Can Money Laundering Law Clean Up India’s Real Money Gaming Space?

Even before the dust settled on the taxation turf, a fresh storm could be raging on the virtual route to make real money, pushing a clutch of online games under the money laundering lens. But will it help spot the rogue players? 

Real money gaming startups just had a breather in their long fight for lower GST with the Supreme Court slapping a stay on the proceedings against 49 real money gaming (RMG) startups earlier this year. But the relief was short-lived as the government has geared up to get the RMG startups under the Prevention of Money Laundering Act (PMLA). The government has also met four major RMG players, including Dream11, Games24x7, and MPL, to discuss the matter in the presence of officials from the Financial Intelligence Unit (FIU) under the finance ministry. 

The players can wager and win real money in these games. The RMG options range from traditional casino games like poker, blackjack, and roulette to fantasy sports, rummy, and skill-based competitions. While games of skill are considered legal in most states, games of chance, such as casino games, face stricter scrutiny. The Public Gambling Act of 1867 governs gambling laws in India, but it does not specifically address online gaming.

Real money games make up about 86% of the revenue for India’s INR 31,938 Cr ($3.7 Bn) online gaming sector. An increasing popularity is likely to catapult it to an INR 78,551 Cr ($9.1 Bn) industry by 2029. The exponential growth rate of the segment and the country’s traditional negative stand against ‘games of luck’ involving monetary transactions always kept the RMG startups on the edge. It was more so in the absence of strict financial controls on the segment. 

Due to lack of regulation in RMG, which is often classified as betting and gambling, there’s no cap on the amount of money a player can spend, anyone can participate with any amount, and there are minimal limits or oversight mechanisms in place. That was the first cause for concern for the government. The sheer volume of money flowing in and out of these platforms – even through domestic RMG firms – has been another major worry. 

No wonder, the government stepped up vigilance on offshore platforms involved in online gaming and betting in the past few years, and raised the GST liability on RMG deposits to 28%, besides slapping a 30% TDS on winners. If real money gaming comes under the money laundering laws, it will have stricter obligations, including know-your-customer (KYC) requirements, and tracking and reporting of suspicious transactions, industry insiders said. 

Under the PMLA, any intermediary that handles such financial flows, is classified as a ‘reporting entity’. In fact, physical casinos with which RMG firms are often compared, are already obligated to report under the Act.

The Prevention of Money Laundering Act, 2002 forms the core of the legal framework put in place by India to combat money laundering. It came into force on July 1, 2005. The directors of FIU-IND and of the Enforcement Directorate (ED) are trusted with exclusive and concurrent powers to implement the provisions under the Act. The PMLA rules impose an obligation on banking companies, financial institutions, and intermediaries and persons carrying on a designated business or profession, to verify the identity of clients, maintain records, and furnish information to the FIU. The aim is to prevent money laundering and to provide for confiscation of property derived from, or involved in, money laundering.

If implemented, this will be the first time consumer-facing tech startups, and not traditional financial entities like banks or NBFCs, will come under the money laundering lens. The implications are massive, especially for smaller startups. Mandatory KYC, real time monitoring, and reporting of suspicious transactions could fundamentally alter how these platforms operate.

Is There A Whiff Of Money Laundering?

“The government’s intention is simple,” a finance ministry official said. “It is looking to maintain a record of all correspondence and transactions. The gaming firms will be required to report certain transactions, specifically those exceeding INR 10 Lakh within a given period to the FIU.” 

They will also have to report transactions involving politically exposed persons (PEPs). So, they need to keep all this data and maintain records. These are regulatory obligations, and more stringent.

Money laundering is indeed a major threat to the integrity of online gaming, but there are no official statistics available on the extent of money laundering through illegal online gaming or gambling operators. Rough industry estimates from a report by the Centre for Knowledge Sovereignty (CKS) claim that the illegal betting market in India receives upwards of $100 Bn a year in deposits. 

Incidents like the Mahadev Betting App scam brought the graft practices to the fore. This online platform allowed users to engage in live gambling across various games, including poker, cricket, badminton and tennis. Examples like Cyprus-based gaming startup Parimatch allegedly channeling INR 700 Cr proceeds from Indian users overseas by converting the money into cryptocurrencies and thereby evading taxes, heightened the gravity of the issue.

