Money Laundering and the Virtual
Gaming Threat Assessment
Florida Department of Law
Enforcement
Financial Crime Analysis Center
Prepared by Heather Desguin
Money Laundering
“The process by which one conceals the
existence, illegal source, or illegal
application of income and then disguises
that income to make it appear legitimate”
- Presidential Commission on Organized Crime
3 Steps to Money Laundering
• Placement: Money placed into a
legitimate financial institution.
Placement
• Riskiest stage.
• Physical movement of cash.
• Structuring: Avoiding the BSA reporting
requirements (cash transactions of $10,000 or more).
• Commingle deposits with legitimate funds.
• Move funds to foreign country with loose/no
currency controls.
Now the money can be moved freely.
3 Steps to Money Laundering
• Placement:
Money placed into a legitimate
financial institution (riskiest stage).
• Layering:
Movement of money through various
transactions to change its form and make the trail
difficult to follow.
• Integration:
Money enters the economy in a
legitimate-looking form.
Money Laundering
• According to the 2008 National Drug
Threat Assessment
– “individuals and organizations frequently
engage in illegal activities to generate income
in order to purchase drugs or finance drug
trafficking operations (DTO), such as…
Money Laundering
• Mortgage fraud
• Ransom kidnapping
• Counterfeiting
• Identity theft
• Shoplifting
• Insurance fraud
• Home invasion
• Personal property
theft
Money Laundering
• Diversification is a vital component
of drug money laundering operations
in the United States.
• The DTOs rely on multiple methods to
move and launder illicit proceeds
Money Laundering
The totality of the money laundered
annually worldwide is roughly between
$600 million and $1.5 billion U.S.
Dollars.
*(About 5% of the world’s gross domestic product).
Money Laundering
• The goal of money laundering is to establish the
dirty money into the financial system or retail
market without bringing attention from
bankers or law enforcement.
• The new emerging trend to complete this goal is
through the use of virtual games.
Money Laundering
• Emerging technologies, like virtual
games, are equipping DTOs with
novel money laundering techniques.
• Structuring in unusually small
amounts is being employed by DTOs
as a money laundering technique.
Money Laundering
• Structuring in unusually small
amounts is gaining in prominence
among DTOs.
– It is similar to traditional structuring; the
principal difference is that this method of
structuring involves
Money Laundering
• Numerous deposits of cash
• Numerous purchases of money orders
• Numerous transfers of money through
MSBs in amounts that are so far below
normal BSA or AML thresholds (usually
under $1,000) that they do not trigger the
filing of SARs.
Money Laundering
“It’s easier to cleanse funds
through virtual games than
banks, though banks are used
at some point in the
laundering cycle”
-Ken Rijock
Virtual Games
• Accessed by Internet
Virtual Games
• Accessed by Internet
• Definition
Virtual Games
Computer generated graphic environment role
playing game that resembles the real world.
Technically these games are referred to as Massive
Multiplayer Online Role Playing Games
(MMORPG), also known as:
Virtual worlds
Virtual games
Metaverses
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion
annually
Example of virtual world video
CSI: NY-Down The Rabbit Hole episode
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple
participants
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
Communication
Users engage in conversations through the use of Avatars.
These games allow real-time actions with other Avatars
from all over the world.
Communication is a central element to the game and is
typically through instant messaging, either publicly
within the game or privately between select users or by
Voice over (a new option) and may be applied publicly or
privately as well.
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
• Monthly Charge
Virtual Games
• Accessed by Internet
• Monthly Charge
• Definition
• Second Life
(SL)
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
Second Life
• Statistics
Second Life
• Statistics
– 15 million users
– 28,000 residents
– 15 million hours
Second Life
• Statistics
• System Requirements
System Requirements
• First you must download the program and
install it on your computer.
• The Internet connection must be Cable or
DSL.
• The operating systems can be 2000, XP or
Vista.
• Computer memory can be 512 MB or more.
System Requirements
• Second Life is not compatible with dial-up
Internet, satellite Internet, and some
wireless Internet services.
• Second Life may not run on certain
graphic cards.
