Game on: criminals set sights on virtual realities

Report to warn that the explosive growth of computer-generated worlds could lead to money laundering

Virtual worlds that have become a second home to millions of computer users could come under the scrutiny of governments as fears grow that they are being used by criminals to launder money.

A report due out next month from Deloitte, the consultancy firm, will say the nascent economies that have developed inside internet-based games such as Second Life and Entropia Universe could be exploited by criminal gangs.

The report warns that the fast-growing popularity of these games could tempt organised criminals, as players can trade virtual property and convert profits back into real currency.

Virtual realities have grown in sophistication since role-playing computer games migrated to the web and allowed players to interact with potentially unlimited numbers of people across the world.

While games like World of Warcraft have concentrated on fantasy challenges, Second Life and Entropia have created worlds much like our own, where virtual property magnates, clothes designers and prostitutes offering virtual sex make hundreds of thousands of real US dollars a year.

In Entropia, the virtual currency, called the PED, is pegged to the US dollar. Players can convert real money into PEDs and back again using an online payment system.

Last year, one American entrepreneur paid $100,000 (£51,000) for a virtual space in Entropia that he planned to convert into a nightclub.

The real-world value of transactions in virtual realities is rising steadily, and is likely to continue growing through 2007. One estimate places the value of commerce in Second Life at $265,000 a day, and it is estimated that average turnover is rising by up to 15 per cent a month. If these trends continue, Second Life's overall GDP could be close to $700m in 2007.

The explosive growth has already attracted the attention of law makers in the US, who are worried about the tax implications of transactions going on inside the virtual world, away from the oversight of the Internal Revenue Service. A joint committee in Congress is finalising a report on the real-world implications of virtual economies, although its chairman has insisted the aim is to head off taxation of virtual transactions.

Deloitte's report will argue that governments should look first at the potential for crime. "Governments may wish to focus more on identifying any attempts to exploit the mechanisms of virtual economies to undertake criminal activity," Deloitte will warn. "Money launderers may use trade in digital artefacts or the ability to withdraw cash from an ATM as a means of money laundering."

A spokesman for Second Life's owner, Linden Labs, said the company was happy to co-operate with tax authorities and criminal investigators, but could not police such matters itself. "The nature of having built a highly participatory economy makes it very difficult, and Linden Labs has always tried to take a hands-off approach to regulation and in-world policing."

Deloitte cautions that the economic influence of virtual worlds is still tiny in comparison with global GDP of $47 trillion. And the long-term sustainability of individual operations is in question. Second Life, for instance, has been plagued in recent months by technical glitches and has attracted the attention of malicious computer hackers.

Separately, the Deloitte report will examine how corporations might make money from social networking sites. It will argue that instead of following MySpace and YouTube in targeting young users, new sites should reach out to older internet users and extended families or tight-knit groups, and begin charging for "privacy" - services that control the people who can access shared material.