Commentary: Amid S$1 billion money laundering probe, a look at how dirty money is washed through online gambling

SINGAPORE: One of the largest money laundering probes in Singapore’s history hogged the headlines this month.

Police arrested 10 foreigners on suspicion of forgery and money laundering activities involving scams and online gambling. About S$1 billion (US$736 million) in assets, including properties, vehicles, luxury goods and gold bars, have been seized or frozen.

Notably, among the list of items confiscated were documents related to “virtual assets”, for example, cryptocurrencies. This leaves one wondering, what exactly is the connection between online gambling and cryptocurrencies in the context of money laundering?

CRYPTOCURRENCIES, A NEW TOOL FOR MONEY LAUNDERING

It is difficult to put a finger on the actual scale of global money laundering. Estimates from the United Nations Office on Drugs and Crime are in the ballpark of 2 to 5 per cent of global gross domestic product per annum. Using World Bank data, global GDP in 2022 came in at US$100.56 trillion, meaning about US$2 trillion to US$5 trillion is laundered each year.

One of the common ways to launder money is through online platforms, including sports betting sites, online casinos, and peer-to-peer betting platforms. These online platforms were especially popular during the COVID-19 pandemic when physical casinos were closed. 

A recent report by US blockchain analysis firm, Chainalysis, estimates that nearly US$23.8 billion worth of cryptocurrency were sent through illicit accounts in 2022, up 68 per cent from US$14.2 billion in 2021. These numbers are merely the tip of the iceberg, illustrating the vast underworld of digital money laundering.

Cryptocurrencies are an attractive option for criminals to launder money due to the relative ease of concealing their real identities and the origins of illicit proceeds. 

Although transactions of cryptocurrencies like bitcoin are, in theory, recorded on the blockchain, in reality, the pseudonymous nature of these assets means that account holders do not need to link their wallets to their real names.

The US$4.5 billion crypto heist money laundering case by a husband-and-wife duo in 2016 illustrates this point. It took years before authorities managed to recover a fraction of the cryptocurrency laundered by Ilya Lichtenstein and his wife Heather Morgan in the United States, in an operation that involved massive manpower and intense chain analyses.

Lichtenstein earlier this month admitted that he had orchestrated the hack against Hong Kong-based cryptocurrency exchange Bitfinex before enlisting his wife to launder the stolen funds in an elaborate scheme involving fictitious identities and the burying of gold coins.

MIXERS AND TUMBLERS

To make matters worse, the rise of “mixers” and “tumblers” - terms used to describe paid service platforms that exist to obfuscate the source of cryptocurrencies - add a layer of complexity when attempting to trace the origins of funds.

Think of “mixers” and “tumblers” as washing machines for dirty money. Put in dirty money, run a washing cycle, and out comes clean money.  One prominent example of what “mixers” and “tumblers” could be is an online gambling website.

There are two common modus operandi adopted by money launderers.

First, criminals in Country A gather cryptocurrencies through online scams, extortions, and malware. For example, criminals use victims’ credit cards to buy bitcoins without going through  banks’ two-factor authentication safety measure. The criminals then use the illicit cryptocurrencies to purchase credits from an online gambling platform.

Criminals in Country A play a few rounds online to create legitimate-looking gambling records, then withdraw the credits and convert them into cash in Country B. This method meets with little to no pushback from online gambling sites with weak anti-money laundering (AML) compliance and supervision.

In the second more complex method, criminals operate in close coordination. This entails criminals selecting an online gambling platform, for example online poker, that accepts multiple players.

Criminals in Country A play against their affiliates in Country B and lose deliberately. Country B affiliates then withdraw the winnings and convert them into cash. To succeed, criminals must avoid detection by both the online platform’s AML and anti-fraud systems, as well as other non-affiliated players in the game.

SINGAPORE’S ANTI-MONEY LAUNDERING EFFORTS

Singapore is one of the strongest globally when it comes to financial crimes detection. Robust AML regulations and suspicious transaction reporting systems are in place.

A digital platform for financial institutions to share information on suspicious customers or transactions is also in the works, which will help further boost Singapore’s AML capabilities. The new platform, called the Collaborative Sharing of Money Laundering/Terrorism Financing Information and Cases (COSMIC), will first be open to six major banks and is set to be rolled out in phases, starting from the second half of 2024.

These systems, while necessary, do not make Singapore an impregnable fortress to money laundering. The rapid progression in technology and sophisticated techniques pose an ongoing challenge for detection and monitoring.

COSMIC for instance, is currently designed and built for commercial banking, not cryptocurrencies. Monitoring cryptocurrencies may require distinct training data to build artificial intelligence and machine learning systems, and consequently, different data analytics tools and functions, and monitoring rules. Moreover, the speed, scale, and complexity of cryptocurrency transactions also severely complicate real-time monitoring, which may need to be addressed in COSMIC’s future coverage.

Without doubt, the first line of defense is the robust implementation of know-your-customer practices. An independent audit is always necessary to ensure this gatekeeping function is running smoothly.

However, the growing sophistication of criminal techniques has blurred the line between what is considered “traditional” and “crypto” money laundering.

One solution could be to integrate cryptocurrency and traditional AML systems, bridging the gap between the two. This would mean linking bank accounts to cryptocurrency wallets to monitor and detect money laundering. To improve detection rates, investments should be poured into AI and machine learning systems to monitor and correlate real-time transactions between cryptocurrency markets and financial assets.

Public education about the crypto-AML connection is also crucial. People must understand the significant risk of allowing criminals to use their accounts on gambling sites for money laundering. In many cases, individuals convicted of money laundering were found not to have understood the grave consequence of letting someone control their bank accounts in exchange for a small fee.

Money laundering through online gambling sites is a tough nut to crack because of its complexity and involvement of multiple parties. However, given its rising popularity in the money laundering market, backing away is not an option. 

Combating money laundering sometimes feels like a cat chasing the red dot of a laser pointer.  Perhaps it is time for us to shift our focus from the red dot to the hand holding the laser pointer.

Kelvin Law is associate professor of accounting at Nanyang Technological University, Nanyang Business School, and his research examines corporate sustainability and financial fraud.