KYC norms likely for online skill gamers to curb money laundering

Online skill gaming, which attracts millions of customers and involves large sums of money, is likely to be brought within the purview of the Prevention of Money Laundering Act (PMLA) in an attempt to thwart money laundering (ML) and terror financing (TL) via such activities.    

If platforms facilitating online gaming with stakes are brought within the PMLA’s purview, such companies would have to follow the know your customer (KYC) norms while onboarding users.

The need for such a move arose after investigation agencies failed to track certain money trails because online skill gaming companies did not authenticate their customers by verifying the documents required for a KYC check. 

According to people familiar with the development, an investigation showed that large sums of money – in lakhs – changed hands through these gaming apps without any KYC check.

Apart from the KYC mandate, bringing skill gaming apps and sites under the PLMA would mean these entities must appoint a designated director and a principal officer.

Making such companies reporting entities (RE) under the PMLA would also mean that these entities must share the details of remitter, beneficiary, and other relevant information with the Financial Intelligence Unit (FIU). Gaming companies may also be asked to flag a Suspicious Transaction Report for any transaction above Rs 50,000.

According to the sources, there is also a suggestion to consider the United Kingdom’s Gambling Act for reference while making online skill gaming companies reporting entities under the PMLA.

Documents reviewed by Business Standard showed that the finance ministry and the Reserve Bank of India (RBI) have expressed concern over lack of a framework for regulating online gaming with stakes. Companies facilitating such activities are incorporated in the country as they are registered with the Ministry of Corporate affairs. There is no prohibition on foreign investment in these companies.

Sources said some of these entities are registered in Malta – a country that has been flagged for strategic deficiencies by the Financial Action Task Force (FATF); it is on the FATF’s grey list.

The rise of payment system aggregators in the digital payment ecosystem has complicated the issue. Credit cards and debit cards are often used for making payments for participation. In the case of credit/debit cards, the transaction reflects in the statement as a merchant purchase and the bank will find it difficult to establish that the transaction was for participation in gaming. With the increasing use of payment aggregators for digital payments, the transaction only reflects the name of the aggregator and not the actual merchant.

India is among the top five mobile gaming markets in the world. A report by Statista estimated the Indian skill gaming industry's market value was around Rs 9,000 crore in FY20; it was expected to cross Rs 14,300 crore in FY22. Not only in top cities, but gaming apps are also increasingly spreading in towns.

Ace investor Rakesh Jhunjhunwala backed Nazara Technologies -- a gaming platform -- made a stellar debut on the stock markets with an initial public offering (IPO) in late March last year. The stock is up over 50% from the issue price. Nazara is India’s only listed gaming company.

According to India Mobile Gaming Report 2021, the top 30 India’s tier-III cities and towns reported up to 170 per cent more gamers compared to 2020. Some small towns reported more than 100-200 per cent growth in online gamers.

A report by EY and FICCI said the online gaming segment in India grew 28 per cent in terms of annual revenue -- from Rs 7,900 crore in 2020 to Rs 10,100 crore in 2021. The report predicts the revenue to grow to Rs 11,900 crore in 2022.