The Game Of Money Laundering, Part 2


In our last blog we discussed the origins of money laundering and how it evolved over the years. We know that when criminal organizations create big piles of money, they can’t do very much with that money until it moves from the shadow economy into the legitimate economy. The use of computers and global banking creates more opportunities for criminals to sneak money into banks and financial institutions so that they can launder the money and move it back into the economy. The new economy makes the process more complex and more difficult to follow. Still, while this may be a game of “speed laundering” it’s still the same old game. At least it was until recently. There’s a lot happening on-line that could create new opportunities for money laundering. Today, we’re going to look at one particular scenario that may give us a sneak peek into the future. Let’s dive right in!

The latest money-laundering  schemes are driven by technology. Deals move faster and in smaller increments, making it harder for the good guys to find and catch the bad guys.  But when technology combines with innovations in commerce, we get entirely new types of risk. Consider eBay. This firm started out with an idea for a simple auction system. You have a painting that you never really liked, so you sell it on eBay and  make a few hundred dollars. Why is that a problem? Well, auctioning isn’t normally a part of the world of finance, so it falls outside of most financial regulations. Add to that the incredible growth of eBay, and we have a unique situation. Old school auction houses, such as Christies and Sotheby’s have been around for hundreds of years, hosting auctions of the world’s finest art and artifacts. At the end of 2011, Sotheby’s had an auction of contemporary art with sales of $200 million in a single night. Yet, the best year for Sotheby’s or its close rival Christies, has been about $6 billion. This year eBay will pass $150 billion in sales of decidedly  more downscale merchandise. That’s more than the economies of 100 countries, and rivals the GDP of Bulgaria. The “micro” auctions that typify eBay’s auction model is the perfect vehicle to launder a lot of illicit funds. Why does eBay have so much potential as a money-laundering  machine? Four reasons:

  1. Biggest Player: First, eBay is the biggest on-line auction service. There are other services out there that could do the same scams, and they might be doing that even as we speak. However, the sheer size of eBay makes it the most likely place to look for big scams.
  2. Illegal Activities:  Ebay has many programs and documents that talk about crime prevention. However, eBay has hosted criminal activity with alarming regularity. The most basic crime on eBay is the selling of items that the seller does not possess, and the seller simply walking away with the cash. A step up from that is identity theft, and unpaid purchases from these accounts. Stolen goods are regularly sold on eBay, much as criminals used to sell stolen goods to a pawn shop. Of course, eBay has gained quite a bit of notoriety as the world’s largest market for counterfeit goods, often in conjunction with international criminal organizations.
  3. Little Regulation: How can eBay be involved in so many criminal activities and still be in business? It’s because the auction industry is very lightly regulated, and in many locations not regulated at all. There are no international regulations for auctions. Because the auction house does not sell anything… they merely provide a marketplace for sales to take place… most legal systems do not hold the auction house liable for the details of transactions. Tiffany’s, the well-known jeweler, has been suing eBay for nearly a decade because of the volume of counterfeit Tiffany’s goods sold on eBay. The courts have backed eBay, stating that an auction house must  do more than host an auction to be liable; it must attempt to influence the sale (such as falsely documenting an item’s value), or prevent the buyer from discovering a fraud. Even being aware that an item is most likely counterfeit is not enough to make the auction house liable.
  4. Paypal Connection: So far we have a huge auction house with a lot of questionable transactions, but nothing that looks like a threat to international banking. However, we haven’t asked how are payments made on eBay? A few years ago eBay asked this question, and wasn’t happy with the answers. Auctions were constrained by unreliable or slow payment systems. In 2002 eBay bought the electronic payment firm, PayPal. PayPal connects your bank account or credit card to eBay’s auctions and facilitates a rapid payment. According to Wikipedia, Paypal has 232 million accounts, with customers in 190 countries, using 32 currencies. With PayPal as part of the system, the lightly regulated eBay has the global reach to allow criminal activities to develop extremely complex layering schemes… that eBay would not be responsible for. Yet, any such scheme would pass through many banks. Today’s Anti-Money Laundering legislation might hold these banks accountable for involvement in any criminal activity. At a minimum, it would be a black eye to see your bank’s name in the Wall Street Journal because of activity on eBay.

