Money laundering and terrorism financing in virtual environments: a feasibility study
| Pages | 50-75 |
| Published date | 07 January 2014 |
| Date | 07 January 2014 |
| DOI | https://doi.org/10.1108/JMLC-06-2013-0019 |
| Author | Angela S.M. Irwin,Jill Slay,Kim-Kwang Raymond Choo,Lin Lui |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Money laundering and terrorism
financing in virtual environments:
a feasibility study
Angela S.M. Irwin, Jill Slay and Kim-Kwang Raymond Choo
Forensic Computing Lab, Advanced Computing Research Centre,
University of South Australia, Adelaide, Australia, and
Lin Lui
School of Information Technology and Mathematical Sciences,
University of South Australia, Adelaide, Australia
Abstract
Purpose – There is a clear consensus of opinion that virtual environments and virtual currencies
pose a money laundering and terrorism financing threat. What is less clear, however, is the level of risk
that they pose. This paper aims to clarify the suitability of virtual environments for conducting money
laundering and terrorism financing activities.
Design/methodology/approach – A number of experiments were conducted to estimate the
quantity of funds that could be moved through these environments. These experiments took into
account a number of factors such as the number of accounts that would need to be opened to
launder/raise a specific amount of funds, the amount of funds that could be placed within a certain
timeframe and the tr ansaction limits i mposed by each of the ma ssively multipla yer online games
and online financial service providers involved in the money laundering and terrorism financing
scenarios.
Findings – The findings of this research show that money laundering and terrorism financing can
take place inside virtual environments. Virtual money laundering and terrorism financing offer high
levels of anonymity, potentially low levels of detection, and remove many of the risks associated with
real-world money laundering and terrorism financing activity. However, this comes at the cost of ease,
time and, in some cases, the amount of funds laundered. Large sums (millions of dollars) can be
laundered in virtual environments, but this exponentially increases the level of effort involved in
setting up accounts and placing, layering and integrating funds.
Originality/value – A number of authors have described potential virtual money laundering
scenarios, but some of these are out-of-date due to closed loopholes, all are rudimentary and make no
attempt to discuss the practicality or feasibility of using these scenarios. This research addresses those
issues.
Keywords Online fraud, Anti-moneylaundering/counter terrorismfinancing, Feasibility study,
Massively multiplayer online games, Virtualenvironments
Paper type Research paper
1. Introduction
As internet technologies become more advanced, so have the ways in which money
launderers, terrorism financers and criminals utilise them for illicit and illegal activity.
The introduction of new payment methods, virtual environments and the ease of
maintaininganonymity on the internethave helped to transform thecriminal underworld,
offeringnew ways to move large sumsof money with relative ease(Pearce, 2012; Jacobson,
2010; FATF, 2010). The internet has become a fertile ground for terrorists to obtain
The current issue and full text archive of this journal is available at
www.emeraldinsight.com/1368-5201.htm
Journal of Money Laundering Control
Vol. 17 No. 1, 2014
pp. 50-75
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/JMLC-06-2013-0019
JMLC
17,1
50
funds to support their operations by participating in activities ranging from credit card
theft using phishing, hacking and key logging attacks through to money laundering
(Strayer, 2011; Jacobson, 2010).
In recent years, there has been much debate about the risks posed by virtual
environments. Concern is growing about the easein which massively multiplayer online
games (MMOGs)[1] may be used for economic crimes such as money laundering, fraud
and terrorism financing (Methenitis, 2009; Sanders, 2009; Sullivan, 2008; Vallance, 2008;
Tefft, 2007; World-check, 2007; Castranova, 2005). Many believe that potential and
opportunity existfor allowing large sums of money to bemoved across national borders
without restrictionand with little risk of detection (Pearce, 2012; Keene,2011; Tsuruoka,
2011; BBC, 2008; Heeks, 2008; Leapman, 2007; Lee, 2005). The ease in which money
launderers and/or terrorists have turned to virtual environments and digital currencies,
when traditional avenues of funding are restricted or lost, has become problematic for
governments (e.g. counter-terrorism agencies) and security pr ofessionals alike
(Australian Transaction Reports and Analysis Centre (AUSTRAC, 2012); Vallance,
2008). With Second Life in particular, its fast-growing economy has left many legal
experts claiming that the lack of even basic regulation of its banks and stock exchange
could provide a haven for money launders, fraudsters and terrorists to hide and move
funds around to avoid the surveillance they would be subject to in the real world
(Chambers-Jones, 2012; Pearce, 2012; Leapman, 2007).
There is a clear consensus of opinion that virtual environments are potential targets
for cyber criminals, money launderers and terrorism financers. However, there is much
debate about the level of risk that these environments pose. Some believe that money
laundering in virtualenvironments is a real threat thatrequires regulation similar to that
seen in the real-world (Chambers-Jones, 2012; Pearce, 2012; Leapman, 2007). However,
others believe that virtual environments and virtual currencies do not provide the scale
necessary for large-scale money laundering activity (Nino, 2011; AUSTRAC, 2012).
For example, Detective Superintendent Colin Dyson, Commander of the New South
Wales Police Fraud and Cybercrime Squad, in a media interview indicated that virtual
worlds hold more appealto criminals as a platform for communicationand co-ordination
than for laundering the proceeds of crime (Pearce, 2012). This may be due to the
additional administrative overheads and potential limitations on volume that exist in
virtual environments.
AUSTRAC’s (2012, p. 16) typology report identified virtual worlds and digital
currencies such as Bitcoinqas potential vulnerabilities, stating:
[...] while the nature and extent for 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.
AUSTRAC (2012) also states that because digital currencies are currently not widely
accepted as payment for goods and services, it limits the avenues through which
digital currency can be used to convert, move and launder illicit funds. The limited
size of digital currency markets, in turn, reduces the extent to which large amounts of
illicit value can be moved. It believes that the overall utility of digital currencies for
criminals, at this point, may currently be limited to niche crimes in the cyber
environment and individual or smaller scale illicit activity.
Money laundering
and terrorism
financing
51
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