Money laundering using virtual worlds, Bitcoin on watchdog's radar

Financial watchdog AUSTRAC says that money laundering using virtual worlds, such as MMOs, and digital currencies, such as Bitcoin, are emerging threats
Image: http://www.flickr.com/people/tradertim/ (Creative Commons)

Image: http://www.flickr.com/people/tradertim/ (Creative Commons)

Bitcoin and digital currencies

Digital currencies offer much of the appeal of virtual world transactions, such increased anonymity, and have the added benefit of being designed for transferring money between parties and paying for goods and services. Particularly appealing for those who want stay off the radar of financial watchdogs are currencies that offer the ability to transfer value without the oversight of a central body such as a bank, with all the regulations that being a registered financial institution entails.

Bitcoin is by far the best known purely digital currency. The cryptocurrency, based on 'coins' generated through a mathematical algorithm (which is progressively 'solved' in blocks to generate coins using computer power, most commonly employing GPUs), holds particular appeal for those of a libertarian bent, because of its non-government-backed and decentralised nature.

There is no central bank that issues Bitcoins and transactions are peer-to-peer, so they do not need to go through any central authority. It offers a great deal of potential for at least somewhat anonymous transactions, although anonymity is not guaranteed (all Bitcoin transactions between 'wallets' can be viewed on the decentralised 'blockchain' database, but individuals can easily generate wallets that have no obvious connection to their real-world identity) .

Although Bitcoin supporters have made efforts to encourage adoption by 'above ground' retailers and service providers, the best known example of Bitcoin-facilitated transactions is Silk Road, an underground online market for illegal drugs that uses the Tor network to obscure the location of its servers on the internet (a recent estimate was that Silk Road is making annual sales of $22 million).

"AUSTRAC is aware that digital currencies, such as those offered by Bitcoin, may become more attractive to criminal groups, particularly in response to tighter regulation and monitoring of established or traditional financial channels by both government and the traditional financial service providers themselves," Schmidt says.

As a result, AUSTRAC and other law enforcement organisations "actively monitor developments across the range of digital currencies currently available in Australia".

While Bitcoin is known to have been used for illegal transactions, the small size of the Bitcoin economy and the frequently wild fluctuations of its exchange rate with 'real world' currency (and the limited avenues for exchanging Bitcoins with conventional currency or goods) mean its potential for money laundering is still largely theoretical.

A leaked FBI report (PDF) issued by the bureau in April notes that although the organisation "assesses with medium confidence that, in the near term, cyber criminals will treat Bitcoin as another payment option alongside more traditional and established virtual currencies which they have little reason to abandon," it "assess with low confidence, based on current user and vendor acceptance, that malicious actors will exploit Bitcoin to launder money. This assessment is based on observed criminal activities, investigations and prosecutions of individuals exploiting other virtual currencies, such as e-Gold and WebMoney..."

However, the report adds, if the currency stabilises and its popularity increases, "it will become an increasingly useful tool for various illegal activities beyond the cyber realm... Bitcoin might ... logically attract money launderers and other criminals who avoid traditional financial systems by using the Internet to conduct global monetary transfers.

The appeal

The advantage of these emerging avenues for money laundering is that they tend to be somewhat anonymous and less subject to oversight by governments and law enforcement.

"New payment methods such as the use of digital currencies or virtual worlds are not issued under the authority of a government body, or backed by traditional currencies," Schmidt says.

"This potentially allows individuals and entities to use them to conduct quick and complex transfers which are not regulated by authorities, making it a challenge for government agencies to follow the money trail."

"By not being able to easily trace either the criminal or the placement of money, and coupled with the issue of which country should criminal proceedings be brought in, it is appealing to criminals who want to quickly launder money," Chambers-Jones argues.

However, for now at least, traditional methods of money laundering still dominate. "By far the bulk of attempted money laundering activity continues to be undertaken through the mainstream financial system," Schmidt says.

'Virtual' money laundering comes with additional administrative overheads and potential limitations on volume, and at some point, funds need to be transferred back into traditional financial channels.

"At this stage, digital currencies are not widely accepted as payment for goods and services, limiting the opportunities for criminals to use digital currency to convert, move and launder illicit funds, as well as the amount of illicit funds that can be laundered," Schmidt says.

"Accordingly, at present, digital currency markets may only be of use to those conducting niche crimes in the cyber environment and individual or smaller scale illicit activity."

AUSTRAC's CEO says Australian authorities have observed cases of criminals using digital currencies or credits in virtual worlds for transactions, but the transactions have been low-value. However, Schmidt adds, the extent of their use by organised crime groups is unknown.

"It’s much more difficult for [criminals] to utilise an environment where it’s a game or a virtual world to move money," says Detective Superintendent Colin Dyson, commander of the NSW's Police Fraud and Cybercrime Squad. Dyson believes that virtual worlds hold more appeal to criminals as a platform for communication and co-ordination, than for laundering the proceeds of crime.

