Online gaming: a virtual paradise for money launderers

Video games are very popular in Germany. In addition to online gaming as a traditional leisure activity, professional gaming has also become established in recent years. This electronic sport ("e-sport" for short) comprises digital competitions in which players or teams compete against each other. Like traditional sports, e-sports are organised into leagues and tournaments are held.

With more than 570 million viewers worldwide, e-sports have long since arrived in the centre of society. According to a study by the German Games Industry Association, one in five Germans belongs to the e-sports community. The structures have become highly professionalised in recent years. Turnover from games, the associated hardware and online gaming services has risen by six per cent to a total of almost ten billion euros in 2023.

However, the virtual arena not only offers great entertainment potential, but also a platform for criminals to conceal their activities.

Video games are increasingly incorporating digital economic systems. Players can earn virtual currencies by completing challenges or acquire them for a fee. A distinction is made between convertible and non-convertible in-game currencies. Non-convertible in-game currency can only be used to purchase virtual objects. Convertible in-game currency, on the other hand, can be traded with other players via an exchange platform.

The use of virtual currencies and the anonymity of player accounts create an environment that is susceptible to criminal activity. Criminals use illegally obtained funds to purchase virtual objects and then sell them (for a profit) via an external marketplace. Although the user agreements of most game providers prohibit this procedure, it is virtually impossible to enforce the ban. In addition, the transfer of game currency between several player accounts controlled by a criminal group can be used to conceal the origin of the funds.

These virtual business transactions are known as microtransactions. The individual purchases and sales rarely involve large sums, but the sum of the transactions is enormous. Filtering out conspicuous payments made by criminals to launder illegally acquired money is like looking for a needle in a haystack.

As traders in goods, games providers are already subject to money laundering regulations. However, if they do not carry out cash transactions, they fall under the privileged status of the Anti-Money Laundering Act and do not have to implement risk management1 or comply with customer due diligence obligations.2

Irrespective of these simplifications, gaming operators are still obliged to report suspicious business transactions. However, this requires the provision of appropriate and effective security systems, which are likely to be inadequate or non-existent in their current form. In particular, unlike payment service providers, games providers are not obliged to operate a data processing system to recognise suspicious transactions.

To protect their customers and their own reputation, game providers should implement adequate security measures even without a legal obligation. This includes, in particular, identifying players and ensuring effective monitoring of microtransactions within the virtual games industry.

This can be operationalised, for example, by requiring players who wish to participate in the virtual gaming economy to first enter into a business relationship with a subsidiary of the game provider that acts as a payment service provider. The latter is therefore subject to comprehensive obligations to prevent money laundering and terrorist financing and can identify suspicious transactions and block affected player accounts.

By continuously analysing the payment flows that are processed via their platforms, gaming providers can ensure that they manage money laundering and fraud risks appropriately and do not inadvertently become a stooge for money launderers.

The experts at KPMG will be happy to answer any questions you may have about money laundering prevention.