New Research shows the Massive Scale of Illegal Betting in South Korea

Introduction

By Tak Sung Hyun, General Manager, Responsible Betting Deparment, Korea Racing Authority; Member, ARF Council on Anti-Illegal Betting and Related Financial Crime

Since its establishment in 2008, The National Gambling Control Commission of Korea (NGCC) has consistently focused on regulating legal gambling industries.

Legal gambling industries that can be controlled directly are subject to intensive regulations such as restrictions on online betting and the CAP system (under which for a certain period the maximum number of business premises is controlled and the rate of sales increase of in the legal gambling industry is kept at an appropriate level).

Since 2008, the size of the South Korean illegal gambling market has grown to KRW 49.0 trillion (~USD 37 billion), an increase of 91%, and expanded to an uncontrollable level. In contrast, the legal gambling market, where regulations were concentrated during the same period, grew by only 46%, to KRW 6.9 trillion (~USD 5.2 billion).

The NGCC introduces its National Master Plan for Gambling Control every five years and the new plan takes effect from 2024. To ensure that the new policy of NGCC is focused on controlling illegal gambling, the Korea Racing Authority (KRA) commissioned the Korean Institute of Criminology and Justice (KICJ) to conduct research regarding the State of the Illegal Gambling Industry and Countermeasures.

In 2023, KICJ published this paper and submitted it to the NGCC. The KRA have very positive expectation that the confirmed facts of the KICJ research will provide important information in establishing the NGCC’s policy for effective countermeasures against illegal gambling.

What follows is a summary of the research (translated into English), prepared by the Korean Institute of Criminology and Justice.

Summary of research by Korean Institute of Criminology and Justice, October 2023

Since the outbreak of COVID-19, online illegal gambling has become increasingly sophisticated and widespread, and its negative effects have also grown due to its association with other crimes. Given the scale and adverse effects of illegal gambling, it is time to change our recognition of this topic. Rather than focusing on the social costs of illegal gambling, the Korean government should consider the ways to promote legal gambling industry, as major developed countries do, to generate tax revenues and implement various social welfare programs with the tax revenues produced to improve the quality of life of the people. The National Gaming Control Commission (NGCC) has so far promoted various policies to eradicate illegal gambling through three rounds of sound development plans for the gambling industry, but there are limitations in cracking down on it due to the nature of online illegal gambling, and the illegal gambling market continues to expand. Therefore, in light of the continued rise in illegal gambling (including online gambling and new/variant gambling) and the social harm it causes, this research aims to explore effective policy measures and how to improve government policies.

This study analyses the environment of the overseas gambling industry, specifically in the United States, a representative country that regulates illegal gambling, and major countries in the European Union, that open their markets with legal gambling. Official statistics have been studied and analysed to understand the conditions and size of the illegal gambling market. A survey was conducted to identify the basic factors to help us analyse the environment of the domestic gambling industry and understand its situation and public awareness. In-depth interviews with practitioners from relevant organizations such as the police were also carried out to analyse government policies to deal with domestic illegal gambling and draw implications from the analysis results.

The scale of revenue and market of global gambling industry were estimated. The net sales of the global legal gambling industry were estimated to be approximately USD 414.7 billion. Korea is ranked 13th in terms of net sales. The global illegal gambling market is estimated to be from USD 340 billion up to USD 1.7 trillion. Even though the COVID-19 pandemic dealt a blow to the net revenue of the gambling industry, it is recovering, and at the same time, the rate of the net revenue of the online gambling industry has been on a steep rise. The domestic online illegal gambling industry is estimated to be KRW 19.6 trillion in 2016, KRW 24 trillion in 2019, and KRW 37.5 trillion in 2022. The number of crackdown cases of online illegal gambling were 25,521 in 2018, 16,476 in 2019, 20,928 in 2020, and 18,942 in 2021. In Korea, the NGCC has established and run the Illegal Gambling Industry Monitoring and Reporting Center in 2012 and big data-based Illegal Online Gambling Monitoring System in 2019. In terms of their response and regulatory approaches, foreign countries have recently allowed online gambling, but at the same time have controlled and regulated it. Nevertheless, the online illegal gambling market continues to grow.

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In addition, gambling experience of adolescents and its association with crimes were studied. As the barriers to entry for illegal gambling online have fallen, and gambling has become more accessible to youth through a variety of channels, the age of first exposure to gambling has continued to fall. Illegal gambling has become a serious social problem among youth , but they perceive it as a "game" rather than "gambling".

Considering the growth of the domestic illegal gambling industry and the integration of new IT technologies into the industry, different policy measures are required. It is necessary to promote the aspect of user protection of the legal gambling industry and educate people on the realities and dangers of online illegal gambling. Additionally, there is a need to prevent people from using illegal gambling and bring them into the realm of the legal gambling industry by easing regulations on the industry and providing it with competitiveness.

