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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