Online games are new choice for money laundering

Massively multiplayer online role-playing games like 'Second Life' offer a nearly foolproof way to mask and move money

By Doug Tsuruoka
Investor's Business Daily

Colombian drug lords and other bad guys have found a new way to launder money: via online "virtual world" games that have thousands of players worldwide.

"Drug cartels are having great success laundering money and buying property in scores of different nations by using Internet games," said Misha Glenny, who tracks organized crime and wrote the 2008 book, "McMafia: A Journey Through the Global Criminal Underworld."

Massively multiplayer online role-playing games like 'Second Life' offer a nearly foolproof way to mask and move money.
Massively multiplayer online role-playing games like 'Second Life' offer a nearly foolproof way to mask and move money.

Observers say massively multiplayer online role-playing games offer a nearly foolproof way to mask and move money from drug and other criminal activities.

MMORPGs use virtual money or credits that players can exchange for real currency.

Such games include Linden Lab's "Second Life" and Blizzard Entertainment's "World of Warcraft." Glenny says the online version of "Dungeons and Dragons" also is used. The game providers aren't connected to the money laundering. Some are trying to fight the problem.

"We initially built, and continue to update, our systems and processes to continuously protect our users and the company from fraud, theft, money laundering and other criminal activities that are an unfortunate part of operating any business on the Internet," Alex Yenni, a Linden Lab spokesman, told IBD via e-mail. "We also actively cooperate with law enforcement agencies around the world to deter and prosecute violators."

Blizzard Entertainment didn't respond to a request for comment.

Enforcement is an uphill battle. The thousands of participants in these games only meet online, and are from many different countries. Few know their fellow game players in real life. Glenny says this lets criminals pay virtual money to cohorts in far-flung places, who then convert it into local currencies for investment in real estate, art and other assets.

So, a heroin smuggler in Kosovo can transfer virtual money to a player in Britain to convert into euros in order to buy a London townhouse.

Russian Mob Cited

There's little government oversight of the virtual money that sloshes around in these Internet games. Glenny says this takes place well below the radar of Interpol and global bank regulators. He says terror networks and transnational gangs -- specifically naming the Russian mob -- are using these games to move cash from weapons deals, smuggling, prostitution and more.

There are no reliable figures on the size of such money laundering, but it's believed to be substantial. The amount of real cash changing hands in virtual-world games already totals in the hundreds of millions.

There are various ways crooks use MMORPGs to launder cash.

In a game like "Second Life," users known as residents interact in their virtual world using humanlike Avatar characters.

The avatars move around in an imaginary world that includes castles, resorts, stores and casinos. While they're interacting, they can trade or buy virtual items like real estate and jewels.

"Second Life," which has more than 21.3 million account holders, uses a virtual currency called Linden dollars as part of its so-called microtransaction system.

The exchange rate constantly changes among game players. A few hundred Linden dollars generally can be traded for one U.S. dollar by game participants.

Another method involves a criminal opening hundreds of separate MMORPG accounts. Crooks then buy and sell things in the virtual world to and from themselves.

On the surface, the transactions seem to be routine. The small amounts used in each transaction are hard to detect.

In the end, all the virtual money is funneled to a master account held by the criminal, who then cashes it into real money.

Cybersecurity tracker Winn Schwartau says another form of laundering was popular in the 1960 s, when criminals used so-called accounting rounding errors to skim off and launder cash using legitimate businesses. In those cases, crooked accountants were recruited. Nowadays, crooked techies are in demand.

"If South American drug lords are playing this game, it makes perfect sense that they would hire some whiz kids to launder money through online games," Schwartau said. "For a long time, money laundering involved nerdy accountants. Now it's whiz kids."

Amir Orad, the CEO of anti-crime software provider Actimize (see related Q&A, this page), says jurisdictional issues stymie the ability of law enforcement in various nations to detect money laundering via MMORPGs.

"Who prosecutes? Who investigates? Whose laws apply?" asks Orad.

Orad says it's very hard for law enforcement officials in different nations to pinpoint where an online crime occurred, let alone decide who should prosecute the perpetrators.

Jurisdictional Problems

"The guy who logged into a computer in the Ukraine is a citizen of France. He is actually based in a third country and is dealing with another player in a fourth country," Orad said, explaining the jurisdiction dilemma facing prosecutors.

Glenny says criminals are using other online ruses besides games to launder money.

One involves creating bogus companies that make online payments to each other for services that were never rendered -- like translation work for clients in different countries.

They will also go to the trouble of creating phony online translation texts and billing documents to camouflage what they're really doing. Online gambling provides other chances to move illegal funds.

Glenny says that in the days before the Internet, narcotics and human traffickers stood to lose anywhere from 50% to 90% of the value of their cash in the process of turning so-called "black cash" into "white assets."

They dealt in physical currency and had to pass these bills through different fronts. This required paying a cut to the various people laundering their cash.

But Glenny says the Internet eliminates these middlemen.

When an illicit online transaction dressed up as a legal one travels across borders these days, Glenny says, the worst that can happen is that you get taxed.

"If this money travels say, between Latin America and the U.S., you might lose 20% in taxes. But that's much more in terms of what goes in your pocket than used to be the case with physical money," Glenny said.

Copyright 2010 Investor's Business Daily, Inc.

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