Illegal online gambling proliferates in China's digital economy

Written by Kapronasia || December 01 2020

China is strict about gambling, only permitting it in the special administrative region of Macau. Elsewhere in the country, gambling is illegal. China's restrictions on gambling cover cyberspace too. Yet that ban is hard to enforce, especially as the pandemic has pushed so much economic activity online. According to a recent Caixin report, some of China's largest internet companies have become party to the illegal online gambling ecosystem. The internet giants may not be privy to the illicit transactions, in some cases because of inadequate due diligence.

Government data cited by Caixin show that online gambling in China has surged during the pandemic. Through the first nine months of the year, Chinese authorities investigated more than 8,800 cases involving RMB 1 trillion in illegal transactions, compared to 7,200 cases involving RMB 18 billion a year earlier.

Shenzhen police found that an online gambling site located outside of China used QQ Messenger and WeChat to market its games. The site instructed gamblers to make nearly RMB 2.6 billion in payments for bets through Alipay and WeChat Pay.

E-commerce site Pinduoduo reportedly was heavily involved in illegal gambling activity. Caixin found that gambling site operators hired people to register a shop on Pinduoduo using their real identities. The fake shops never sold any genuine goods. However, every payment had a number traceable to a real shop, and even a delivery record. Proprietors of the bogus shops earned commissions from the gambling sites.

In practice, someone who wanted to place a bet for RMB 2,000 would buy something from one of the bogus stores at that price. The transaction would be recorded as just that, while the funds would in reality flow to the offshore gambling site.

Many of the gambling sites are based in Southeast Asian countries with deep economic links to China such as the Philippines, Myanmar and Cambodia. Under pressure from Beijing, Cambodia banned online gambling in Dec. 2019. About 200,000 Chinese nationals left the country in January 2020. However, some of the activity has gone underground. Online gambling is nominally illegal in Myanmar, but enforcement is inconsistent. The Philippines is unlikely to ban online gambling given its importance as a source of employment. That holds especially true during the pandemic when face-to-face interaction is reduced.

One key takeaway from the crackdown is that China's digital economy lacks sufficiently robust anti-fraud and anti-money laundering controls. Despite the widely touted technological capabilities of firms like Alipay and WeChat Pay, criminals appear to have moved massive amounts of illicit funds through the e-wallets with relative ease. Many of the suspicious transactions were somehow overlooked.

As these platforms are increasingly regulated like banks, they will need to invest heavily in their compliance systems as the incumbents do.