Second Life
• Statistics
• System Requirements
• Fees
Second Life
Fees
Free
Create an avatar
Move about freely
Engage in all SL
activities
Premium
*monthly fees start at $9.95
Create an avatar
Move about freely
Engage in all SL
activities
Own Land
Land
The monthly fee is based on the type and
amount of land you own. Land may be
bought by the parcel or by the Island. It’s
a matter of what you are willing to pay.
Islands are about $1,600 dollars and owners
must pay a $295 monthly maintenance
fee.
Second Life
• Statistics
• System Requirements
• Fees
• Player defined
Second Life
• Second Life is designed for social exploration.
It’s like a video game world, but without the high
scores and the fighting.
• Instead, users explore the many different
islands, buildings, and events created by others.
It’s a playground for the artistic and the
creative, where you can express yourself and
discover new social experiences.
Second Life
Player defined…
– On your property you can build, create
and invite.
– Invite only is a desirable option for
criminal enterprise.
Second Life
Those seeking greater privacy can purchase private locations in which they can
restrict access and “Invite only” residents they wish to be in contact with.
They can hold private conversations that no one else is privy to or be at risk for
monitoring by the game server.
Allowing extremists and criminals to communicate covertly, spread
propaganda, recruit and train new associates, launder money, share child
pornography and commit other crimes ANONYMOUSLY.
******Unlike instant messaging over Yahoo, Linden Labs does not maintain
written script.
Which makes Second Life …
Second Life
•
•
•
•
Statistics
System Requirements
Fees
Player defined
• Controversial
Second Life
• One area of concern with Second Life is
the potential for child exploitation.
Child Exploitation
• Linden Lab has absolutely zero tolerance for
depictions of child pornography within Second
Life.
• Linden Lab will cooperated fully with any legal
authorities that choose to investigate the
individuals involved in such activities.
• Child pornography is illegal and a breach of
their Terms of Service.
• Anyone engaged in this activity or any illegal
activity will be permanently banned from
Second Life.
Child Exploitation
A popular activity among a certain group of
residents is
• Age Play
– Adults recast themselves as “child-like”, to
play out sexual fantasies.
***The system does not allow you to create
child avatars.
Child Exploitation
According to Second Life this is not
a terms-of-service violation because
no illegal activity is occurring---as
no “real” children are involved.
Child Exploitation
Robin Harper, Linden Lab’s vice president of
community development has stated that
“IF this activity were in the public areas of
Second Life then it would be viewed as
being broadly offensive, and therefore
unacceptable.”
Harper has also stated that there hasn’t been
a general outcry among users about age
play.
Child Exploitation
and that
“Most of the activity occurs in private
sections of the virtual world and
when all is said and done, the ability
to try new behaviors and try new
things out is a big reason people are
in virtual worlds.”
Child Exploitation
• “virtual” child pornography is not a crime
in the United States.
• Under 18-year-olds are banned from
taking part in Second Life.
• Currently, Second Life has no age
verification in place.
Child Exploitation
• There are unsafe, mature and PG areas
located within Second Life.
• Mature areas do allow nudity, bad
language and even violence.
– Businesses sell guns and other weapons and
your Avatar can die.
– When your Avatar dies the resident is logged
off Second Life.
Child Exploitation
• There is an “abuse reporter” tool in the Help
menu of the Second Life client.
• For example,
– If another Avatar bumps into your Avatar,
you may receive a pop-up saying “Do you
want to report this as abuse?”
– Or you can right click on an Avatar to report
abuse.
Second Life
•
•
•
•
•
Statistics
System Requirements
Fees
Player defined
Controversial
• Intellectual Property
Rights
Intellectual Property Rights
Many game publishers are taking action
against criminals and are trying to nip
potential criminal enterprises in the bud
by not allowing players
to barter game items
buy game items off site
Intellectual Property Rights
Intellectual Property Rights
Intellectual Property Rights
because game creators claim that the virtual
items are the intellectual property rights of
the game and not the game users.
And that buying or bartering from others or
off-site violates the game’s END-USER
LICENSE AGREEMENT (EULA).
Intellectual Property Rights
• EULA
– A legal contract between the manufacturer
and/or the author and the end user, the final
or ultimate user of a computer system.
– The EULA details how the software can and
cannot be used and any restrictions that the
manufacturer imposes.