However, Chambers-Jones believes that it is "a real threat even that it has taken time for it to be recognised as a real crime".

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Comments

kezah

1

What is this article on about?

Why in the world couldn't I, a rational adult, be able to send MY MONEY to whom ever I want, when ever I want, what ever sum I want?!

The only way I can rationally see myself being limited in this regard is if I was someone's slave, and my master decided to limit my freedoms on this matter. Am I someone's slave??!

greg

2

Can these institutions that want to control what I can do with the product of my labor transparently provide what constitutes a cyber crime and quantitative evidence supporting the actions that they are taking supposedly to protect me? Never mind the fact that they are using my money to pay themselves to do that.

What am I, and the rest of the public, being protected from and what is the extent of the danger? Is it enough to justify them taking away my freedoms? And let's suppose the danger is immense. What is the efficacy of the actions they are taking and willing to take? What percent of the danger is being averted? Where are the peer reviewed scientific studies on this data?

Anu

3

Understandable. There was that nice totalitarian dream about knowing every transaction in real time in the upcoming proprietary cashless society. What you buy, from who, at what price and possibly also why.

And also the great possibility to veto any transaction as it happens. No citizen can do anything the state doesn't approve of. And now Bitcoin comes along and spoils the show.

Truth

4

Check out this article from today where Standard Chartered laundered hundreds of millions of dollars for Iran. Compared to banks, Bitcoin is nowhere on the radar.

http://www.business-standard.com/india/news/stanc-to-pay-340-mn-to-settle-charges/483396/

Danielle

5

Trying to tar electronic currencies because they might be used by bad guys is demagogery of the worst sort. You could just as well say briefcases are evil because they can be used to deliver cash for drug deals. What is totally lacking in this article is evidence that electronic currency is more likely to be used by bad guys than any other method of value transfer.

When I worked for the check clearing operation of Chase bank on Wall Street many years ago, they were the "correspondent bank" that handled clearing for smaller banks around the world when the check was traveling between countries. I observed million dollar deposits from banks in tiny cities in Colombia in transit to elsewhere. When I got a bit older and more worldly, I figured out this must be drug money being cleaned up.

The banks themselves are the biggest money launderers, because at some point the criminal has to legitimize their funds if they want to live well, or move it somewhere safer. The biggest danger to a drug lord is from his own employees, so they are pretty motivated to get their profits out of reach. With sufficient money, you can buy bankers and lawyers to cover your tracks. They know best how to beat the system, because they are the system. Perhaps investigators should look for corruption in the system instead.

DPH

6

Welcome to the party "Drug Lords," online gamblers and Silk Road victimless criminals.

The only possible danger here is to the state's oppressive money monopoly. If this evolves into a creditable threat to the current transactional gatekeepers, it will crushed by any and all means required. Financial control and manipulation is the lifeblood of the state. It will not go quietly into the night.

Robert

7

I quote:
"While the nature and extent of money laundering through digital currencies and virtual worlds are unknown, it is important to recognise their potential for criminal exploitation, particularly in response to tighter regulation of established or traditional financial channels,”

I respond:
Exactly! The extent is unknown. Considering the fact that there will ALWAYS exist legitimate and illegitimate ways to use something (like US cash), the mere action of recognizing the potential for criminal exploitation is USELESS. Therefore, it is insignificant to recognize the "potential". Quit wasting your time, and focus your energy on something that will bring measurable results to improving this world as a happier, healthier world!

byofrcs

8

Bitcoins and MMO are very different issues. Bitcoin is actually very public with every transaction being logged. You just don't know who it is logged with.
MMOs are not public but are logged to a user within the MMO server owner.
Two very different paradigms and disingenuous of AUSTRAC to conflate these given that Bitcoins have the possibility of running a herd of bulls through the whole concept of fiat money and central bank fractional banking systems. Bitcoins can have no quanative easing.
Anyway Bitcoins today function as a very good way of converting small amounts (pennies to a few bucks) from one currency to pay someone in another currency without horrendous commissions.

freedom curtailed

9

bitcoin represents loss of control for governments, that's why they are starting to spread disinformation about it

Think about it - imagine if you (i.e the government) could produce fiat currency at the press of a key and effectily create inflation for your citizens - that's what they do when they create fiat currency all the time

bitcoin flies in the face of that. It allows for citizens to go about their trade unhindered by governments

bitcoin allows citizens to trade without the loss of purchasing power which fiat money systems cannot do

Gold, bitcoin etc are a treat to the current banksters way of controlling the planet through debt - and to think you thought you were free and that the government was there for the citizens - nope, the banksters will do everything possible to shut down a citizens right to go about their lives unhindered

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