The real conditions and issues of illegal gambling that we have identified are as follows: no use of illegal gambling-related virtual accounts and cryptocurrencies was found, but if they are used in the future, it would be difficult to detect it; different types of illegal gambling on the Internet, such as sports betting and illegal bookmaking, have spread on the Internet, and are mostly used by young people; regarding crackdown and investigative procedures, relevant legal provisions are scattered around different laws, so it is necessary to integrate relevant laws and also develop laws that fit the current situation. As illicit funds are often traded with borrowed-name bank account and burner phone, the chances of confiscating illegal proceeds are very low.

Regarding the policies to regulate illegal gambling, the following observations and recommendations are made: when it comes to the role of the NGCC, education on and prevention of gambling addiction as well as addiction treatment centres need to be strengthened; for illegal online gambling, a combination of arrest and treatment should be applied; policies such as imposing fines on illegal gambling users are not effective, but policies such as suspending the operation of illegal gambling houses are believed to be highly effective; it would be more effective if the NGCC and the KRA (Korea Racing Authority) join a consultative body on illegal gambling; and there are challenges in cracking down on those who go abroad for gambling, and its effectiveness is low for now.

The following policies to support legal gambling industry are proposed: promotion and education on the difference between legal and illegal gambling as well as addiction treatment are required; it is also necessary to find ways to enhance the competitiveness of the legal industry, and to encourage illegal gamblers to use the legal gambling industry through advertising and promotion. Hold'em pub business should be transformed into legal gambling business. Even business owners of hold'em pub want to work in a legalized area. It is self-evident that reckless controls will never eradicate illegal gambling, but rather they will push the industry into the dark rapidly. Hold'em pub business should be promoted to a legalized industry that can be controlled by the NGCC and relevant organizations. It is important to note that regulation on the legal gambling industry was launched in response to the scandal of Sea Story (*note: A Korean giant gambling-like video arcade chain) in the past, and this never should be repeated, in other words, the crackdown on hold'em pubs should not be extended to regulate legal gambling business.

The government is required to review youth-focused illegal gambling regulations and prevention policies.

More than 40% of adults who engage in illegal gambling used to belong to the group at risk for gambling addiction in their adolescence. The following are the results of our survey on the respondents’ experience of illegal gambling in adolescence: 76.8% of respondents say that illegal gambling increases the likelihood of gambling addiction; 71.2% of respondents believe that it raises the possibility of using loan sharks and experiencing illegal collections; and 60.7% of respondents think that it makes them more likely to commit fraud and theft.

The following results show that the government has to look into new policies in light of changes in the illegal gambling market: 84.6% of respondents say that illegal gambling is becoming more prevalent; 91.5% of respondents believe that the use of cryptocurrencies for illegal gambling is growing; 43.5% of respondents see that cryptocurrency is actually being used for illegal gambling; and 68.7% and 72.6% of respondents say that hold'em pubs and avatar casinos are proliferating, respectively.
The following outcomes display that the government agencies’ responses to illegal gambling need be changed: 47.9% of respondents show negative response to the effectiveness of addiction counseling treatment; 67.0% of respondents answer positively to the establishment of a dedicated illegal gambling unit at the NGCC; 66.1% of respondents display positive perception about the effectiveness of the policy to offer monetary incentive to those who report illegal gambling; and 66.9% of respondents give positive response to the government’s supervision of illegal gambling in collaboration with private sector.

The following responses indicate that new policies to address illegal gambling’s association with other crimes should be developed: 65.6% of respondents say that illegal gambling is engaged with drug-related international crimes; 59.2% of respondents believe that illegal gambling is linked to transnational crimes involving human trafficking; and 53.3% of respondents find that illegal gambling is connected to terrorism-related transnational crimes.

The following results present that the strategies to regulate illegal gambling should be reinforced: 71.0% of respondents believe that imposing fines on illegal gambling users would be effective; 71.9% of respondents reckon that restricting or suspending the licenses of illegal gambling venues would be effective; 70.5% of respondents suppose that training professional reporters would be effective; and 67.9% of respondents say that a government-led consultative body would be effective.

The following responses show that the strategies to prevent the number of people from being drawn into illegal gambling should be examined (i.e., strategy to support the legal gambling industry): 63.5% of respondents respond positively to the idea of licensing the private gambling industry; 56.2% of respondents  are positive about the idea of supporting the legal gambling industry as a leisure sport; 59.3% of respondents show positive reaction about strategies to improve the image of the legal gambling industry; 64.4% of respondents respond positively to the government’s active support for promotion; 59.4% of respondents display affirmative response to the idea of increasing purchase limits; 57.3% of respondents believe it is necessary to reconsider restrictions on inter-racecourse betting; and 63.3% of respondents are positive about the idea of raising the rates of return to customers.

