COMBATING MONEY LAUNDERING IN INDIA’S ONLINE GAMING SECTOR

The Digital India Foundation (DIF) has released a significant report highlighting the threat of money laundering to the integrity and growth of the Indian online gaming sector. This report outlines the emerging risks, industry growth, and recommendations to tackle these challenges effectively.

Key Findings of the Report

International Online Betting Threats

• Rise of International Platforms: The report indicates that international online betting sites are increasingly being exploited for money laundering and financing terrorism, contributing to cybercrime.

Sectoral Growth

• Rapid Expansion: India’s online gaming industry is witnessing a remarkable growth rate of 28% annually from FY20 to FY23.
• Projected Revenue: The revenue for this sector is anticipated to reach USD 7.5 billion in the next five years.
• Job Creation: With 568 million gamers, the industry is expected to create significant job opportunities across fintech, cybersecurity, and cloud services, with projections of 250,000 jobs by 2025.

Vulnerabilities and Risks

• Mechanisms for Money Laundering: The report identifies several methods used in money laundering within online gaming:
• Illegal Operators: Some platforms evade regulations using mirror sites and VPNs.
• In-game Currencies: These currencies can be misused for illegal activities.
• Cryptocurrencies: These offer anonymity and facilitate cross-border money laundering.
• Mule Accounts: Accounts that hide the source of illicit funds.
• Smurfing and Money Dumping: Small transactions are used to avoid detection.

What is Online Gaming?

Online gaming involves playing video games with others via the internet, allowing real-time competition across various devices like computers and smartphones.

Classification of Games

• Skill-Based Games: Legal in India if they primarily involve skill (e.g., Dream11, MPL).
• Games of Chance: Considered illegal if the outcome is mainly determined by chance (e.g., Roulette).

Current Scenario

• Youth Demographics: Over 600 million individuals under 35 years are driving the industry’s growth.
• Smartphone Usage: The penetration rate has reached 75%, significantly boosting gaming access.
• Mobile Gaming: Accounts for 90% of gaming revenue, largely through free-to-play models and in-app purchases.
• E-sports Growth: E-sports viewership has skyrocketed to over 80 million, supported by government initiatives.

Legality of Online Gaming and Gambling in India

• State Jurisdiction: State legislatures have the exclusive power to legislate gaming laws per Entry No. 34 of the Seventh Schedule of the Constitution.
• Public Gambling Act, 1867: This is the primary law governing gambling, which is outdated for addressing online challenges.
• GST on Gaming: The Finance Ministry has imposed a 28% GST on online gaming, casinos, and horse racing.
• Lotteries Regulation Act, 1998: State-run lotteries are considered legal.

About Money Laundering

Money laundering involves hiding the origins of illegally obtained money, transforming illicit funds into legitimate assets.

Common Methods

• Structuring (Smurfing): Breaking large cash amounts into smaller deposits.
• Trade-Based Laundering: Using trade transactions to obscure the origins of illegal funds.
• Shell Companies: Creating businesses with no real activity to legitimize illicit transactions.
• Real Estate: Purchasing property with illegal funds to convert them into legitimate assets.

Prevention Steps in India

• PMLA Enforcement: Implementing the Prevention of Money Laundering Act.
• Financial Intelligence Unit (FIU): Establishing a body to monitor financial activities.
• Mandatory Reporting: Banks must report significant cash transactions.
• KYC Guidelines: Strict identity verification for customers.
• International Coordination: Collaborating with organizations like the FATF.
• Oversight of Online Gaming: Implementing rules under the Information Technology Rules, 2021.

Challenges Facing the Gaming Sector

• Financial Integrity: An illegal betting market worth over USD 100 billion raises concerns about money laundering and fraud.
• Cybersecurity Threats: Risks of cyberattacks compromise user data and safety.
• Misuse of In-Game Assets: Potential for illicit activities complicates regulation.
• Illegal Offshore Platforms: The presence of these sites undermines regulatory efforts.
• Circumvention of Regulations: Many platforms exploit loopholes, signaling a need for stricter enforcement.

Risk Mitigation Steps

• Taskforce Establishment: Create a dedicated group to propose regulations for the gaming sector.
• Mandatory Registration: All online and offshore Real Money Gaming operators must register under the CGST Act.
• Legal Whitelist Creation: Regularly update a list of legal gaming operators to guide payment services.
• Advertising Regulations: Only whitelisted applications should be allowed to advertise.
• Collaboration with Financial Institutions: Work with banks to block transactions to illegal operators.
• Cross-Border Cooperation: Initiate agreements with international bodies to combat illegal gambling.

Mains Question:

1. Discuss the implications of money laundering in the online gaming sector in India and suggest measures to enhance regulatory frameworks to mitigate these risks. (150 WORDS)