You’ve probably read a lot of news articles over the years about money-laundering in Second Life and in other virtual environments. I know I have.

The fact is, though, that there is probably little or none of that actually happening.

The basic idea of money-laundering is that you take money that you have obtained by some unlawful means (dirty money), and then ‘launder’ it into funds that will withstand the scrutiny of tax investigators (clean money).

There are a number of ways to do this. The majority of them involve cash and cash-intensive businesses, such as banks, casinos, some kinds of real-estate and some classes of restaurant; where transactions are handled in cash, and there can be significant and unpredictable variations between the cost of doing business and the amount of money moved.

Some involve the purchase of winning lottery tickets (again) for cash, before the ticket is turned in.

“And how could you afford this mansion, and this fleet of cars, sir?”

“I won the lottery. I can show you the tickets. I’m a lucky guy!”

There’s other tricks, such as bulk cash smuggling and black salaries that notably also involve cash. All of these methods use cash, because electronic transfers, bank accounts, and credit-cards leave money trails that are easily accessed with a warrant; and once you have the information, the fraud is easy to spot. So, these are all handled with actual cash. Dirty money is almost always cash to begin with anyway, for exactly that reason, and usually can’t be converted into any electronic form until it has been fully laundered.

Mind you, it isn’t impossible. Smurfing, or ‘structuring’ as it is more properly called, uses the depositing of small sums by many distinct individuals. Of course, to evade regulatory scrutiny, you need to keep getting different smurfs regularly, as it doesn’t take very many deposits by a single individual for tax investigators to come calling and start tracing the funds.

The problem with smurfing through virtual environments like Second Life, is that there is a trail of electronic records involved. Money into banks, through cards, into Linden Dollars, between user accounts and out. Smurfing funds outwards wouldn’t necessarily help much. The problem with smurfing is that it vastly increases the overheads, ie. the costs of laundering. It’s a bit of a last-ditch method, since almost every other laundering method generates better profits.

For example, a basic lottery ticket laundering scheme often has as much as 20% in overhead. Smurfing can have overheads many times that, making it among the least profitable options available to the would-be launderer.

It would be difficult to launder more than one or two thousand dollars undetectably each year through Second Life without being one of the really large players in business, and then you’d be under almost constant scrutiny from Linden Lab and its fraud-detection software – and then, only if there were no other operations trying to do the same. That’s small potatoes for money laundering. You’d do a hundred times better with a fake cafe or pizza restaurant, offline.

To-date, there’s been no evidence presented that suggests that virtual environments are a practicable means of laundering unlawfully obtained monies. Being that the chain of transactions is readily traceable and auditable by authorities should they choose to do so, it seems unlikely that they will be used for such for the foreseeable future.

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Tags: Crime, Fraud, Law, Linden Lab / Linden Research Inc, Lottery, Money, Money-laundering, Second Life, Tax, Virtual Environments and Virtual Worlds