Saturday, January 13, 2007

VIRTUAL INTERNET BANKS for Money Laundering?

Will 5 new unregulated virtual banks become money laundering centres ? l-banks-become-money-/

11 January 2007

Entropia Universe, one of the largest online role-playing games, and where subscribers can do business in a virtual universe, has announced that it will auction off five virtual banking "licenses" this month.

These are full-service cyberbanks without any governmental regulation, meaning absolutely no compliance requirements, presenting a golden opportunity for money launderers and terrorist financiers to thrive there, and to do so with impunity.

Is the phrase "Barbarians at the Gate" appropriate here ?

Entropia, a Swedish-based online game from MindArk PE AB, claims to have 500,000 subscribers that moved $ 160m through its virtual economic system. It actually has a fixed rate of exchange, where virtual currency is convertible to US Dollars at ten to one, which can be accessed through an established real-world ATM system reportedly from over 1m automated tellers worldwide.

The website says " the first virtual universe with a real cash economy."

The economic aspects are far from theory; players have paid up to $100,000 to purchase virtual properties on Entropia. Whilst financial transactions in the game may seem imaginary to most financial professsionals, they do indeed require real dollar funding, which is input into the primitive, but effective, virtual ecomony. The website boasts " Make real money on virtual planet Calypso."

Will the presence of virtual banks accelerate its growth ?

The licenses, which will be exclusive for a period of two years, allow lending to subscribers, and appear to have no restrictions whatsover on the scope of banking business which may be transacted. This mean that typical virtual transactions might look like this :

* Money launderers, using financial professionals in their employ as front men, purchase a virtual bank license. They choose a name for the bank that is deceptively similar to that of a well-known international financial institutions, and open correspondent accounts in some of the more unsavory offshore tax havens.

They create bogus "loans" to fund the criminal activities of their clients on a global basis. Inasmuch as there is neither compliance nor regulatory structure, they can pretty much accept anyone as a customer. Of course, all the "customer identification" documents they accept as proof of identity are bogus.

* Narcotics traffickers, arms dealers, counterfeiters, and all other types of financial criminals flock to the virtual banks, where no questions are asked about source of funds, whether you are a fugitive from justice, or even if you are financing global terrorist operations. Anything goes.

* Since the virtual banks do not exist in any physical sense, there are serious jurisdictional issues confronting law enforcement and regulators. The virtual banks exist on the science-fiction planet of Calypsyo. When one bank is closed up, through action against the company sponsoring the website, another opens up in a faraway country where enforcement is lax and corrupt, or where the law has not yet developed sufficiently to allow enforcement.

* Money launderers adapt to enforcement by operating a string of virtual banks, moving on when one is eventually terminated. In short, this is a potential money laundering nightmare. The virtual banks have no government-issued licenses, and we trust that this virtual financial "industry" can be promptly terminated under existing laws.

Online role-playing games simply cannot create financial structures without real-life regulation. It would open the floodgates for financial criminals.

For Further Reading: Virtual Money Laundering now available on the World Wide Web, World-Check 2 January, 2007.

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