Incorporating video games into a laundryman's "wash, dry, and fold"; process might seem like a joke to some, but anyone who has spent time inside some of the more popular virtual worlds like Second Life should understand why this is not something people should brush off too quickly. The size of virtual worlds, the nature of their economies, and the availability to receive cash for virtual items makes money laundering a potential threat that is worthy of attention.
Virtual worlds can take the form of either a computer-based online game or simulated social environment in which individuals from across the globe can participate simultaneously.1 In fantasy role-playing style games like World of Warcraft, players fight monsters and achieve different levels through journeys, quests and the like. Virtual realms like Second Life, however, are more akin to an everyday, real-life social experience. Users, often referred to as residents, create their virtual representation in the form of an avatar and can partake in many of the same activities inside the virtual reality world that they would on a normal day in their real life. Residents can chat and interact with others, hold a job and receive virtual currency as compensation, purchase a house, meet a friend at the local coffee shop, worship at a church of their choice or even tie the knot with another resident.
Virtual Economies, Goods and Currency
Many virtual worlds have their own economies equipped with currency exchanges and exchange rates. Virtual currency and goods can be purchased electronically, transferred to other residents or used to create profits through a virtual business venture, then exchanged for real dollars by way of an electronic payment, wire transfer or in some cases by check. Third-party exchanges provide a medium for players to purchase and sell goods and currency to and from each other through independent sites not directly affiliated with the games, which can add another layer to a virtual money laundering scheme.2 For example, a user can purchase virtual currency from a third-party exchange site, transfer that money over to their virtual account in Second Life and shift it around inside the game, then sell the virtual currency accumulated from game activity inside Second Life back to the third-party exchange site for real dollars.
Virtual currency can be used in Second Life to purchase just about any type of item one can imagine, including, but certainly not limited to: land, dining room sets, board games, revolvers, mechanical bulls, you name it.3 Users are at times willing to pay substantial sums of real dollars to acquire virtual assets, as Jon Jacobs did when he spent U.S. $100,000, almost his entire net worth at the time, on a digital space station inside Entropia Universe in hopes of generating future income from the property.4 That turned out to be a smart investment, as he not only was able to make thousands of dollars per month charging fees for access to the property,5 but later sold several of his virtual properties for a grand total of U.S. $635,000.6 Not a bad rate of return. Virtual currencies are not the equivalent of Monopoly money used only for play as some perceive them to be.
The market for virtual goods and services as a whole has increased dramatically and is to the point now that the overall economy for virtual goods is greater than the overall GDP of countries the size of the Cayman Islands and Aruba.7 Inside Network, an organization which provides research and news on the social gaming industry, predicted in a recent report that the market for virtual goods in the United States will reach approximately U.S. $2.9 billion in 2012.8 Second Life alone has one million users logging in every month and nearly U.S. $35 million changing hands between residents each month.9
The substantial sums of money being drawn into virtual worlds has even resulted in Second Life and Eve Online placing their own self-regulated banks inside the games, although both have been shut down.10 Entropia Universe, however, received an actual banking license from the Swedish Financial Supervisory Authority11 and proceeded to sell five virtual electronic banking licenses for a combined total of U.S. $400,000.12 The licenses allow their holders to open real banks inside the game capable of providing standard bank services such as interest-bearing accounts, direct deposit, bill payment and loans.13 The bank provides deposit insurance for up to U.S. $60,000 per customer14 and provides for more enhanced regulation than other previous attempts at internal banks like Ginko Financial, Second Life’s failed attempt at using a self-regulated bank.15
Money Laundering Risks
Turning specifically to the idea of how virtual worlds can be used to launder money, an example of how criminals might do this is to first set up multiple accounts of their own, funded with real dollars. The user can transfer virtual currency and goods between the accounts through purchases, gifts, or bartering, providing the appearance of routine game activity between residents. The proceeds can then be funneled to an account the criminal maintains in order to convert the virtual assets and currency back to real dollars. The dirty money now appears clean. This scenario can be replicated with co-conspirators operating around the globe. Multiple members of a criminal organization can open accounts and work together by performing the same process. The result is the same: dirty money goes in, seemingly clean money comes out.
Using a virtual world to launder dirty cash is a nonconventional method with unique benefits. Some of the biggest obstacles criminals face during the money laundering process can either be minimized or avoided altogether by using virtual worlds. The entire process can happen with potential anonymity at any time of the day and without a single member of the criminal organization having to show their face. Utilizing virtual worlds allows criminals to fly under the radar and exploit an area that most law enforcement officers are unfamiliar with, which is one of the biggest issues facing law enforcement in their effort to combat financial crimes taking place in virtual worlds.16 Without an understanding of how virtual worlds operate and how criminals can use them to clean their dirty money, officials will have a difficult time detecting this type of activity inside them.
