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02.12.12 1. Introduction Online Gambling as a Game Chager to Money Laundering • Money laundering is the process by which criminals attempt to conceal or disguise the nature, location, source, ownership or control of their ill-gotten gains, so as to make it possible to invest or consume the proceeds of crime (Masciandaro1999) • Money laundering (Unger, 2007): distorts prices, consumption, saving and investment rates; increases the volatility of import/export levels, the demand for money, interest and exchange rates, as well as the availability of credit; 29th November 2012 threatens the solvability and liquidity, as well as the reputation and profitability of the financial sector; Dr. Ingo Fiedler Endangers the continuance of foreign direct investment (FDI) Acts as a multiplier for crime, corruption, bribery and terrorism ML as a necessary condition for organized crime Universität Hamburg Institut für Recht der Wirtschaft Universität Hamburg Institut für Recht der Wirtschaft What makes ML different from other crime? the negative externalities of money laundering are to a large part indirect: Money laundering lowers the cost of (other) criminal actions and, hence, increases the amount of crime. In contrast to a criminal who can be ideologically motivated (think of a terrorist) the money launderer is not necessarily prone to the "injurious“ behavior of an ordinary criminal – he is only motivated by profit • Money Launderer as the weak link in the chain of organized crime The money launderer is modeled as an independently. Dr. Ingo Fiedler 2 Dirty and White dollars • Money laundering is a criminal activity • Still, it is different: Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler 3 • Crime ’pays’ less because a ’dirty dollar’ earned in the criminal economy is worth less than a ’clean’ one earned in the legitimate economy (Wilson 1992) • The reason is that the dirty dollar has to be laundered to become a clean dollar – and money laundering comes with a cost • ML as an agent of the producer of crime Focus of the paper: increase the costs of money laundering to decrease the amount of crime Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler 4 1 02.12.12 Measuring the Immeasurable: Prevalence of Money Laundering The Market for Money Laundering • 2-6% of the global GDP stems from illicit sources • $0.6-2.5 trillion flow through money laundering markets per year • 0.1%-0.3% of moiney laundering is detected and intercepted Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler 5 Gambling and Money Laundering • • • • • • • • • • • Three different cases of money laundering: 1) Illegal gambling as an illegal transaction and a money laundering offense per se 2) Illegal transaction occured ex ante: Deposit of illegal funds via anonymous method and payout as (tax free) gambling win 3) Use of gambling as a payment tool for illegal transactions 7 Deposit Option Player Huge volume of transactions/cash flows No physical product Often tax free „winnings“ Dr. Ingo Fiedler 6 E-cash Flows • Gambling as a perfect tool for money laundering Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler Universität Hamburg Institut für Recht der Wirtschaft Player Universität Hamburg Institut für Recht der Wirtschaft Payment Processor 235 payment methods Credit cards (physical/virtual) Debit cards (physical/virtual) Prepaid cards (physical/virtual) Bank wire ACH Cheque Gateways Player-to-Player transfer (P2P) (Mobil-)Telefone bill Cash Withdraw Option Payment Processor Dr. Ingo Fiedler Gambling Operator 2.910 Operators • Casinos • Bookmaker • Betting exchanges • Poker • Bingo • Skill Games Gambling Operator 8 2 02.12.12 The Complexity of E-cash Flows with payment processors Analyzing different scenarios Case A: Small cocaine dealer ObjecLve: Transfer €10,000 of illegal drug funds to legal bank account Use a prepaid card (e.g. Paysafecard) 100x100 10,000€ € Deposit Casino Paysafe-‐ Account cards 10,000€ Cash 10,000€ Customers Dr. Ingo Fiedler Universität Hamburg Institut für Recht der Wirtschaft 9 Fog: Not observable for financial intelligence Play 9,500€ Casino Account 9,500€ Bank Account Tax free income! 500€ Casino Operator Dr. Ingo Fiedler Universität Hamburg Institut für Recht der Wirtschaft 3 Wire Transfers as Gambling Wins 10 Analyzing different scenarios Analyzing different scenarios Case A: Small cocaine dealer Case B: Medium cocaine dealer ObjecLve: Transfer €10,000 of illegal drug funds to legal bank account ObjecLve: Transfer €200,000€ illegal drug funds to legal bank account Use online gambling as a payment tool 1,000€ Bank Account Deposit Customer A . . 1,000€ . Credit Card Customer J Deposit Universität Hamburg Institut für Recht der Wirtschaft 1,000€ Poker Account Customer A . . 1,000€ . Poker Account Customer J Player Transfer 10,000€ Poker Account Fog: Not observable for financial intelligence Dr. Ingo Fiedler Deposit via offshore accounts 3 Wire Transfers as Gambling Wins 10,000€ Bank Account Tax free income! 11 200,000€ Cash 200,000€ 200,000€ Switch Foreign Bank Couple of Casino Country Deposits Account Accounts Play 200,000€ Customer Fog: Not observable for financial intelligence 5,000€ Casino Operator Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler 195,000€ Casino Account Wire Transfer 195,000€ + Bank Account Phone Call „Jackpot“ Tax free income! 12 3 02.12.12 Analyzing different scenarios Analyzing different scenarios Case B: Medium cocaine dealer Case C: Huge cocaine dealer ObjecLve: Transfer €200,000€ illegal drug funds to legal bank account ObjecLve: Transfer €200,000,000 illegal drug funds to legal bank account e-Wallets as a payment system Found an online casino Found a Gambling Operator in a „tax heaven“ Figure 9: Example of using online gambling as a payment tool for €200,000 of illegal proceedings. 20,000€ Customer A 20,000€ E-‐Wallet Account A . . . 20,000€ Customer J . . . 20,000€ E-‐Wallet Account J Universität Hamburg Institut für Recht der Wirtschaft 200,000€ 200,000€ E-‐Wallet Couple of Casino Account Deposits Account Drug Dealer Fog: Not observable for financial intelligence Wire Play Transfer 195,000€ Bank + Phone Call Account „Jackpot“ 5,000€ Casino Operator Dr. Ingo Fiedler 200,000,000€ Switch Country Cash Tax free income! 200,000,000€ Customer 13 Online Gambling as a „Game-Changer“ to Money Laundering Foreign Bank Account Create Fake Revenues (and Expenses) 200,000,000€ Business Fog: Not observable for financial intelligence Real Expenses, taxes etc. 190,000,000€ Business Profits Dividend payout 10,000,000€ „Tax Heaven“ Dr. Ingo Fiedler Universität Hamburg Institut für Recht der Wirtschaft 190,000,000€ Bank Account 14 4. Onlineglücksspiele „Game-Changer“ der Geldwäsche d) Der „Game-Changer“: sehr geringe Kosten Price of ML Supply of ML (gets cheaper) Low Costs More OC Low Risk of Detection Demand of ML Old crime level New crime level Organized crime Decreased costs of money laundering due to online gambling more organized crime Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler 15 Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler 16 4 02.12.12 Recommendations • Taxing Gambling Wins Increases costs of money laundering Decreases profits from crime Decreases crime Thank you for your kind attention! • Law enforcement Tackling illegal gambling = Tackling money laundering Precondition for any regulation: No illegal gambling Universität Hamburg Institut für Recht der Wirtschaft Dr. Ingo Fiedler [email protected] 17 Universität Hamburg Institut für Recht der Wirtschaft 5