Few banks are aware of the number of illegal eBay transactions or have processes that can prevent involvement in an eBay fraud. Individuals who have been scammed on eBay may contract their banks to stop a payment, but many of these crimes are not reported. True money-laundering  schemes may just go unnoticed. But what if the situation is much worse than what I have described? What if eBay worked with an organization that auctioned items that didn’t exist, always used false names and  wore disguises to hide their identify? We don’t have to assume. This already exists throughout the world of on-line gaming. Not gambling, gaming. As in elves and dragons or light saber wielding Star Wars fanatics. What’s going on here?

The granddaddy of on-line gaming or MMORP (massively multiple on-line role playing) is World of Warcraft (WOWC). This one game generates about a billion dollars a year in subscriptions, and an unknown amount of additional money in “commerce,” from its 12 million users. If you’re the kind of person who spends a lot of time on WOWC, you will eventually need to kill an enchanted dragon or go on a quest for some rare object. To get that object you could spend months performing time consuming tasks, or you could simply buy that object from someone. Not too long ago you would pay fantasy world currency for fantasy world  products; today, you pull out your credit card and pay real money. Virtually all of these transaction pass through PayPal.

These fantasy auctions are largely innocent, criminal history tells us that every big criminal scheme was based on a smaller, earlier version. In our last blog we discussed Al Capone’s use of prohibition to develop an immense criminal empire. We know that eBay has a history of supporting petty theft and unethical behavior, but current law holds the seller… not the auction house… responsible for crimes. Based on other crimes, it’s not hard to imagine that small sums of illicit money are moving through fantasy auctions. Role playing sites are growing very quickly, and the opportunity to hide and launder money will grow along with these sites. The combination of MMORP sites, little regulation of eBay and the money moving capacity of PayPal we have a platform to accomplish very sophisticated money laundering. Because banks can be unknowingly enmeshed in these transactions, financial institutions need to understand how eBay is evolving and if it is creating a backdoor for criminals to move money through international banks.

In the last century, police departments kept an eye on pawn shops to find clues about crimes and even get a jump on new potential criminal activities. Ebay has become the world’s pawn shop, and will require similar policing. However, eBay, unlike pawnshops of old, has enmeshed banks and financial institutions through PayPal’s connection to bank accounts and credit cards. Over time more advanced payment systems will enter the market,  but may share eBay’s exemption from financial regulation. We can expect criminals to exploit any new opportunity to launder money. Will banks remain one step ahead of the criminals? They might, if they examine and understand new and emerging threats to the banking system. At least, that’s my Niccolls worth for today!

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5 Responses to The Game Of Money Laundering, Part 2

  1. damnuble says:

    So when we, as the innocent bystanders with good intentions, come across a listing on Ebay that is obviously suspect (i.e. a $30 item being sold for $8000.00), who do we report it to? Or do we report it at all?

  2. damnuble says:

    So when we as the innocent bystanders see an item on Ebay that is clearly suspect (i.e., a $30 item being sold for $8000) who do we report it to? Or do we report it at all?

    • Thanks for the comments! If you contact Ebay about a specific problem auction, they claim that they will suspend it… and they do seem to do that with some frequency. However, if you see a vendor with many questionable items or many auctions for essentially the same item, perhaps sold via different vendors, Ebay’s policy is that they will not take action, because this means that Ebay is deciding who can and cannot be in business. If the item is stolen (and you can provide evidence) they will shut down the auction. They have also stopped auctions for body parts (kidneys and organs), which is illegal in most states.

      However, if the issue is widespread selling (through one or more vendors) of counterfeits, or misrepresented products, action is unlikely. This was the debate with Tiffany, the well known jewler. Tiffany told Ebay that they never made certain types of jewelry, and that Ebay could easily search for these items and remove them (I believe one item was a hairpin with crystals). Ebay has declined to address systemic “corrections.” Also, if you personally purchased a fake product they will work with you to get your money back and (if you paid via Paypal) they more or less insure you and will reimburse you.

      • C T says:

        Thanks – this has been a discussion on a forum I belong to. It is a knife collectors forum. We noticed several postings on Ebay for $20 or $40 knives that were listed as “Buy It Now” for several thousands of dollars. Our first thought was some kind of money laundering scheme. Apparently though, some sellers also do this when the item is not in stock – they price it so high that no one would purchase it. Apparently this allows them to skirt around some of Ebay’s sellers rules. I am not an Ebay seller so I don’t know the rules but both explanations seem plausible.

  3. Philip Cohen says:

    And the ugly reality for consumers dealing with the clunky, unscrupulous eBay/PayPal complex …
    “Shill Bidding Fraud on eBay: Case Study #5″ … http://bit.ly/11F2eas

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