Going beyond issues pertaining to the detection of this activity, actually prosecuting a case of virtual world money laundering could present a variety of challenges. One of the benefits of virtual worlds is the potential for anonymity, which can make it difficult for law enforcement to know who they are dealing with in the first place. Due to the ability for individuals from across the globe to come together and interact inside a virtual world, jurisdictional issues also pose a problem for law enforcement. With the availability of cross-border money movements combined with the added complexity of the involvement of Internet servers, the process of determining who has jurisdiction, who is responsible for investigating the crime, and who prosecutes the case can become very convoluted.17
AML/CTF Legislation and Application to Virtual Worlds
What may be the largest advantage virtual worlds provide criminals is their lack of regulation. Virtual worlds are not required to maintain records, institute customer due diligence programs to ensure they know who they are dealing with, or comply with the other regulations in place over traditional financial institutions.18
Be that as it may, virtual worlds which allow users to purchase virtual currency, store value in the equivalent of real dollars, transfer virtual currency to other users, and retrieve real dollars in exchange for their virtual currency should theoretically fall under the category of a Money Services Business (MSB), specifically a money transmitter, according to Title 31 of the United States Code of Federal Regulations.19 According to subsection (ff)(5)(i)(A) of section 1010.100, “The term 'money transmission services’ means the acceptance of currency, funds, or other value that substitutes for currency from one person and the transmission of currency, funds, or other value that substitutes for currency to another location or person by any means. ‘Any means’ includes, but is not limited to …an electronic funds transfer network; or an informal value transfer system.”20
If a user loads real dollars into Second Life in exchange for Linden dollars, Second Life’s virtual currency, stores that value inside a virtual account, then directs Second Life to transfer virtual currency to another resident who can retrieve real dollars in exchange for Linden dollars, Second Life’s LindeX exchange system is acting as a functional equivalent to a money transmitter, which requires registration with the Financial Crimes Enforcement Network, state licensure in all states where business is conducted, and compliance with AML legislation. Lower-risk business models can avoid being regulated as an MSB, but more information is needed to determine whether virtual worlds might be able to dodge this kind of regulation.
China’s online game regulators have actually published regulations making it illegal to trade virtual currency for real money21 and forcing game operators to maintain purchase records of online gamers for at least 180 days from their last purchase.22 These actions were taken in an effort to strengthen the management of virtual currency used in online games amid concerns that the currency, such as the popular Chinese game Tencent’s QQ coins, may have an impact on the real financial system in the future and could be exploited by criminals.23
If AML legislation ever does become strictly enforced in virtual worlds similar to how it is with financial institutions, the effects on virtual worlds must be considered. Subjecting virtual worlds to the same AML requirements in place over traditional financial institutions could end up doing more harm than good. The trick would be to preserve game play in the best way possible while increasing transparency and ensuring virtual worlds adhere to proper AML standards. Virtual worlds do present a valuable technological advancement, and with this in mind, they should not be crippled with unduly burdensome regulatory requirements.
Recommendations for Detection and Deterrence
It appears that, in some respects, virtual worlds are not so “virtual” after all. The large amounts of money moving through these games and the lax amount of oversight have created a problem that at the very least warrants further investigation. It is difficult to have a true understanding of the gravity of this potential area of criminal exploitation because, for the most part, governmental bodies are not monitoring these games for this type of activity, and the area as a whole remains lacking in investigation. It would be worthwhile to have a risk assessment conducted on money laundering done through virtual worlds. This would allow a relevant governmental body to investigate the issue and determine the extent of the risk posed by virtual world money laundering. This information would aid in determining whether regulations subjecting virtual worlds to increased oversight or to traditional AML legislation would be beneficial.24
There are some relatively painless measures that game operators could take to limit the attractiveness of this avenue for money laundering, such as logging transactions, monitoring transactions above a specified amount, and improving customer identification procedures. In addition, third-party exchanges allow many alternative payment methods to be used to purchase virtual currency. Some of these alternative payment methods, such as the digital currency Bitcoin, are much easier for purchasers to maintain anonymity and present risks of their own. As these sights provide mediums to “cash in” and “cash out” outside of the games themselves, restrictions pertaining to available methods for payment and retrieving cash for currency would be beneficial.
A risk that we have limited information on has been realized and, as such, it would be worthwhile to take steps to investigate and mitigate it. Although the financial transactions inside virtual worlds are typically relatively small, as head of the Anti-Money Laundering Training Academy, Kevin Sullivan, stated during an interview about financial crime in virtual worlds, “bad guys like variety and will continue to explore this option as they never put all their eggs in one basket.”25 The bigger these worlds get, the more dollars being shifted into them, and the closer their economies and the financial exchanges within them mimic those of the real world, the more reason we have to ensure the activity inside them is safe for everyone involved.
