How Online Gambling Facilitated Money Laundering and Underground Banking in Southeast Asia?

With many anonymous payment options and a lack of thorough oversight by the authorities into online gambling accounts, it becomes hard to determine whether the account is genuinely used for gambling or money laundering & underground banking. Online gambling involves non-face-to-face interaction, limited staff to ensure regulation compliance, and dealing with complex international transactions.

Investigations get more complex as the involvement of various jurisdictions and regulations aren’t well-coordinated. Online Casinos, labeled ‘Designated Non-Financial Businesses and Professions’, have less advanced compliance systems than banks. This makes online casinos attractive targets for criminals, while operators tend to be less vigilant.

Recently, UNODC has released a report titled, ‘Casinos, Money Laundering, Underground Banking, and Transnational Organized Crime in East and Southeast Asia: A Hidden and Accelerating Threat’ highlighting the connection between online casinos, e-junkets, and cryptocurrency exchanges, leading to prevalent cross-border criminal activities in the region.

UNODC report identified various vulnerabilities in preventing money laundering in online casinos in East and Southeast Asia & the Pacific by analyzing recent cases in various regions. Here are some major vulnerabilities reported by UNODC, leading to the misuse of online casinos for the illicit purpose of money laundering and underground banking;

Non Face-to-face Transactions

It becomes hard to determine the purpose of online accounts as anti-money laundering (AML) risks become distinct when customers register for online gambling without face-to-face interaction.

Many times, stolen identities are used for online gambling and to create player’s profiles.  Third parties are often involved in accessing the accounts and managing the transactions of high-risk clients such as criminals, politically exposed persons (PEPs), or sanctioned individuals without conducting appropriate customer due diligence (CDD).

Miscoding Transactions

Miscoding transactions refer to a transaction’s wrong code, category, or description, causing errors in financial reporting, accounting, and regulatory compliance. Online gambling transactions in East and Southeast Asia are frequently coded incorrectly to stay off the government’s scrutiny.

These transactions are sometimes unintentional errors and often made deliberately to conceal the source of the transaction. For instance, a gambler’s credit card might show a charge listed as ‘flower shop’ rather than ‘online casino’ making it tricky to recognize the actual transaction.

Gambling in Exchange for Luxury Items & Illicit Goods

In East and Southeast Asia, e-junket operators commonly offer a service where players can redeem in-game credits online to get valuable items, including luxury watches, vehicles, handbags, vacations, and more.

Some land-based casino operators in high-risk jurisdictions in Southeast Asia are prompting a money laundering scheme where players can use online gambling accounts to trade for illicit goods. For instance, where a buyer and seller of illicit goods are involved in the same game, the buyers transfer money to the seller through a game or bet and the seller withdraws the money from the payment account in exchange for the goods.

As the money comes from betting, it is challenging to trace it back to illegal activities. Major organized crimes in the region have adopted this typology, deploying junkets to distribute significant payments.

Challenges in Verifying Funds and Co-mingling Illicit Proceeds

In Southeast Asia, authorities have raised concerns associated with online casinos to verify the source of funds and misuse of online gambling platforms for blending illicit proceeds with regular gambling. The challenge arises mainly due to different payment methods, such as unregulated payment methods and financial intermediaries don’t have sufficient AML controls in place. Also, there are many unlicensed online gambling sites and a lack of customer due diligence within the industry.

Authorities have further reported that large operators engaged in organized crime utilize small casinos to conceal the source of funds, by channeling gaming revenues through these small platforms, charging a 1-2% fee for adding extra layers of co-mingling.

Widespread Unregulated Live-dealer Proxy Betting

Reports from authorities in Southeast Asia indicate the prevalent instances of unregulated and unauthorized live dealer-proxy proxy betting, occurring prominently in VIP rooms and online casinos. This betting method is associated with high money laundering risks, arising from challenges in customer ID verification, and is prevalent in countries like Cambodia, Lao PDR, Myanmar, and the Philippines. Many prominent operators in the industry are found to have direct links with well-known criminal networks.

Alongside offsetting agreements through e-junkets and within less restrictive regulatory frameworks, this vulnerability has enabled anonymous individuals to launder large amounts of funds from one jurisdiction to another, with just a click or by phone call.

Inadequate AML/CDD Policy Implementation

The report reveals that discussions with regulatory authroities, law enforcement, and intelligence agencies have advocated the imperative for the development of due diligence policies and procedures for online casinos to ensure AML compliance. As per the report, UNODC has received multiple alerts about insufficient procedures for risk management, internal controls, AML measures, and reporting.

Barriers to Prosecuting Predicate Offenses

Money laundering through casinos is not a new concept, but the rapid growth of online casinos has made it more widespread. This poses significant challenges for law enforcement to trace criminal proceeds and prosecute offenders. Authorities in the region have also reportedly admitted the fact that they are unable to trace predicate offenses in money laundering through online casinos and this has led to a legal loophole. The authroities find it challenging to prove whether the gambling proceeds are associated with organized crime.

Frequently, players decide to split their funds into several betting accounts, to make them less suspicious and add further complexities for the prosecutors.

Expanding Infiltration by Organized Crime

Developments in information and gambling technology have made it easier for organized crime to enter Southeast Asia’s growing online casinos. These advancements along with the ‘white label’ have attracted a significant number of new players to the industry, causing decentralization of money laundering businesses. Consequently, this poses difficulties for law enforcement and financial investigators to trace the origin.

Just like franchises, white-labeling websites allow operators to outsource every aspect of the business. This encompasses complex betting software, website design, customer data and relationship management, technical support, branding and marketing materials, and often operating licenses from third-party service providers.

Money laundering and organized crimes have become prevalent in the Southeast Asia regions, to address these growing challenges, authorities must establish robust anf effective AML regulations. Additionally, they need to ensure the proper enforcement of the developed rules and  assure regulatory compliance.

The authorities must extend the area of focus on online casinos, e-junkets and cryptocurrency exchnages, acting as the major vehicle for laundering of illicit funds in the region. The implementation of robust policies and regulations, enhnaced due diligence and international cooperations are crucial to mitigate these crimes. Integration of advanced technologies like artificial intelligence and blockchain analytics can be helpful for authorities to detect and deter suspicious activities and organized crime.

Also read: What are the Red Flags for Money Laundering: Exposing the Illicit Transactions