SECOND LIFE COULD BE DANGEROUS SAY UK ACCOUNTANTS

18 May 2007

Fears that Linden's virtual world could be used by criminals and terrorists

The Telegraph newspaper in Britain carried a report on the much discussed Second Life phenomenon from Linden Labs this week, airing opinions from legal and financial experts who claim that the lax regulatory regime could provide a haven for money launderers, fraudsters and even terrorists to hide and move funds.

Second Life is a cyberspace world with no police force, no courts and no taxes. Its fast-growing economy is lightly controlled, and banks and the stock exchange lack even basic regulation, the Telegraph points out, adding that there are now over 6 million users around the globe.

The accountants are worried about Second Life, it appears. The article highlights a report drawn up for Britain's Fraud Advisory Panel (FAP), calling on the UK government to extend real-world financial regulation into Second Life and similar virtual "games". The study warns that players can transfer large sums of money across national borders without restriction and with little risk of being detected.

The FAP, a watchdog established by the Institute of Chartered Accountants in England and Wales, says that criminal or terrorist gangs could use the game to move funds and avoid surveillance. Other risks, it says, include credit card fraud, identity theft, money laundering and tax evasion.

Second Life was created in 2003 by Linden Lab, a San Francisco-based technology company. The number of users has soared from 700 000 last autumn to 6.2 million currently.

Players create on-screen characters known as "avatars" who can mingle with others anywhere in the world. Using a pretend currency called "Linden dollars", they can buy and sell virtual items from clothes to homes, for fun or to impress. Characters can even start up businesses.

Crucially, Linden dollars can be freely exchanged for real American dollars. On an average day, about GBP 750 000 changes hands.

The warnings follow the announcement last week that German prosecutors have launched an investigation into allegations that child pornography was sold on Second Life. Last month, Linden Lab called in the FBI to assess if its virtual casinos break US laws against online gambling (see previous InfoPowa reports).

Steven Phillipsohn, a fraud litigation solicitor and chairman of the FAP's cybercrime working group, said: "There's nothing virtual about online crime, it is all too real. It is time government took this seriously. The legitimate benefits of virtual communities will prove enormous, but people need to be aware that this cutting-edge technology has a darker side. Money laundering is the obvious risk. There will be a migration of fraudsters into these sites when they see all of the opportunities."

The report describes Second Life as "a parallel universe with almost no external rule of law, no enforced banking regulations or compliance, no policing and no governmental oversight".

It adds: "Commerce, relationships and criminal activity in virtual online communities are hidden. But the money is real and, in the case of fraud, tax evasion or theft, so is the loss."

David Naylor, a partner at London-based solicitors Field Fisher Waterhouse which was the first law firm to set up a virtual -office in Second Life, said: "The law doesn't stop just because this is a virtual world, but with its borderless nature, it may be challenging to determine whose laws apply. And there's a culture of anonymity, so it is often difficult to know whom you are dealing with." His company's presence is to advertise its name, but could in future be used to recruit clients whose cases would be pursued in the real world.

A move to regulate Second Life would require the UK government to extend the scope of watchdogs such as the Financial Services Authority, which oversees banks and financial markets in Britain. The UK Treasury said its officials were examining the report. A spokesman told The Telegraph: "The government is committed to combating all forms of financial crime."

A spokesman for Linden Lab, said: "Second Life's terms of service make it clear that each resident is morally, socially and legally responsible for their opinions and behaviour in-world, and that illegal activity will not be tolerated.

"We have worked consistently with law enforcement, countering any illegal activity that we are made aware of, and will continue to co-operate with any legal or regulatory authority."

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