These apps attract users through advertisements across online platforms. Despite numerous warnings against direct and surrogate advertisements for gambling and betting, offshore and illegal platforms continue to aggressively target Indian consumers, particularly during high-profile events such as the IPL.

With such apps flooding the online gaming space, the IT ministry issued more than 1,400 blocking orders since 2022. The ED too launched a nationwide crackdown on foreign-registered online gaming companies for allegedly siphoning off $480 Mn in May 2023. 

“I think it’s totally fair for the authorities to check in on gaming platforms from time to time. They should be able to see what’s going on, especially if there’s any money laundering or shady business taking place. It’s just a safety check, so I don’t see anything wrong in it,” said Jay Sayta, a technology and gaming lawyer.

Will Tighter Compliance Choke Smaller Startups?

As the news of the government gearing up to get real money gaming under PMLA spread, it has split the segment into two. While big companies are in favour of the move, smaller startups found themselves in sticky wicket. 

The issue is not about the quantum of transactions, but about the infrastructure that needs to be set up to comply with the PMLA requirements. 

“When it comes to things like data requirements, analysis, or reporting, there’s definitely going to be some cost for the gaming firms. That said, all of that can be properly evaluated once everything is clearly laid out in black and white,” an executive at a gaming unicorn said.

The impact could be significant in terms of costs. Several gaming startup founders said the costs could go up by 10–20% if PMLA compliance is enforced. For a small gaming startup with a turnover of, let’s say, INR 1 Cr, it is difficult to spend INR 10-20 Lakh on compliance. There are many startups run by a two-three-member team. They might have to hire people or consultants and set up systems specifically for this. There’s personal liability too. If there’s any suspicious transaction, the gaming firm will have to flag it immediately. “Small startups will not be able to manage all this,” said an advisor to a gaming association.

But their larger peers appear insulated as the cost escalation for them would be 1-2% as most of them have the requisite infrastructure in place, or in extreme cases, 15-20% that they can easily absorb. 

“That’s why the larger companies are agreeing to the government’s move. What’s effectively happening in this country is that we are making policies that end up hurting smaller companies more,” an advisor to a gaming association said. He refused to be identified since the issue is still under consideration. 

The government is, however, yet to decide on the quantum of the transaction for which PMLA would be applied, or the mandatory measures that should be in place. The impact can be assessed more precisely when there’s greater clarity on these.

“This is of no real help to the sector, especially in terms of controlling offshore platforms. It’s yet another blow at a time when the industry is still reeling from the GST burden,” lamented the founder of a mid-scale gaming startup, requesting anonymity.

Will The Law Help Spot Rogue Elements In Gaming?

The UN Convention Against Transnational Organized Crime describes money laundering as an act by which the proceeds of crime are made to appear legitimate. The act of conversion and concealment constitutes the ‘laundering’ of criminal proceeds. The money trail may be complex and obscure the original criminal source. This is typically associated with organised crime activities that generate massive cash profits, such as drug trafficking, arms trafficking, human trafficking, and fraud, it said.

Money laundering in real money gaming can take place through users who attempt to channel illicit funds through gaming platforms, as well as operators of illegal platforms who directly engage in laundering.

“If gaming firms are brought under PMLA, it will add legitimacy to the industry. But if the government really wants to tackle the issue of money laundering, the focus should be on the illegal operators, not the legitimate ones,” an executive at a Bengaluru-based gaming startup said. 

The legitimate players are already following regulations, most of them are complying with RBI guidelines, and there’s already a fair amount of vigilance in place. “At the end of the day, this isn’t just an industry issue, money laundering is a national issue. So, while it’s important to bring legitimate companies under the law, the bigger focus should be on cracking down on the illegal betting operators who are actually at the root of the problem,” he added.

An estimate by the GST Council shows that online gaming will fetch around INR 85,000 Cr to the exchequer between FY24 and FY28, while on the direct tax front, TDS contributions from them is pegged at INR 6,800 Cr in this period. 

According to a report by FICCI and EY, more than 155 Mn Indians are engaged in real money gaming sub-segments such as fantasy sports, rummy, poker, and other transaction-based games, with around 110 Mn active players participating every day. 

It is impossible to estimate the return to the exchequer from the imposition of the money laundering law on RMG startups. Given the volume of traffic and the amount of money, the government’s move to control the segment through the money laundering lens is not irrational. What sends out shockwaves is the worry over the toll on legitimate real money gaming players.

[Edited By Kumar Chatterjee]