Intellectual Property Rights
In Second Life…
Anything that the residents create is solely
theirs to own and market…
residents retain ownership of intellectual
property rights.
Intellectual Property Rights
By allowing this Second Life
has created a unique aspect
to the game…
Second Life
•
•
•
•
•
•
Statistics
System Requirements
Fees
Player defined
Controversial
Intellectual Property Rights
• In-game economies
In-game Economies
• Players buy game currency with real money.
• The money is automatically converted into
that games currency and in the appropriate
amount according to the game’s currency
exchange rate at the time of purchase.
• Currently Second Life’s exchange rate is
roughly $300 Linden Dollars to $1 U.S.
Dollar.
NOTE: On average, SL residents conduct around $1.3 million in
transactions every day.
In-game Economies
• Players can also barter, sell or trade
virtual items to obtain game currency.
• Second Life actually allows its residents
to set up businesses to sell virtual items,
that they have created in the game, that
actually generate an actual income.
In-game Economies
• Although visiting the world is free, those who are keen to
contribute, who want to design their own clothes or create
their own buildings, have to purchase a premium
account for a monthly fee.
• But there is an added incentive for those who choose to be
creative, they get to keep the copyright of everything
they make within the game and have the option to sell
their work to other players using a game currency called
Linden Dollars.
In-game Economies
Real businesses are also in
Second Life……
In-game Economies
•
•
Avatars can go to browse
virtual stores and exchange
text or voice messages with
each other while they shop.
There’s a Sears store, a Toys R
Us, a SkyMall outlet, a
Brookstone, a Red Canoe, an
Everything Olive, even a
Shopping Channel store.
Although they may be virtual,
all of these stores offer real
services.
In-game Economies
• By Clicking on any
product on display,
opens up the browser
to display more
information on it.
In-game Economies
•
•
You can watch live streaming
video on the television sets that
are on display. You can also
sit on the couch and watch a
nice 40″ flat panel on the
wall.
You can move the distance of
the couch from the wall, to
reflect the setting at your own
home and the TV screen
changes in size to recommend
to you what you need for your
home.
Virtual Games
By 2009 virtual commodities
will be worth about $7
billion.
Virtual Games
• Virtual Games are taking over
– Besides businesses capitalizing on the
popularity, television shows are.
– Recently, South Park aired an episode in
which much of the animation was modified
in-game footage from World of Warcraft
– The Simpsons parodied World of Warcraft in
an episode in which Bart and Marge became
engrossed in an online role playing game
Virtual Games
• Law and Order: SVU chased a rapist through a
fictional virtual game
• In The Office, Dwight explores Second Life
• CSI: NY chased a killer with the episode ending
in a cliffhanger that will involve at least one
more episode. Also, CSI: NY has their own
Island where your Avatar may become a CSI
and solve crimes
• CNN opened up a news bureau to report on issues
happening in Second Life
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
• Monthly Charge
• Second Life (SL)
• Virtual Money
Electronic Money
• Also known as electronic money; emoney; digital cash.
• Like conventional paper money,
electronic money can function as a
medium of exchange, a unit of
account and a store of value AND is
vulnerable to money laundering.
Electronic Money
• Electronic Purse
– E-purse
– Stored Value Card
Electronic Money
An electronic purse is a credit card looking device.
– The value is stored electronically on the card with an
integrated circuit chip.
Unlike a card with a magnetic stripe, which stores
account information, an electronic purse actually
stores funds on the cards memory chip.
Electronic Money
The memory chip does not require an online
connection to an account number.
No cardholder identification is needed to make a
payment.
Value is transferred from the card directly to
merchants without the transaction going
through an account at a bank or financial
institution.
This limits the amount of identifying
information on the user.
Provides no transaction records.
Electronic Money
• Mobile Payments
– Use of mobile phones
or other wireless
communication
devices to pay for
goods/services by
accessing bank
accounts/credit cards
through these devices.
• May OR May not
require a financial
institution.
– The transactions that
DO NOT require a
financial institution
rely on brokers.
Electronic Money
• Accounts are prepaid.
– Reducing credit risk
– Anonymous
– Brokers protecting account
information
– May be accessed by voice,
text or wireless
applications
• New mobile payments are
not based on a bank or
payment card account
assigned to the
transaction.
