By Vibhore Yadav
Introduction
Modern money laundering essentially relies on legitimate businesses characterised by a large cash-flow and complex, anonymous transactions that are difficult to trace in order to convert proceeds from illegal activities into ‘clean’ money which can be used for legitimate purposes. Historically, businesses such as retail outlets, restaurants, rental companies, casinos etc. have been relied upon for this purpose. However, over the last few decades, with the advent and rapid progress of information technology, criminals too have evolved and have begun relying heavily on the internet for laundering money. Online gambling, which is legally permitted in many countries, has emerged as one of the most popular and fastest-growing methods of laundering money using the internet. This is primarily because it not only has all the traditional characteristics of a business fit for laundering, but it is also generally cross-border in nature, which makes it inherently difficult to track and regulate. It is now considered to be one of the cheapest and ‘safest’ methods for money laundering.
This post examines the use of online gambling as a tool for money laundering, briefly discusses the current legal framework relating to this in India and the manner in which it can be changed to better regulate money laundering.
Money laundering through online gambling
Online gambling, which broadly comprises of sports betting and various card games such as poker and rummy, has emerged as a near-perfect mechanism to obscure the link between money and the criminal activities through which it may have been obtained. The industry, which has been growing at a rapid pace and is set to be worth around USD 94.4 billion by 2024, has evolved to operate in a complex technological and regulatory environment, making it susceptible to criminal exploitation. Certain key characteristics of online gambling which make it a suitable tool for money laundering include the completely virtual nature of transactions, internationality of cash flow, complexity in payment processing, lack of international coordination, regulatory lacunae and the low cost of transactions. These factors combine to result in a significantly lower risk of detection along with higher profitability when compared to other traditional methods of money laundering.
The cross-border nature of online gambling is one of the key factors which differentiates it from traditional gambling in casinos and makes it harder to regulate. Online gambling often involves multiple stakeholders present in different legal jurisdictions making it difficult for countries to effectively subject such transactions to their domestic laws. For example, a gambling website may be registered in one country, with its servers placed in a second country. It may then be operated from a third country and be accessed by launderers from a fourth country. Further, these websites are often entirely unregulated because of their registration in countries like Antigua, Belize, Costa Rica and Granada which have lax legislative frameworks with respect to gambling, anti-money laundering and taxation. Countries also face technological challenges in tracking and regulating online gambling as there more than 2900 gambling websites in operation today, along with more than 235 payment methods through which they can be accessed, such as prepaid cards, credit cards, ACH systems, player-to-player transfers and even cash.
In practice, one of the most popular techniques to launder money through online gambling is by ‘chip dumping’. In chip dumping, several players in an online card game, playing with small amounts of illegally obtained money, conspire to continuously lose to a single player in order to transfer all their money to him. The winning player then simply cashes out all his winnings into his account as money which is considered legitimate and cannot be traced back to its illegal roots.
Legal framework in India
The current legal regime in India on this subject is somewhat convoluted and based on archaic laws. ‘Betting and gambling’ are a part of the State List enumerated in the Seventh Schedule of the Constitution and so only state legislatures are competent to legislate on this subject. Fourteen Indian states and Union Territories have simply adopted the British-era Public Gaming Act, 1867 (‘Public Gaming Act’), which was the central legislation on this subject and applicable to the whole of India before the Constitution came into force. The Public Gaming Act is primarily intended to punish public gambling and the ‘keeping of common game houses’ but does not make any specific reference to online gaming. Several other states like Maharashtra, Delhi and Andhra Pradesh have enacted their own specific legislations on this subject. Currently, Goa and Sikkim are the only two Indian states which permit casinos to operate in their territories, whereas, Sikkim and Nagaland are the only two states which expressly permit and regulate online gambling. Telangana is the only state which specifically prohibits online gambling in its territory.
Interestingly, Indian gambling laws only deal with and prohibit ‘games of chance’ and not ‘games of skill’. A game of skill is one whose result doesn’t entirely depend on sheer luck and is actually influenced by the expertise, experience and knowledge of the players. Consequently, while ‘rummy’ is considered to be a game of skill, and thus generally permitted, poker is not. Thus, given the lack of any specific laws prohibiting the practice of online gambling (other than in Telangana) and the permissibility of games of skill, numerous gambling websites have been legally offering such online games in India.
