Risks Associated with the Gambling Industry: Money Laundering, Fraud, and Preventive Measures

Article by : Divya Gandotra Jun 17, 2024

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The gambling industry is considered high-risk primarily due to its susceptibility to money laundering and various vulnerabilities to potential fraud and scams. According to the evaluations, by the end of 2024, the total value of the online gaming market will exceed $200 billion. 

The gambling industry, with its casinos, sports betting, and online gaming, appeals to people looking for fun and the chance to win money. While it serves as a source of excitement for enthusiasts, many governments and financial institutions consider that the gambling industry relates to a high-risk sector. 

The main factors for high-risk consideration are:

• Regulatory compliance
• Money laundering risks, and 
• Fluctuating revenue streams

These vulnerabilities make it easier for illicit activities to occur within the industry. For example, the large amounts of cash involved in gambling make it an attractive target for money launderers looking to conceal the origins of their illicit funds.

Additionally, the fast-paced and high-volume nature of gambling transactions can make it difficult to detect and prevent fraudulent activities. These specific factors contribute to the high-risk nature of the gambling industry.

Money Laundering in Online Gambling

Despite stringent regulations and increased scrutiny, the online gambling industry continues to be an attractive option for illicit individuals looking to launder money. According to statistics, gambling has risen to become one of the top three sectors that faced the highest Anti-money laundering (AML) penalties for 2023, accumulating over $475 million in total.

Warning Signs of Money Laundering

It is crucial for companies to be able to identify and recognize red-flag behaviours and suspicious activities related to online gambling transactions to effectively mitigate financial risks. Understanding and being able to detect these indicators allows firms to tailor their systems to match their risk tolerance and to tackle the specific challenges posed by online gambling.

Online gambling presents several key risks for money laundering, such as:                                                          

• Anonymity.  Some major dangers linked to online gambling relate to the level of anonymity it offers to users. Usually, traditional casinos use face-to-face interactions. At the same time, virtual platforms enable users to engage in gambling activities without much personal information. This anonymity opens the door for criminals to exploit the system by using other people’s credit card details, creating fake personalities, or utilizing cryptocurrencies for bets and withdrawals of their “winnings,”. These actions may employ the online gambling platform for money laundering purposes.
• Multiple accounts. Online gambling platforms frequently allow users to create several accounts. It creates opportunities for criminals to obscure the source of funds by transferring money between these accounts. As a result, it can make it difficult for casinos to trace the funds origin and potentially facilitate illegal activities such as money laundering.
• Cross-border financial transactions. The widespread reach of online gambling across international borders creates a complex network of cross-border transactions. It adds another layer of complication to efforts to identify and trace funds. The global nature of online gambling makes it challenging for regulatory bodies and financial institutions to effectively monitor and mitigate money laundering.
• The free money flow. In the realm of online gambling, significant amounts of money are constantly in motion. This presents a high level of opportunity for criminal elements to launder their illicit funds through the platform. By engaging in betting activities and cashing out winnings, they are able to disguise the origins of their money, making it appear as if it comes from lawful gambling pursuits.
• Regulatory challenges. Online gambling regulation is a complex and varied landscape. It implies significant differences in approaches across several jurisdictions. This diversity creates difficulties for authorities seeking to address money laundering within this industry. Some countries implement special regulations and establish the newest monitoring systems, such as in the UK. At the same time, other jurisdictions, like Malta, have adopted more simplified regulatory approaches. This disparity can lead to the exploitation of loopholes by criminals, facilitating the laundering of money using online gambling sites.

Money Laundering Stages and Methods

In general, there are three the most common stages of the process of money laundering:

1. Placement. Funds are first imputed through the deposit of money into online gambling accounts. This can be executed using various methods. For example, these methods can include bank cards, various cryptocurrencies, or checks. These methods provide a way for the illicit funds to enter the system while appearing to be legitimate gambling transactions.
2. Layering. Following the placement stage, the funds source is then obfuscated through a series of complex financial transactions within the gambling platform. This involves multiple bets, several financial  transfers, and multiple small withdrawals, which makes it extremely challenging ttracing origin of the money. These convoluted transactions effectively conceal the true source of the funds and create a facade of legitimate gambling activity.
3. Integration. Finally, scammers can withdraw the laundered funds as clean money or use them for legitimate transactions. This could involve purchasing assets, making investments, or transferring the money to some further accounts. By doing so, the illicit funds are effectively integrated with legitimates, making it difficult to distinguish between the two. This integration stage allows the laundered funds to blend seamlessly into the legitimate financial system.

When operators understand these stages, it can be crucial to recognize the typical techniques used by fraudsters to launder money with the use of online gambling platforms. 

It is important to remember key methods such as:

• Smurfing. This appears when scammers break down large amounts into much smaller transactions. It helps to avoid their detection by state bodies and relevant financial institutions. These transactions will be not so noticeable.
• Coordinated betting. Betting with deposited money, teaming up with other players, and making planned bets to hide the source of the money are all considered as prohibited actions.
• Chip dumping. It is when a player intentionally loses chips to another player at an online poker table in order to secretly transfer funds.
• Peer-to-peer transfers. Using gambling accounts to help illegal transactions by directly transferring funds between parties.
• Concealment. This involves storing illegal money in gambling accounts without taking it out immediately and using the same unnamed banking method to access it later. 

Fraudulent Activities in Online Gambling

Fraud in the iGaming industry takes on various forms and can pose significant threats to operators. The iGaming sector is experiencing rapid growth in regions such as Europe and Asia. As a result, it attracts the attention of fraudsters seeking to exploit security weaknesses across the entire player journey, starting from initial login procedures to deposit and withdrawal processes. 

