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)

Over the last two decades cybercrime has matured from the early days of curiosity-driven hackers and pranksters to a fully fledged industry. In the process, much of the distinction between ‘traditional’ crime and online crime has been eliminated: On the one hand organised crime now uses the internet as another tool for communication and transferring criminal proceeds; on the other hand spam, phishing and malware are mature criminal industries.

At the same time as the internet has changed the way people socialise, entertain themselves and work, it’s helped transform the criminal underworld, offering new ways to make money — and new ways to use launder proceeds whether from traditional crimes or cybercrime.

In July, the Australian Transaction Reports and Analysis Centre (better known by its acronym, AUSTRAC) issued one of its periodic typologies reports, which summarise money laundering case studies as well as making an assessment of emerging approaches for laundering the proceeds of crime. Two of the “potential vulnerabilities” flagged by the recent typologies report were the use of ‘virtual worlds’ — think World of Warcraft or Second Life — and digital currencies, such as Bitcoin.

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“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,” the report stated.

"At this stage, the misuse of digital currencies and virtual worlds for money laundering is still very much an emerging vulnerability," AUSTRAC CEO John Schmidt says.

"That said, AUSTRAC has undertaken research into the potential money laundering threats posed by electronic payment systems and new payment methods."

Virtual worlds, such as massively multiplayer online games (MMOs), offer the opportunity for money laundering in those cases where there’s a mechanism for converting some form of in-game credit (be it items or a fictional currency employed by the game) into ‘real world’ money.

“The criteria for virtual world money laundering to take place is that the world needs to have their own financial currency which can have real world money going in and out of,” explains Dr Clare Chambers-Jones, associate professor in banking and finance law at the University of the West of England and author of Virtual Economies and Financial Crime: Money Laundering in Cyberspace.

“This process of placing and layering allows the dirty money to be laundered. There are few regulations which prevent this from occurring,” Chambers-Jones says.

“Some stored value card providers also allow their products to be used in a virtual world. These can then be exchanged for real world currency,” Schmidt adds.

Real threat or emerging vulnerability?

Employing virtual worlds to launder money is not a new idea, but whether it's currently being used to hide proceeds of crime on any significant scale is still a subject of debate. But it's not just AUSTRAC that has been keeping an eye on the potential for money laundering; the Financial Action Task Force, the global body that monitors money laundering, issued a report in October 2010, Money Laundering Using New Payment Methods, that noted these digital methods were emerging avenues for hiding illicit profits.

One of the earliest virtual worlds that offered a mechanism for exchanging 'real world' money for in-world credits, and, crucially, back again, was Linden Lab's Second Life, which launched in 2003. Money can be exchanged for Second Life's virtual currency, 'Linden Dollars', and back again using Linden Lab's currency exchange or a third-party provider. "Second Life has been a focus of mine as to virtual world money laundering and there are instances of money laundering taking place," Chambers-Jones says.

In Q2 of 2011, the total amount of Linden Dollars held by Second Life users was in the region of US$30 million, which makes it relatively small fry given that the FATF estimates that the cost of money laundering and the underlying crime is two to five per cent of global GDP.

9 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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