Current checks and balances
Online gambling websites are broadly of two types: those that are hosted in India and those that are hosted in foreign nations. Websites hosted in India are subject to reporting obligations under the Prevention of Money Laundering Act, 2002 (‘PMLA’) and the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rules’) as Section 2(wa) read with Section 2(sa) of the PMLA stipulates that an entity carrying out “activities associated with casino” would be a ‘reporting entity’ for the purpose of the statute. Section 12 of the PMLA obligates reporting entities to maintain records of all transactions and documents relating to the identity of clients and provide the same to the Director of the Financial Intelligence Unit within prescribed time periods. The PMLA Rules further obligate reporting entities to undertake onerous customer due diligence while onboarding clients and also maintain records of transactions that are ‘suspicious’ or above a stipulated monetary threshold. These requirements make India-based gambling websites a relatively less attractive option for money laundering as there is a lack of anonymity, ‘suspicious’ transactions can easily be flagged by the relevant authorities and money trails are recorded. Thus, websites hosted in foreign jurisdictions with no such legal restrictions are automatically preferred by launderers. The Foreign Exchange Management Act, 1999 (‘FEMA’) seems to act as a roadblock to transactions with such websites as gambling-related outward remittances are forbidden by Rule 3 read with Schedule 1 of the Foreign Exchange Management (Current Account Transaction) Rules, 2000. However, gambling websites have side-stepped this restriction by accepting deposits in Indian currency, thus not attracting the provisions of FEMA whatsoever.
Suggested regulatory changes
Currently, there are no central laws specifically dealing with online gambling in India and this has meant that numerous websites have been operating in the country mostly in an unregulated manner. In my opinion, there is a need for the Union government to step in and formulate a law on this subject which formally legalises and regulates this activity, after amending the Seventh Schedule to bring in ‘betting and gambling’ to the Union List. A licensing regime can be put in place to regulate gambling websites. Gambling websites, whether Indian or foreign, should only be allowed to operate within the country once they have received a license to do so from the government. The grant of this license should be made conditional on their compliance with all domestic laws and reporting requirements such as those provided under the PMLA. Attempts should be made by the government to block unlicensed websites and prevent them from being accessed in India pursuant to the relevant provisions of the Information Technology Act, 2000. Accessing such unlicensed websites from India should also be made a criminal offence. This will ensure that in case some unlicensed gambling websites escape the government’s radar, people who use them for laundering activities face significantly higher penalties.
Critics of gambling often argue that this activity should be banned entirely in order to preserve the ‘moral and social’ fibre of the nation. However, banning online gambling in India altogether will achieve no purpose as, given the large market for online gambling that already exists in India, this industry will simply shift underground and even recreational gamblers will be forced to engage in this activity through surreptitious means. Additionally, this sector needs to be governed by a single, uniform law formulated by the Union government because separate, and often conflicting, State laws make it “technologically infeasible” to block errant gambling websites. Will this be enough?
Given the technological limitations that regulators operate within, it is highly unlikely that the government can block access to all unlicensed websites that are available on the internet and so there are always bound to be certain gambling websites that can potentially be used for money laundering. However, the proposed licensing regime goes a long way in increasing the cost of laundering, the chances of detection and the penalties in case one is caught using unlicensed gambling websites. Further, chances of detecting and blocking unlicensed sites also increase if the government engages in collaborative efforts with other nations and private players such as ISPs, internet security companies and monitoring organisations along with focussing on the training of law enforcement officials. Thus, this licensing regime is a far better alternative to the status quo, not because it can completely stop laundering through online gambling, but because it makes online gambling a significantly less ‘attractive’ avenue for money launderers.
Conclusion
Till date, the Indian government has done little to directly tackle the increasing rate at which online gambling sites are being used to launder money and has almost turned a blind eye to it. The government needs to change its approach and focus on revamping the legal framework in this regard along with entering into global collaboration efforts to tackle unregulated online gambling websites.
[The author is a fifth-year student at West Bengal National University of Juridical Sciences, Kolkata.]
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