Since the first arcade games in the 70’s the gaming industry has risen exponentially over the decades. It is the biggest earning media sector beating music, TV and movies. Year after year the sales records reach new heights and the number of players is also increasing. It has been estimated that the industry has reached $165 billion revenue in 2020. With the constant growth and new opportunities come new challenges. How to secure the payments, how to comply with the law and how to protect the gaming community?
Brief history of games
First there were the arcade games. Coin-operated, skill based games installed in restaurants or amusement arcades. Up until the creation of home consoles, they were all the rage. But home consoles gave more freedom to the creators, so they started to produce complicated, more immersive games. What made the industry so big, was the rise of internet and mobile games. Microsoft created a subscription platform that gave players access to multiplayer services and the ability to communicate with each other. PC users also received that ability with the MMO (Massive Multiplayer Online) game World of Warcraft, which at its peak had about 12 million active players. After the creation of app stores, the games also became available to mobile devices. The mobile games are responsible for half of the industry revenue, it is estimated that in 2020 it reached $85 billion.
Threats to the industry
According to research there were 2.7 billion gamers in the world in 2020. With so many people involved in the industry, there are threats that the developers face. The players are not only teenagers and young people. The oldest gamer according to the Guinness World Records is a 90-year-old woman from Japan. This globalization brings risk of financial crimes in the industry. It is challenging to regulate due to the multitude of players from all over the world, with different laws in each country. One of the biggest threats to the industry is fraud. According to Newzoo’s Report, 47% of gamers spend money while playing and 1 in 5 gamers has experienced fraud when paying for games. What attracts criminals to the industry is microtransactions, which are an easy way to launder money. The players also face account takeover threats, while developers credit card fraud and chargeback fraud.
Money laundering in video games
Unregulated AML policies and lack of KYC approach has opened a gate for financial crimes. Online games can be used to launder money from criminal activity especially from organised crimes. It is easy to transfer in-game currency from one account to another, and there are games that offer the ability to exchange in-game currency back into fiat money. For an unregulated industry it is easy to create multiple accounts and launder money between them. Most of the more popular games use non-convertible in-game currency, which seems to be more secure, but the Financial Action Task Force in its report stated that there may arise a black market for selling such currency, thus transforming it into a convertible one.
How does money laundering look in video games? On an account (that has been either created or hacked) a criminal deposits illegal funds, that can come for example from a stolen credit card. They purchase items on that account and later they can sell either an entire account or just the items on marketplaces such as eBay and withdraw funds. Such accounts can be banned, but that does not guarantee any legal consequences, since they are not reported to the authorities.
Loot boxes: gaming or gambling?
The most talked about game feature recently were loot boxes – a randomized item drop, that could be obtained as an in-game reward or by real money. They were the source of money laundering in 2019. Because the chances of getting an item are random, they are considered a form of gambling. First country to ban loot boxes was Japan. In 2018 due to violation of gambling legislation loot boxes were banned in Belgium and the Netherlands. More countries are to follow – China implemented age restrictions, the same is proposed in the UK.
Streaming
Players not only love playing games, but also watching others play. Esports are very popular and attract more viewers then television. One of the most popular platforms for streaming games to the public is Twitch, which also offers its own currency. Since its launch in 2016, the currency brought an income of around $14 million. This could be used to launder money as well, and it’s very simple.
How to comply with the AML rules?
AML regulations for the gaming industry vary in different countries. What is important is a risk based approach to the customer. To prevent money laundering it is vital to assess risk and take precautions such as internal policies. It is up to the game developers to detect fraudulent transactions, since there are no government regulations in place. The Financial Action Task Force in its statement announced that marketplaces that trade virtual assets will be subjected to AML and KYC policies, so it may be easier to track down any fraudulent accounts.
Get to Know Your Player
When a player is creating an account he usually gives minimum information. This information can include: email address, phone number, date of birth, payment information, personal address. There is no law requiring a user to present any identity documentation. But that may change in time. Due to the fact that the players spend more and more money on their accounts it could be beneficial for confirming the players identity.
Automated checks can stop smaller fraud operations, but bigger ones could still pass. It is worth implementing more advanced checks, like video verification, or methods that are supported by an artificial intelligence and a human specialist, which eliminates the threat of a fraud. This may discourage some of the players and therefore the game companies from applying more strict rules of onboarding, but the players could receive in-game incentives for going through additional checks. By engaging more, the companies can avoid fines and reputational risks and create a more secure environment for their players.
Fully-Verified was created as answer to its founders collectively losing over $150 000 to various types of fraud in their eCommerce businesses.
