A dark corner of the cyber world benefited from increasingly convenient internet-based payment and logistics services as e-commerce soars amid the pandemic: illegal online gambling.
And the shadowy, often offshore operators of illicit gambling sites found witting or unwitting enablers in some of China's leading tech giants according to police, who are conducting a massive crackdown on the unprecedented surge in online gambling.
Investigators found that illegal gambling sites have relied on search engines and social media platforms that are household names to lure gamblers, while using leading e-commerce platforms and delivery companies to facilitate massive fund transactions disguised as online shopping orders.
They include China's biggest online search engine, Baidu, Tencent Holdings' messaging apps QQ and WeChat, and Ant Group's payment service Alipay, authorities say. E-commerce site Pinduoduo appears to have been especially vulnerable. Investigators have also implicated major courier companies, including New York-listed listed ZTO Express, Shanghai-listed YTO Express and STO Express, as well as a number of logistics companies.
"Many large internet companies are involved in the investigations," one police officer involved in the probes said.
The appearance of such icons of China's booming e-commerce economy in gambling operators' tool kits raises questions about whether the internet giants conducted adequate internal oversight and risk-control efforts to screen for illegal dealings, authorities say. There's little question that many of these companies profited from involvement in the gambling operators' complex business chains, investigators say.
For their part, the legitimate online businesses say there are limits on their ability to monitor and prevent illegal activities. Most of the implicated companies are said to be cooperating with authorities. After a top Baidu executive was detained in the probe, Baidu pledged zero tolerance for violations and promised to assist police in the investigation.
"We've done everything we can do," one Pinduoduo source said.
Based on law enforcement data, the surge in illegal online gambling amid the pandemic has been astonishing. By the end of September, Chinese authorities launched investigations of more than 8,800 cross-border gambling cases and arrested more than 60,000 suspects allegedly involved in the illegal businesses.
Police cracked down on 1,700 online gambling platforms and 1,400 underground banks, involving more than 1 trillion yuan ($151 billion) of illegal transactions, data from the Ministry of Public Security showed. That compared with 7,200 online gambling cases in 2019 totaling 18 billion yuan.
In Shenzhen, police found that operators of an overseas-based gambling site marketed its games through QQ and WeChat, and then directed gamblers to make nearly 2.6 billion yuan of payments for bets through Alipay and WeChat Pay.
In Wuxi, Jiangsu Province, police in August arrested two people for selling 60,000 logistics records for nonexistent deliveries. The logistics records were used to fabricate online shopping orders for gambling sites to launder more than 7 billion yuan paid by gamblers, local police said. Most of the money was remitted through Alipay for bogus deals with tens of thousands of fake merchants on Pinduoduo, according to a person with knowledge of the matter.
Such cases show how gambling site operators set up complete business chains linking search engines, social media platforms, e-commerce sites, payment services and delivery systems to facilitate recruitment, transactions and money laundering. The gambling sites often use overseas servers, with senior executives staying abroad to command a complex web of activities, according to police.
Although internet companies have argued that it is difficult to detect such illegal transactions and have pledged to enhance risk control, analysts said none of parties involved is really innocent because everyone benefits from the illegal dealings. For search engines, ad promotions generate revenues, while fake retail deals boost e-commerce platforms' books and bogus deliveries offer logistics firms quick money, analysts said.
Serving the bad
Shi Youcai, the head of Baidu's Mobile Ecology Group who oversees the company's sales system, was detained on Sept. 15 by police on allegations of facilitating online gambling promotions, putting the search engine giant's controversial advertising operations under the spotlight. His detention followed investigations of seven other Baidu staffers starting weeks ago, including Vice President Li Zhongjun, Caixin has learned. Shi was later released on bail.
Shi, who worked at Baidu between 2001 and 2011, returned to the company in 2019 as a special adviser to a newly restructured mobile ecology division, becoming the de facto head of Baidu's sales system.
Shi opened the door to illegal advertising on Baidu's platform and benefited personally from the business, one person close to Baidu's management told Caixin. A Baidu business partner said Shi tightened control over Baidu's advertising partners and offered favors to agencies with whom he had ties. Business with regulatory risks, including promotion of card games, could be conducted only with certain agents, the executive said.
Shi has denied the allegations. Industry sources said it is almost impossible that senior company management didn't notice the practices.
"Those [illegal] ads have always been there, but were not investigated before," said one online advertising customer. "And Baidu is not the only one."