• Service providers
conducting these types of
transactions are not
regulated by a bank or
financial institution.
Electronic Money
It has been estimated that by the
end of 2008 mobile payments will
total $55 billion
Electronic Money
• Internet payment
services
Electronic Money
• Rely on an associated bank account and
the Internet may be used to move funds to
and from the associated bank account.
OR
• They operate entirely on the Internet and
are indirectly associated with a bank
account.
Electronic Money
• By not being associated with a financial
institution it allows them to establish their
own terms regarding methods of
payment, such as:
– Cash
– Money orders
– Transfers from anonymous prepaid cards
Electronic Money
• Depending upon the accessibility of the
Internet payment service:
– These activities could involve payment or fun
transfers across international borders.
– The payment service provider may not be
subject to the same (if any) anti-money
laundering measures that apply to banks
and financial institutions.
Electronic Money
• Digital Precious
Metals
Electronic Money
• Digital precious metal brokers allow
consumers to purchase virtual precious
metal at market price based on the world
commodity exchanges.
• Once acquired, precious metal may be
used in exchange for goods and services.
– E-Gold and Gold & Silver Reserve
Electronic Money
• On April 24, 2007, a federal indictment was
filed by the United States District Court for the
District of Columbia against the online
payment system E-Gold and Gold & Silver
Reserve for:
– Conspiracy to launder monetary instruments
– Conspiracy
– Operation of unlicensed money transmitting
business
– Money transmitting without a license
– Aiding and abetting
Electronic Money
• E-Gold had the second largest reach of
any online payment system (PayPal
being the largest), with more than
– 3 million accounts in
– 165 countries
– And more than $2 billion annual
transactions.
Electronic Money
• Allowed anonymous transactions.
• Accounts could be opened with only a
working e-mail address and no other
identify verification.
Electronic Money
• Also known as virtual money,
electronic money; e-money; digital
cash.
• Legitimate market demand.
• Vulnerable to money laundering
schemes.
• FATF concerned for several reasons:
Electronic Money
• It’s not a credit instrument and there is no need
for authorizations from a bank or credit
institution (which is outside the normal
banking structure).
• Accounts may be opened with just an e-mail
address AND no other customer identification
may be required.
* Making transactions anonymous
* ALL virtual games use some sort of new payment system
when dealing with their in-world economy.
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
• Monthly Charge
• Second Life (SL)
• Virtual Money
• Brokers
Brokers
• Brokers serve as intermediaries between buyer and
seller and handle the financial transactions.
• Brokers are not financial institutions or money
service businesses so they are not held to any
standards in reference to anti-money laundering or
reporting requirements under the Bank Secrecy Act.
• The financial transactions that brokers deal in have
been termed “new payment methods” since they deal
with virtual money. Virtual money is not defined as
a currency like the U. S. Dollar, Yen or Euro, so these
payment operators are currently not included in
regulations.
• Large percentage of brokers are located outside the
US.
Virtual Games
• Accessed by Internet
• $3.4 billion annually
• Monthly Charge
• Second Life (SL)
• Virtual Money
• Multiple participants
• Brokers
• Persistent state
• Avatar
• Communication
• Virtual Banks
• Definition
Virtual Banks
• In 2007 Entropia Universe sold 5 banking
licenses for $400,000 real US$.
– The licenses allow their owners to lend cash to the
game’s participants for the virtual purchase of
anything from game-fighting weapons to real estate.
– Licenses are good for two years.
– $100,000 US$ as collateral for license.
– No BSA reporting requirements.
– Cash Cards.
Virtual Banks
Owners of the licenses:
Jon “NeverDie” Jacobs (avatar name), an Entropia nightclub
owner—pp $90,000.
Janus JD D’Arcwire (avatar name), representing an
undisclosed real life bank—pp $59,060.
Yuri iNTellect (avatar name), representing Russian
Internet payment provider MONETA.ru—pp $99,900.
Anshe Chung (SL avatar name), 1st virtual millionaire—
pp $60,00.
Jolana Kitty Brice (avatar name), anonymous
entrepreneur—pp $95,000.
