Fighting Money Laundering with Regulations and Due Diligence

Fighting Money Laundering with Regulations and Due Diligence

  • Andrew Tottenham — Managing Director, Tottenham & Co
August 22, 2018 6:00 AM
  • Andrew Tottenham — Managing Director, Tottenham & Co

Money laundering, or should I say anti-money laundering (AML), is concentrating the minds of people in the gambling industry all around the globe. The EU implemented the 4th Anti-Money Laundering Directive in June 2017. The UK Gambling Commission has handed out record fines for failures in AML procedures to both online and land-based gambling businesses. In British Columbian, a June report about money laundering in casinos rocked the industry and the provincial regulator. Even the Republic of Northern Cyprus, home to a $1 billion a year casino industry, has taken steps to combat money laundering through its casinos, confiscating $100 million and investigating a further $5 billion of transactions. Gambling businesses throughout Europe have become the de facto front line in efforts to combat money laundering.

One of the problems the industry faces is that the old compliance “tick box” approach is no longer enough. The Compliance department in many companies used to be an audit function: transactions were sampled and tested and provided they met the requirements, the box was ticked, and everyone was happy. But our governments have now decided that casinos should not only implement policies and procedures to stop money laundering, but also should be the investigators.

Nowadays AML efforts have to include a constant review process. What methods you apply to one person might not be enough for another. Failings need to be reviewed, and learnings applied. And all this has to be done despite the unwillingness of regulators responsible for AML to publish prescriptive requirements. They tend to issue those vague statements that bureaucrats love, leaving the operators to hope that they are doing AML well enough to avoid sanctions.

It is fair to say that some members of the industry have stepped up their efforts, but others have been found to be woefully short. According to the UK Gambling Commission’s report on their review of AML processes, some gambling companies had hired money laundering reporting officers with no formal qualifications who were “unable to provide suitable explanations as to what constitutes money laundering”. Oh dear!

Unfortunately, this type of thing tarnishes the whole industry. Gambling is an emotive issue and what better subject for populist politicians to jump on than money laundering in gambling businesses? The media laps this stuff up. That is not to say that AML should not be taken seriously, but some sense of proportion is required.

Under 4MLD, gambling businesses are required to take a risk-based approach to their AML procedures: identify where the risks lie, who are likely to be launderers, and what actions might give them away. Once a threshold of €2,000 has been reached in a single or series of linked transactions, customer due diligence procedures must kick in. The bigger the amount exchanged, the higher the risk, and so enhanced due diligence is to be implemented. Not only does the source of funds need to be verified but also the source of the customer’s wealth. That is quite easy for some customers but for customers from countries where public records are scant, and the banking system opaque, the risks are high. There are companies that offer to find out this information, but depending on the level of evidence required it can be fairly expensive. When a casino’s tax rate is 50%, unless someone is a high-spending customer, it might barely make sense to let them play at a high-stakes table.

Also, it’s no longer enough to solely carry out customer due diligence steps when a relationship starts. Rather, gambling businesses must be “constantly curious” about where the money they accept is coming from. I once heard a regulator ask how a casino operator knew that a VIP customer hadn’t gone bankrupt since the customer’s last visit.

Not all gambling companies are treated equally. When the Directive was being debated in the European parliament, Krišjānis Kariņš, a Latvian member, managed to get the word “all” deleted from the phrase “obligation for all providers of gambling services”. Now each country is free to determine which providers of gambling represent a “low risk” and therefore the Directive’s obligations will not apply. In the UK, the Government, despite the Gambling Commission’s response in the Government’s consultation on implementing 4MLD, stated that the remote and land-based betting sectors along with the remote bingo sector and the casino sector have “a higher risk relative to other gambling sectors”, and decided to exempt all sectors from the 4MLD except the remote and land-based casino sector. So somehow – I don’t know how – the bookmakers managed to dodge those regulations. Deft lobbying perhaps, although they seemed to have lacked any of that touch with the issue of fixed odds betting terminals.

It has been argued that losing money is not laundering money, and therefore operators should not be concerned with buy-ins, only with cash outs. However, spending the proceeds of crime is illegal and gambling businesses are expected to be vigilant for this. Hence the requirement to start the due diligence process once a customer has either bought in or cashed out €2,000. (Note that this does not stop operators from being obligated to report suspicious transactions that may be below that threshold.)

The European Commission estimates that over €2,000 billion is laundered annually, over 3.5% of global GDP, and the problem is getting worse. Jeremy Carver, from Transparency International, an organisation that seeks to reduce all forms of corruption, has stated that the financial centre in City of London is the largest money market in the world, and that it is where the largest amount of money is laundered. If we want to get serious about reducing money laundering, we should be focussing our AML efforts and resources on the world’s primary money markets. His organisation believes that 80% of all money is laundered through banks and other institutions. The Financial Action Task Force, an intergovernmental organisation founded by the G7 group of countries to develop policies to combat money laundering, gave British banks a clean bill of health in 2007 but revised their findings in 2011, saying that there was a “woeful and total abdication” by the UK banks with regard to policing money laundering. Has anything changed?

AML laws and regulations need to be applied evenly across countries and sectors. Criminals will be looking for weaknesses; if they can find any they will seek to exploit them. As they say, “capital flows to opportunity”, and money laundering is no different. It could be that a country that fails to apply its AML regulations fully will find its gambling industry become a magnet for launderers. If that seems worrying, keep in mind that there are yet more regulations coming: the 5th Anti-Money Laundering Directive has already been adopted and countries have until 2020 to implement these new rules in national legislation.