Interpol defines money laundering as "any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources". When you start a discussion about money laundering, it should help to identify what money you think is being laundered. The almost global concern over the possibility that online gambling could be used to launder money is rooted in a variety of "what if" scenarios.
But if you want to know where authorities are looking for money laundering, you need only check the latest news headlines.
In December 2015 twenty-five people were charged with various crimes including money laundering in connection with unlicensed, illegal gambling rooms across the USA. This case revolves around an illegal casino operation.
Another recent case saw a man charged with money laundering for allegedly structuring withdrawals to avoid generating financial transaction reports. In the second case the accused apparently give several thousand dollars to casino staff in chips as a gratuity, a not-uncommon practice.
But to be considered money laundering he would have to expect at least some of that money to be returned to him.
The vast majority of gamblers who never report their gambling income have nothing to worry about. Unless you rack up $2 million worth of transactions in a 3-year period and consistently make $9900 withdrawals you're probably not going to appear on any police agency's radar.
But what a lone individual does is very different from what a group of people do.
And the question we want to answer is how big a problem is money laundering proving to be in the world of online gambling?
2011's Black Friday, when the FBI seized several popular poker Websites and arrested a number of people associated with the online poker industry, is the most notable online money laundering case to date as far as licensed gambling companies are concerned. The operation began when Federal authorities arrested Daniel Tzvetkoff of Intabill and charged with money laundering, bank fraud, and wire fraud. Intabill facilitated transactions between various poker Websites and their players. Tzvetkoff turned state's evidence to avoid a 75-year prison sentence.
What triggered the charges against the poker companies, though, was apparently an attempt to invest in a US bank with the intention of miscoding transactions. Hence, all subsequent online gambling by US players (including state-sanctioned gambling) has been relatively undisturbed. The mere fact that US law forbids online gambling has not led to widespread arrests even though banks refuse to accept deposits they fear may be the proceeds of online gambling.
If the law is unenforceable against US players, authorities must limit their actions to those people who facilitate illegal gambling in any form. To avoid igniting a States Rights confrontation Federal authorities are not digging too deeply into online gambling unless someone is running the gambling operation from inside the United States and accepting members across state lines.
McAfee generated some media buzz with a vague report alleging that players and online casinos are conspiring to hide the money from authorities, while also mentioning 25,000 unregulated gambling Websites. The 25,000 figure is suspicious because McAfee attributes it to iGaming Monaco, whose PDF file is no longer online. But a Bloomberg story from 2009 mentions 25,000 illegal gambling sites that were accessible in France. Internet numbers are always hard to verify and the more years that pass since the numbers were collected the less reliable the numbers become.
Maybe there are 100,000 illegal gambling sites today, and maybe there are only 2500.
We can agree that however many illegal gambling sites there are, all are collecting money illegally and thus wherever that money goes it is probably being laundered.
But how much of the estimated $45 billion worldwide online gambling market is comprised of illegal gambling operations?
Or is the $45 billion just an estimate of legal gambling markets?
Regulated gambling companies appear to be reporting their revenues to someone otherwise we have to assume the $45 billion figure (really just a projection based on past year analyses) is a number some drunken economist made up to justify another grant.
With more than 2,000 licensed, regulated casinos to choose from, it's hard to imagine many millions of online gamblers preferring to set up the Tor network and working hard to dodge ISP surveillance (which is not really feasible). About the best they could hope for is to encrypt their transactions. The most likely market where this kind of activity would be widescale is probably China, where Internet users play a massive game of cat-and-mouse with the government censors.
Where Are the Licensed Gambling Sites Regulated?
For the average online gambler, the open Internet provides a transparent marketplace. Players are free to share grievances with casinos on forums and review sites, at least some casinos respond to the grievances, and it's not hard to find lists of online casinos that are licensed and regulated by the various well-known gaming authorities in Antigua, Canada Curacao, Malta, and the United Kingdom (to name just a few). Since the FBI isn't knocking down doors trying to round up all the gamblers there isn't much incentive for people to hide their tracks, especially in Europe.
Battle lines are certainly being drawn over online gambling. For example, Loto-Québec (Quebec's government lottery agency) wants to shut down "illegal gambling sites" to prevent them from siphoning off hundreds of millions of dollars from its market every year. The agency is authorized by the recently passed Bill 74 (the province's omnibus legislation) to compile a list of 2200 online gambling sites and compel Quebec's Internet Service Providers to block access to them.
