money laundering via the web doesn’t surprise me- but don’t expect government regulation to stop at the games that offer official “cash-in” and “cash out” options. If anything, the unofficial RMT is an even bigger risk- it adds another layer of transactions to trace through.
Expect all persistent games to run into new tracking/reporting regulations very soon…
[…] Thanks to Raph for the pointer to this article. […]
The bigger issue is of becoming a financial institution. Those are waters that add huge layers to any organization. Consider a company I did work for a few years back that processed gift card transactions. They went through great pains to maintain that they were not a financial institution. All monies for gift cards are kept by the stores participating. It is the store’s responsibility to move the money according to what the gift card company told them. It’s a layer removed from actually dealing with the money and as such major portions of Sarbanes-Oxley and Grahm-Leach-Bliley do not apply.
Any MMO with both “cash-in” and “cash-out” that also handles the money aspects of the cash-in/out process is in danger of being regulated as a bank at some point in the future. That likely means compliance with the acts mentioned above in addition to various other privacy acts. It could also mean the MMO has to hold a certain amount of cash reserves in place like a bank is required to do and with that come the government regulators. Here, we thought $75M was expensive to develop a MMO. One with these burdens will use that $75M just staying compliant; forget actualy developing the game.
Entropia and SL come to mind immediately. WoW and others seem safe to me because the cash-out/cash-in portion of the game is handled by e-bay and other auction sites. EQ2 with it’s official hand in the auctions business might be in a bit more grey of an area because they broker transactions on an official basis between paying customers. Seems like the best bet at this point is to continue the practice of forbidding player trades and such while turning a blind eye to the daily reality where it occurs frequently.
I think for SL, this is kind of a fake concern as I posted on the Herald
http://www.secondlifeherald.com/slh/2007/01/is_second_life_.html#comment-27223626
Too many checks, balances, filters, long waits, insecurities, etc. to be a useful laundromat.
Easier to make a company run off a webpage and use PayPal.
“Easier to make a company run off a webpage and use PayPal.”
IGN? and RMT sites?
Thats like low hanging fruit to the FTC and SEC….
[…] 1 – The risk community noticed virtual money laundering “The premise is of course the (by now) old chestnut in the VW community of buying in-game currency, transacting it a bit, then cashing it out.” This could mean some big shake-ups. (tags: law terrorism drugs laundering money institutions financial worlds synthetic metaverse Life Second) […]
MindArk and Entropia have the security wrapped tightly around the economy system in regards to transfers. As MindArk guarantees the PED currency value, they are very strict about who gets what from whome. Which I see as a good thing, as it brings security into the whole concept. This is also what is lacking in systems where the company behind doesn’t take measures to secure the money transfers, but instead let it operate on thirdparty providers, meaning increased risks for everyone involved.
[…] Interesting…. the story has done a full loop, and now World Check has noticed various online gaming sites are talking about it. https://www.raphkoster.com/2007/01/03…ey-laundering/ […]
In Entropia , any random John Doe can deposit money via UCash -untraceable method-,can have a fake ID account then ” trade ” the money in a so-called ” PvP trade ” , wich in Entopia is legit , legal and final trade. Then the ” winner ” of that money simply cash-out via the ATM Card . Maybe you can trace the ” winner ” , but never the ” sender ” . And considering MindArk’s long history of NOT action in such alleged cases….
Finally a MMOG for grownups. The D&D bois line up to boo and hiss. Your fear and loathing are showing. Et tu, Raph? How disappointing.
Mikyo, I have to admit, I don’t follow. Fear and loathing of what, Second Life? Me? Uh…
[…] Nonetheless, it’s yet another signpost towards the issues that will certainly arise as virtual worlds allow more cashing in and cashing out. If these truly “will work in much the same way as real world banks” as the press release says, then there’s a host of laws associated with that — and I doubt too many videogame developers are ready to incur the sorts of uptime, guarantees, response times, and security rules that banks have. Would something like this mesh with say, Linden’s open source Second Life client? Probably not in the eyes of law enforcement… […]
[…] Linden Dollars, Entropia PEDs, or Tencent Q-Coins – which currency for Virtual Money Laundering? If you were going to use a virtual currency for money laundering, which would it be? Second Life is showing steady growth in its virtual economy, as noted at 3pointD. Raph and Matt have picked up on an article at World-Check on the general problem of virtual money laundering and have noted that the topic has floated around the industry for a while. But what about Q-coins? Tencent operates a massive IM / communication / community service called QQ in China. There is nothing like QQ in the US – it is ubiquitous with over 22 million Peak Concurrent Users (PCU) and 224 million active accounts, according to Gamasutra. And Q-coins. Q-coins are Tencent’s virtual currency. This currency is so popular that the Chinese government considers it a potential threat to its currency. Though Q-coins cannot be officially exchanged with real currency, they are used for payments for a wide range of online services as well as illegal activities including sex services and online gambling. I would not be surprised if Tencent expanded its QQ service beyond China… and where QQ goes, Q-coins will follow. But even so, here is a virtual currency that is widely used and accessible online with difficult jurisdictional issues if problems occur. Posted by SecurePlay at 10:15 […]
[…] Raph Koster has pointed to a sobering post by Kenneth Rijock, on the World-Check site. World-Check is a site that tracks risks world-wide, and Rijock is an attorney who has a rather interesting resume, to say the least: He has more than 25 year’s experience in the field of money laundering, as a practising laundryman, financial institution compliance consultant, and trainer/lecturer to law enforcement and the intelligence services of both the United States and Canada. After serving as a banking lawyer in an international law firm, he spent the decade of the 1980s as a money launderer and advisor to narcotics trafficking organisations operating in North and South America. […]
[…] Nonetheless, it’s yet another signpost towards the issues that will certainly arise as virtual worlds allow more cashing in and cashing out. If these truly ‘will work in much the same way as real world banks’ as the press release says, then there’s a host of laws associated with that — and I doubt too many videogame developers are ready to incur the sorts of uptime, guarantees, response times, and security rules that banks have. Would something like this mesh with say, Linden’s open source Second Life client? Probably not in the eyes of law enforcement… […]
[…] Players Banned – Not Gold Farmers – WTF? From Ralph Koster: https://www.raphkoster.com/2007/01/03…ey-laundering/ Gaming) The risk community noticed virtual money laundering So there�s this site called […]