Ken Lawson, CAMS, secretary, Florida Department of Business and Professional Regulation, Tallahassee, FL, USA,
Cameron Carstens, law clerk, Florida Office of Financial Regulation, Tallahassee, FL, USA, email@example.com
The views in this article do not represent those of any agency.
- 1 See, e.g., Kevin Sullivan, Virtual Money Laundering and Fraud, AMLTRAINER.COM 1 http://amltrainer.com/wp-content/uploads/KS-Virtual-Money-Laundering-and-Fraud.pdf (last visited July 1, 2012).
- 2 See, e.g., VirWox, https://www.virwox.com/ (last visited July 1, 2012).
- 3 See generally Marketplace, SECOND LIFE, https://marketplace.secondlife.com/ (last visited July 1, 2012).
- 4 See Sean F. Kane, Asset Creation, Seclusion And Money Laundering In The Virtual World, INTERNET LAW & STRATEGY (ALM Law Journal Newsletters, Philadelphia, PA), July 2006, at 1.
- 5 See id.
- 6 See Paul Tassi, Virtual Entropia Universe Property Sells for $335k Real Dollars, FORBES (Nov. 11, 2010), http://www.forbes.com/sites/insertcoin/2010/11/10/virtual-entropia-universe-property-sells-for-335k-real-dollars/.
- 7 See Socrates Alvarez, 3 Ways Companies Profit From Virtual Goods, INVESTOPEDIA (May 2, 2012), http://www.investopedia.com/financial-edge/0512/3-Ways-Companies-Profit-From-Virtual-Goods.aspx#axzz1zOuHWt9y.
- 8 See April Burbank, FavorTree — New App Uses Gamification For Social Good, FORBES (July 10, 2012), http://www.forbes.com/sites/ashoka/2012/07/10/favortree-new-app-uses-gamification-for-social-good/.
- 9 See E-mail from Peter Gray, Second Life Representative, to Cameron Carstens, Law Clerk, Florida Department of Business and Professional Regulation (June 13, 2012, 3:53 PM PST) (on file with author).
- 10 See Clare Chambers-Jones, Virtual Economies And Financial Crime: Money Laundering In Cyberspace 50-53 (Edward Elgar Publishing Limited 2012).
- 11 See Peter Svensson, Online game gets real-world banking license, ASSOCIATED PRESS (March 18, 2009), http://www.msnbc.msn.com/id/29760522/ns/technology_and_science-games/t/online-game-gets-real-world-banking-license/.
- 12 See Chambers-Jones, supra note 10, at 127.
- 13 See Svensson, supra note 11.
- 14 See id.
- 15 See Bryan Gardiner, Bank Failure in Second Life Leads to Calls for Regulation, WIRED (Aug. 15, 2007), http://www.wired.com/gaming/virtualworlds/news/2007/08/virtual_bank.
- 16 See Telephone Interview with Sean F. Kane, Counsel, Pillsbury Winthrop Shaw Pittman (June 13, 2012).
- 17 See Doug Tsuruoka, Funny Money At Play In Online Games Crooks Using New 'Laundry’ 'Second Life’ and 'WoW’ provide way to exchange dirty dough for clean cash, INVESTOR’S BUSINESS DAILY (Dec. 27, 2010), http://go.galegroup.com.proxy.lib.fsu.edu/ps/i.do?action=interpret&id=GALE%7CA245131100&v=2.1&u=tall85761&it=r&p=ITOF&sw=w&authCount=1.
- 18 See Kevin Sullivan, Interview with Kevin Sullivan: Money Laundering & Financial Crime in Virtual Worlds, KEVIN SULLIVAN’S BLOG (Aug. 31, 2010), http://www.amltrainer.com/interview-with-kevin-sullivan-money-laundering-financial-crime-in-virtual-worlds/.
- 19 31 C.F.R. § 1010.100(ff)(5)(i)(A) (2011).
- 20 Id.
- 21 See Alicia Ashby, China Makes First Move To Regulate Virtual Currency, ENGAGE DIGITAL (June 29, 2009), http://www.engagedigital.com/blog/2009/06/29/china-makes-first-move-to-regulate-virtual-currency/.
- 22 See Nicolas Groffman & Erik Leyssens, China: New Online Game Regulations Aim to Tidy Up China’s Online Game Sector, MONDAQ (July 7, 2010), http://www.mondaq.com/article.asp?articleid=104224.
- 23 See id.
- 24 The idea of a federal body taking a closer look into a particular area of virtual worlds is not farfetched. Linden Lab, the maker of Second Life, previously invited the FBI to investigate concerns of criminal activity inside their in-world casinos, which ultimately led to the casinos being banned indefinitely. See Gardiner, supra note 15.
- 25 Supra, note 18.