The following responses reflect the respondents’ perception about the appropriateness of the current strategies to encourage illegal gamblers to move to legal gambling: 52.1% of respondents show positive response to the idea of increasing the payout rate, for example, by excluding taxes from refund to be paid out.

The recommendations for regulatory policies for online illegal gambling are as follows: regulatory policies for online illegal gambling are required to dissuade illegal gambling users by enhancing the competitiveness of the legal gambling industry and thus reduce demand for the business; to this end, there is an urgent need to ease regulatory policies that currently aim at the legal gambling industry, such as raising the rates of return to customers, allowing online access and improving convenience of purchasing, etc.; and at the same time, it is necessary to increase the promotion on the legal gambling industry’s compliance with social responsibility, such as education for addiction prevention and treatment, user protection policies, and ensuring of fairness.

The following are recommendations for policies to license the private gambling industry: the licensing policy of the private gambling industry has positive implications in terms of a new source of revenue and ensuring of transparency, but the debate on the policy is still continuing. As some of this policy’s aspects are not in line with domestic situation and more in-depth review is needed. In the cases of US/Europe, even though they adopted deregulatory approach of permit-based policies, illegal gambling has continued to spread.

In the case of Korea, it is required to improve the competitiveness of the legal gambling industry through deregulation but at the same time regulate illegal gambling. One of the main issues associated with illegal gambling is gambling of adolescents. Their experience with illegal gambling represents a significant risk in that it can lead to gambling addiction and spill over into other crimes. In this regard, it is important to study the mechanisms (pathways) of youth illegal gambling experience and criminal behavior, establish a practical monitoring system in illegal gambling prevention education and promotion strategies, and investigate the experience of crime perpetration and victimization triggered by illegal gambling and develop countermeasures.

Another main issue related to illegal gambling is the emergence of variants of gambling. The spread of illegal gambling using cryptocurrencies has made crackdown and arrest, and confiscating of gambling funds difficult. In order to ensure the enforcement of relevant laws and the responses of the relevant ministries be effective, fundamentally integrated laws should be enacted and relevant existing laws should be revised. The relevant government agencies’ approaches should be changed. Strategies for regulating illegal gambling need to be strengthened. In particular, given the limitations of addiction counseling treatment, a transition to medical treatment is required. It is also necessary to establish a dedicated illegal gambling unit, increase monetary incentives for reporting illegal gambling, and refine how to control and supervise illegal gambling in partnership with private sector.

The Korea Communications Standards Commission (KCSC) is required to block illegal gambling sites. The KCSC should expand its manpower, reinforce monitoring activities, and immediately block overseas illegal gambling sites upon recognizing them. The agency is required to monitor all potential sources of illegal gambling such as texts, SMS and pornographic sites, and shut them out without delay if they are linked to illegal gambling sites. Since illegal gambling sites are using data alteration with repeaters and changing their addresses often to confuse investigative agencies [‘mirror websites’], the KCSC should cooperate with the Korea Internet & Security Agency or investigative agencies to crack down on and regulate related promotional businesses and monitor relevant domains.

Cryptocurrency regulation by the Financial Services Commission (FSC) and the Financial Intelligence Unit (FIU) is also required. In the case of cryptocurrency exchanges, the Act on the Reporting and Using Specified Financial Transaction Information should be amended and supplemented to impose anti-money laundering obligations such as Customer Due Diligence (CDD), reporting of large cash transactions, and reporting of suspicious transactions, just as it does for general financial institutions. It is also necessary to analyse the blockchain where cryptocurrency transactions are stored, identify the flow of money laundering, train experts in the field, and block cryptocurrency addresses with international organizations such as Interpol. Relevant data such as financial transaction details and taxation data from the Financial Intelligence Unit (FIU) should be shared.

A dedicated joint task force should be established. Illegal gambling is highly organized and evades investigation efforts, making it necessary to crack down on it and confiscate its proceeds. In addition, it is necessary to consider setting up a dedicated joint response team under the National Police Agency, the NGCC, the Prime Minister's Office, and directly under the President (including the National Intelligence Service). This law enforcement unit should be able to mobilize investigative forces based on expertise and experience, and take comprehensive measures by function, from evidence collection to cooperation for investigation, blocking gambling sites, and confiscating illegal funds. International cooperation is essential to arrest and prosecute online gambling operators. A system to facilitate international collaboration with countries that do not regulate online gambling should be developed. Korea is also required to join the Convention on Cybercrime to facilitate international joint investigations and rapid collection of relevant evidence.

New paradigm of the legal gambling industry need be considered. Given the domestic situation and environment, the state and the NGCC should ease the regulations of the legal gambling industry to enhance the competitiveness of the legal industry, and law enforcement agencies and related organizations should curb and strongly regulate the illegal gambling market. The competitiveness of the legal gambling industry should be enhanced to secure a new source of tax revenues, and encourage the illegal market to move into the legitimate area, and prevent youth gambling addiction.

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