If these are the approximately 2200 licensed gaming sites around the world, do their operations constitute a basis for pursuing money laundering charges against their owners and officers?
What will Antigua do?
The little Caribbean nation, first among all nations to license online gambling, recently won the right to sanction the United States for not complying with treaty requirements to exchange services by allowing US citizens to gamble online.
If the WTO sided with Antigua against the USA what is to prevent them from siding against Canada?
And so what we have here is a game of finger-pointing across jurisdictional lines. One country's definition of illegal gambling is another country's definition of licensed online entertainment. To enforce money laundering laws across national boundaries requires cooperation among police agencies, which in turn requires agreement among all authorities that illegal activity is producing money that is being moved around in the shadows. The circumstances for such charges and prosecutions simply don't exist on a wide scale.
As long as the licensed and regulated online gambling industry does not meddle with the banking industry there appears to be no real case for money laundering under US and other laws. And because gambling simply redistributes wealth among players (allowing casinos and bookmakers to keep a little back as commission) the vast majority of players don't have to worry about how they are going to explain large sums of money to their governments (assuming they would not just go ahead and pay taxes on their income).
In another recent case, New Jersey authorities arrested and 46 people with illegal gambling, alleging that the leaders of the operation were laundering money and using a Costa Rican business and Website to manage tens of millions of dollars per year with just a few hundred bettors.
As in previous cases, this was an unlicensed, unregulated gambling operation.
A more interesting case emerged in March 2016 when the US Department of Homeland Security alleged that Costa Rican-based 5Dimes was advising its US players to buy Amazon gift cards to make deposits. 5Dimes is licensed in Costa Rica and Costa Rican authorities say they are not concerned about the investigation because 5Dimes is taxed on the basis of its local payroll and as such as considered to be conducting legal business operations. On the other hand, Costa Rica is investigating 5Dimes for allegedly moving money through Malta and Duba.
So whose opinion shall prevail?
If 5Dimes is laundering money as the US alleges, then is it an international crime or only a crime within in US jurisdiction?
What should Costa Rica do if the US arrested a 5Dimes officer, as has happened to other online gambling company officers?
If Costa Rica determines that 5Dimes is laundering money in other ways for other purposes will they reach an agreement with US authorities?
And what implications could such a deal have for other international casinos?
Into all this comes the new preferred medium: Bitcoin. As more online casinos accept Bitcoin more concerns are voiced over how easily it will be for money launderers in the gambling industry to hide their money.
But Bitcoin is used as an intermediary for currency exchange by players, not by the casinos.
If they convert their operations to work solely with Bitcoin, but maintain their licenses and tax reporting as per jurisdictional requirements, how are they generating illegal revenues?
Bitcoin and other encrypted digital currencies will make it hard (not quite impossible) for authorities to track the flow of money. Players who win big can accept payment in Bitcoin and use that value to buy and sell currencies across the globe.
Eventually, however, they'll have to bring some of that money home. But the way gambling works most of the money will be flowing from player to player and some of that money will always be kept in float, just sitting in casino accounts, Bitcoin wallets, and/or currency exchange accounts. At what point does it become laundered and who is benefiting from the laundering?
The burden of managing the money lies mostly with the players. The 5Dimes players will probably lose their money if the US government seizes it.
Maybe Amazon will be able to provide records showing who made deposits but will that money be transferred back to Amazon's customers or will they just be handed store credit?
Worse, will the government simply keep the money?
Federal authorities often redistribute seized funds to state and local police agencies.
Although it is hard to prove that money laundering is part of the online gambling economy there are enough traces of it on the edges of the industry to keep the question open. While it might seem just as relevant to ask if the convenience store industry facilitates illegal gambling, the sale of unlicensed tobacco products, and the sale of alcohol to minors, thus far US authorities are not talking about using regulation to control the marketplace.
They are stuck in a Prohibition era mindset that acts as though Elliot Ness and his boys just need to take out a few speakeasies to put a stop to all this nonsense.
In the end they got Al Capone for tax evasion and Prohibition was repealed. Barrel busting police tactics were found to be ineffective against the public's insatiable demand for backroom booze. At least by taxing the alcohol government is able to channel some of the money for the greater good. And that, of course, is the argument used to justify state-run lotteries.
It's really not that gambling is bad for the children; it's just that when the citizen gamble in someone else's jurisdiction the tax money is going to the wrong governments. Maybe the money laundering is just incidental to the real problem of whose jurisdiction should be raking in the most money and by what channels.
You might also be interested in our post about how safe your online casino account is from hackers.