Online gaming yes, money laundering no

Anjali Menon, Shraddha Suryavanshi | Updated on April 06, 2021

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Surging growth in online gaming sector has raised money-laundering risks and hence monitoring in-game transactions becomes important

Investors are placing large bets on indigenous online gaming companies propelling such companies to new heights, and recently encouraging one such company to even test itself on the floor of the stock market. The online gaming industry in India has witnessed a massive upswing in its growth trajectory, both in terms of users and significant venture capital investments. World over, the recent booming growth in the online gaming sector has attracted a surge of nefarious activities and it is in this context that assessment of the money-laundering risks through gaming platforms takes centre stage.

How is money-laundering happening?

There are a few varied means of money laundering through online games that are known so far. The key factor that enables money laundering through online games is that virtual, in-game items – that are bought by players to enhance their gaming experience/advancement in the game through customisation and extra benefits - sometimes have a real-life value outside the game (there are instances of such items being sold on popular ecommerce portals). Such items are (illustratively) purchased using virtual currencies, using funds acquired through hacking/phishing of accounts, or through a labyrinth of exchanges amongst multi-player online role-playing game characters (which are hard to monitor and often enable cross-country money movement anonymously). Stolen credit card details were used to purchase ‘V-bucks’ from the Fortnite store and sold at a discounted rate to players. These means effectively help criminals “clean” the money deployed, through transfer of the virtual in-game items in lieu of real money and allow criminal transactions to get lost in myriads of legitimate ones.

Gambling element?

Certain online games allow players to buy “loot boxes” which contain an unknown loot, and can potentially be used favourably in the online game after its contents are accessed post-purchase. Non-disclosure of the hidden reward in it or the odds of winning various virtual items, targets or engenders addictive tendencies. This is probably why recent advertisements of a popular online fantasy sports platform caution users regarding financial risks and possible addiction. Loot boxes have recently become a popular avenue for money laundering.

Until recently, the Indian legal framework governing gaming and gambling was primarily focused on more conventional games, such as lotteries and rummy. The primary central legislation concerning gambling, the Public Gambling Act, 1862 and most state gambling legislations (given ‘betting’ and ‘gambling’ and their taxation, are constitutionally, state subjects), with a few exceptions such as Nagaland and Sikkim, do not specifically cover online gaming. Online gaming operators have thus structured their games and operations relying on the broad principles laid down in these legislations and precedents. Owing to online gaming’s growing popularity (that skyrocketed during the Covid-induced lockdown) several states like Andhra Pradesh, Tamil Nadu, Kerala and Meghalaya have recently imposed bans/licensing requirements. In this situation, one could argue that loot boxes are akin to gambling and ought to be similarly regulated in India as it could entitle the online gamer to an unknown reward (as money or something of value). In-game currencies also create value by giving an advantage to the player, hence wagering/betting in such currency could also constitute gambling.

AML Regulations

Currently, the anti-money laundering (AML) laws in India require “reporting entities” like banks, financial institutions, persons carrying on “designated business” (which interestingly includes games of chance), to undertake client verification before commencing a business relationship. Such entities are required to maintain records of prescribed transactions like cash transactions crossing ₹10 lakh, and “suspicious transactions” whether or not effected in cash. While the obligation cast on reporting entities is wide enough to cover non-monetary transactions, it does not explicitly extend to gaming companies. However, the recent penalty imposition by Financial Intelligence Unit (FIU-India) on an online payment system, despite their contention that it is not a reporting entity, is an illustration of the strict stance authorities are capable of taking to uphold the spirit of AML laws. In its order, FIU-India emphasised the need for AML laws to cover entities that facilitate cross border transactions through various payment systems.

Possible Mitigating Measures

To avoid a similar crackdown, gaming operators could consider adopting a few practices to mitigate the AML risk, such as implementing algorithms to monitor in-game transactions and notify potential criminal activity; prohibiting/tracking payments between users or providing transaction limits; deactivating accounts if the user manipulates origin information/identifiers or has deployed automated bots to accumulate prizes/virtual assets; monitoring debits and credits from online accounts with insufficient play to justify such activity, and whether multiple gaming accounts are setup from the same IP or physical address.

While some may critique these as avoidable cost-inducing measures, gaming operators should yet consider adopting them to avoid regulatory repercussions/investigations, should any criminal activity take place through their platform – particularly given how the new Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021 are raising the bar of monitoring and compliance on intermediaries. Even the recent NITI Aayog Report is also leaning towards self-regulation by online fantasy sports platforms in India. Online gaming platforms should also consider implementing these measures as good business practices to augment their reputation and profits, and attract investments from foreign investors who are bound by stringent AML regulations and would not want to attract regulatory scrutiny by association.

Anjali Menon is a Partner and Shraddha Suryavanshi is an Associate, at Shardul Amarchand Mangaldas & Co.

Published on April 06, 2021

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