A Caixin search of online advertising monitoring site Reyun showed that a 2019 ad for a gambling-like card game was promoted by a number of major platforms backed by tech giants, including ByteDance and Tencent.
Recently, Tencent, WeChat and ByteDance have all published lists of ads that are prohibited on their platforms, including gambling, lotteries and health care services, among others.
While online advertising provides gambling sites access to customers, the more important part for their business is to set up a channel to funnel cash from users without being caught by regulators.
That helps explain how e-commerce sites like Pinduoduo and logistics companies became part of their system.
Several online gambling participants interviewed by Caixin said they could top up their game accounts on gambling sites by simply scanning a quick response code appearing on the website and completing the payments through WeChat Pay or Alipay. After the payments, they got receipts showing the money was received by "Pinduoduo platform merchant" or Shanghai Xunmeng Information Technology Co. -- the operator of Pinduoduo. With the transaction records, some of the gamers complained to Pinduoduo after they lost huge amounts of money.
But behind the payments was a complicated chain of business dealings that disguised the illegal transactions as normal e-commerce deals, Caixin has learned. Each payment was linked to an online purchase order placed through a merchant on Pinduoduo with a traceable online shop and a clear order number.
Payers have no idea which merchant they paid or for what products. Pinduoduo's customer service staffers said the company had no access to the details of orders, according to gamblers.
People familiar with the matter said that all the merchants and purchase orders were fabricated to serve gambling transactions. Gambling site operators hire people to register a shop on Pinduoduo with their real identification and help them make the sites appear as normal online shops. But no real products have ever been delivered through these digital storefronts, despite the transaction records, allowing the money to flow from gamers to gambling site operators, they said.
Shop owners earn commissions from the gambling sites for managing the fake shops.
"I register a shop for them to use," one owner said. "A piece of clothing was priced at thousands of yuan, and there were soon orders." Such shops can post daily transactions between 5,000 yuan and 600,000 yuan, according to the source.
Following the fake online orders were a slew of delivery records for the nonexistent items to complete the chain of business designed to cover money laundering. In August, police in Wuxi arrested two people suspected of selling 60,000 fake delivery records over two years that are believed to be linked to gambling-related money laundering.
The delivery records indicated orders from tens of thousands of merchants registered on Pinduoduo, mainly based in Zhejiang and Jiangsu provinces. The transactions totaled 7 billion yuan, according to police.
With fabricated online orders and delivery records, the transfer of gambling funds is disguised as a normal online transaction. Pinduoduo said that because it lacks its own payment service, the company has difficulty fully controlling information related to each payment and detecting potential violations.
But a police officer disagreed. Screen shots of shops serving online gambling showed that their products were often labeled with extraordinarily high prices. For instance, a pair of slippers priced at 9.9 yuan at other shops had a price tag of 1,999 yuan on one of the gambling-linked shops.
"It should be very easily identified by e-commerce platforms to take risk control measures," the police officer said.
According to Pinduoduo, the company assisted police in cracking down on more than 10 online gambling cases in the first half 2019, and reported 18,958 suspicious cases involving 1,719 merchants on its platform.
Experts said the platform should be able to do more. A police officer focusing on online gambling told Caixin that compared with Pinduoduo, other major e-commerce platforms, such as Alibaba's Taobao and JD.com, have seen far fewer gambling-related transactions.
That may partly reflect the stricter requirements on new shop registration applied by Taobao and JD.com, another police officer in Jiangsu said.
There is no official disclosure on the size of gambling-related transactions on e-commerce sites. In 2019, Pinduoduo said it would remove revenue related to violations from its financial report.
In the third quarter of 2019 following the online gambling crackdown in August, Pinduoduo reported a surprise 2.3 billion yuan loss when analysts expected a profit.
Logistics companies also played their part in the online gambling boom. Producing fake delivery records requires access to couriers' systems and coordination among different departments of a company, police said.
Police investigations of fake deliveries related to online gambling have targeted a number of senior executives of couriers and logistics companies, who are suspected of involvement in fabricating delivery records, a Wuxi police officer said.
For delivery companies, a delivery request with no item to transport means no-cost revenue to boost financial performance. An industry insider said the 60,000 fake logistics records uncovered in Wuxi are likely to translate into 1.8 billion yuan of fake revenue for delivery companies participating in the operations.
Read also the original story.
Caixinglobal.com is the English-language online news portal of Chinese financial and business news media group Caixin. Nikkei recently agreed with the company to exchange articles in English.