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

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.

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