Some prevalent fraudulent activities that iGaming companies need to be vigilant against include:

Multiple accounts fraud

This type of fraud involves fraudsters creating many accounts with using fake credentials to gain an unfair advantage online. These accounts are used to carry out various forms of cheating and various scams, including manipulating online polls, artificially boosting product or service ratings, and engaging in fraudulent schemes to influence online competitions, contests, or games. 

Examples of multiple account fraud include:

• Bonus abuse. Numerous fake accounts are created to get multiple welcome bonuses and other promotions. These can be a problem if not properly restricted because bonuses are usually only allowed to be used once.
• Affiliate fraud. This is when a third party benefits by using deceitful tactics in marketing, for example, campaigns named pay-per-lead. Some examples include using stolen data to get leads or generate fake sales for another business.
• Gnoming. It occurs when a player uses several accounts that look like they belong to friends but actually only they manage them. These ‘ghost profiles’ can be used to falsify some data, exploit promotional discounts, or generate more winnings outside of the rules.
• Chip dumping. Poker games are a good example of this fraud. A gambler loses chips intentionally or credits them to another person at the table to transfer the funds to the account of another player. This can be used for money laundering purposes and some bonus abuse.

Account takeovers 

Scammers often initiate account takeover, or ATO, attacks to illegally access player accounts and carry out unauthorized transactions. ATOs pose a significant threat to platform security. It can result in the theft of funds as well as undermine trust in the gaming business among players. Recent research conducted by Sift revealed that around 80% of users would cancel a brand if they became victims of scammers.

Payment fraud

It is crucial for iGaming companies to implement effective fraud prevention tools, as fraudulent transactions can lead to significant costs and risks. Allowing fraud to go unchecked can have long-term impacts on operations, brand reputation and reliability. Some popular payment fraud forms in iGaming may be:

• Phone top-up abuse. It is a type of payment fraud. It involves using phone credits or, in some cases, prepaid cards. Scammers fund online gambling accounts and often bypass certain gambling requirements. Fraudsters may deceive players into making a payment through social engineering and even phishing. In the end, the funds will be in the fraudster’s account.
• Chargebacks and first-party fraud. Customers ask their bank for refunds when they disagree with a credit or debit card charge. In the iGaming industry, this frequently happens after customers lose money gambling. This fraud occurs when customers knowingly make purchases and then falsely claim they didn’t authorize them to obtain a refund. This practice is prevalent in online gambling, as sometimes losing gamblers can exploit chargebacks in this manner.

Measures to Prevent Money Laundering and Fraud

The gambling industry is particularly vulnerable to fraud and money laundering. Therefore, it is crucial for online casinos to implement strong measures. Operators should put these measures in place and protect users. It will uphold the integrity of the sector. Both regulatory bodies and gambling operators are actively implementing a variety of strategies. The aim of these strategies is to combat illicit activities in recognition of the industry’s attractiveness to fraudsters.

Governments around the globe have also acknowledged the potential dangers linked to the gambling industry and have taken action by implementing comprehensive regulatory measures. These regulations are intended to set up guidelines that guarantee equitable gameplay and minimize the likelihood of fraudulent activities and money laundering.

To prevent financial crimes, gambling operators must follow strict AML (Anti-Money Laundering) and KYC (Know Your Customer) policies. As part of these measures, users are required to undergo comprehensive identity verification procedures and provide valid identification documents. These policies not only help deter money laundering but also safeguard customers by creating a safe and transparent gaming environment.

Moreover, in order to run a legal gambling service, it is crucial to acquire the necessary gaming licenses from the appropriate authorities. Each country has its own set of regulations when it comes to licensing, and adherence to these rules is vital for carrying out operations within that specific jurisdiction. Licensing bodies typically impose rigorous criteria to uphold the financial stability and honesty of the operators.

Fraud Prevention Strategies for Online Gaming Operators

In order to effectively combat fraud, it’s essential to employ a balanced strategy that spans the entire customer journey. Continual evaluations are key to keeping pace with evolving fraud methods. Relying solely on broad rules-based techniques may lead to high false positive rates and excessive manual reviews, as they may struggle to distinguish legitimate users from fraudulent ones. For robust fraud protection, iGaming businesses should implement a range of preventive measures.

The following measures can help gaming operators to identify and prevent fraudulent activities:

1. Require all new gamers to submit official identification documents and undergo a verification procedure according to Know Your Customer (KYC), as well as certain Anti-Money Laundering (AML) processes to validate their identities and prevent illicit activities.
2. Monitor and assess player behavior for any unusual or suspicious patterns that could indicate abnormal playing habits, transactions, or activities with an account, which might suggest the presence of bots or some other forms of  organized fraud.
3. Collaborate closely with payment services providers to streamline payment processes and reduce the risk of chargebacks resulting from fraudulent activities. Utilize technologies such as 3D Secure to enhance the security of payment transactions.
4. Regularly conduct comprehensive audits and various risk assessment tools to proactively identify and address potential vulnerabilities before they appear. Continuously review and refine KYC, AML, as well as some other compliance procedures to eliminate any loopholes.
5. Provide thorough training for support teams to help them recognize common fraudulent tactics and red flags associated with player fraud. Ensure that fraud analysts are kept informed about the latest trends in the field of gaming fraud through participation in industry conferences and specialized training programs.

Conclusion

 In 2024, online gambling operators must prioritize the establishment of strong fraud protection protocols. To safeguard online gambling business, it is crucial to take active measures to prevent instances of fraud. Given the persistent threat posed by fraudsters, who are likely to target the gaming business at some point, online gaming operators should implement robust fraud protection measures to mitigate the potential damage caused by successful fraudulent activities.