Virtual Banks
•
Entropia Cash Card
– By simply transferring your
PED* to the Cash Card using
the Transfer Center in the
Entropia Universe, you can
use the Cash Card to pay for
goods and services in retail
outlets, or to withdraw real
cash from millions of ATM
machines around the world.
– WITHOUT having to go
through traditional financial
institutions or banks.
*Project Entropia Dollar
Virtual Banks
• As of January 22, 2008, Second Life banned
banks and any ATMs to offer interest of any
direct return on an investment without proof of
an applicable government registration statement
or financial institution charter.
• Why this action?
Virtual Banks
Sometime around September 2007 the
virtual bank in Second Life, Ginko
Financial, vanished.
SL residents lost around 200,000 Linden
Dollars (equivalent of $75,000 US$).
Virtual Banks
Ginko became popular over its three-plus
year existence in SL thanks to incredibly
high returns on investments, as high as
60%.
Virtual Banks
Ginko was able to skip town and leave
virtually no trail for authorities to follow.
The bank founder won’t reveal what he did
with the money.
***in-game laws don’t dictate that he
even has to.
Virtual Banks
No individual seems to have lost enough
money to make filling a lawsuit
worthwhile.
Because Second Life members live in
different countries, it’s not clear what
jurisdiction you would file suit in.
Money Laundering Scenario
• Cash is earned illegally in country A.
• An avatar is created in a virtual game and the player
purchases online currency (virtual money) with that
illegal cash.
• A collaborator in country B creates an online shop in a
virtual game.
• The party in country A visits the shop in the virtual
game and pays inflated prices for online services using
the virtual money previously bought.
• The shop owner transfers the virtual money received back
into the real world as proceeds from a virtual online
business.
Money Laundering Scenario
Money Launderers can
legitimize their income
through accounts established
with online game companies
by…
Money Laundering Scenario
• Selling virtual game items to other
players for a credit to their account;
the game company periodically
settles the account by issuing a
legitimate check to the account
owner/launderer for the virtual items
sold in the game.
Money Laundering Scenario
• Accepting virtual money in
exchange for illicit drugs,
thereafter receiving a legitimate
check from the game company.
Money Laundering Scenario
• Maintaining multiple game accounts
through which they can buy items from
and sell items to themselves, in a cyber
version of a trade-based money
laundering scheme.
Money Laundering Scenario
• Selling virtual currency in exchange for
real money to other players.
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
• Monthly Charge
• Second Life (SL)
• Virtual Money
• Brokers
• Virtual Banks
• Internet
Internet
• It is estimated that 4 of every 5 people who
use the Internet will actively participate in
Second Life or some similar medium.
• 1.6 billion out of a total 2 billion Internet
users will have found new lives online.
China’s Internet population ties US for
world’s largest at 221 million people.
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
•
•
•
•
•
•
Monthly Charge
Second Life (SL)
Virtual Money
Brokers
Virtual Banks
Internet
• Florida
Florida
• Florida has over 18 million residents, which makes it the
fourth most populous state.
• Florida ranks third for total number of complainants (of
Internet crime) residing in Florida.
– When the perpetrator did reside in the same state as the victim,
Florida was ranked the second highest.
• Florida ranks third for total number of perpetrators (of
Internet crime) identified as residing in Florida.
Virtual Games
• Accessed by Internet
• Definition
• $3.4 billion annually
• Multiple participants
• Persistent state
• Avatar
• Communication
•
•
•
•
•
•
Monthly Charge
Second Life (SL)
Virtual Money
Brokers
Virtual Banks
Internet
• Florida
• Recommendations
Recommendations
• Education
• Training
• Implementation of changes to existing lawsUnlawful Internet Gambling Prohibition and
Enforcement Act of 2006
• Due diligence of game creators
• Federal Task Force
• All individuals/companies that provide services
involving monetary transactions should be
regulated and compliant with anti-money
laundering requirements.
• Define virtual money as indisputable genuine
financial currency.
www.secondlife.com
Contact Information
Heather Desguin
Government Analyst
Florida Department of Law Enforcement
Office of Statewide Intelligence
Financial Crime Analysis Center
P.O. Box 1489
Tallahassee, Florida 32302
850-410-7057
Are there any questions?