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IGC Response to FATF Money Laundering Recommendations
Introduction
The following has been prepared by the Interactive Gaming Council in response to the FATF’s paper on Money Laundering and demonstrates the association’s willingness to work toward effective regulation of the online gambling industry.
The Interactive Gaming Council (“IGC”) is an international non-profit trade association comprising the leading worldwide interactive gambling companies. Members are either operators of online gambling sites, software suppliers, eCommerce providers, information-providers or otherwise associated with the industry.
The IGC advocates for regulation of the online gambling industry through compliance with an industry code of conduct where players’ interests are protected. Members’ sites operate in a reasonably transparent fashion, and operators comply with the licensing and regulatory policies of their respective jurisdictions.
The IGC believes that online gambling should be subject to the same regulatory requirements as regulated land-based gambling organizations. This would include independent investigations of the backgrounds of key persons and owners, as well as assessing the financial capability of the company to carry on its operations in a competitive fashion. The regulatory infrastructure envisaged requires a cooperative approach between industry and government.
Money Laundering Defined
Money laundering is defined in the draft EU 2nd Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering as:
· the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or assisting any person who is involved in the commission of such activity to evade the legal consequences of his action;
· the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from criminal activity or from an act of participation in such activity;
· the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity;
· participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counseling the commission of any of the actions mentioned in the foregoing paragraphs.
The IGC does not dispute this definition.
Money Laundering: Regulation as a Solution
Money laundering occurs with attempts to convert illicitly obtained funds, predominantly cash, through wires or similar channels for other means. Online gambling does not lend itself to any from of cash movement because of the online nature of the business, specifically, there is no face-to-face contact in the business. Wire transfers, although subject to the banking system’s stringent wire rules initiated following September 11, 2001, are not generally used because they are not effective marketing payment options. If a regulatory structure were imposed in the online gambling sector, what exposure does exist would certainly be mitigated.
A comprehensive regulatory infrastructure and compliance within the licensing jurisdiction similar to the regulatory philosophies that apply to leading land-based gambling jurisdictions is the solution. With new technologies, there is a need for governments to review how they regulate (not what they regulate), even more so as geographical borders “disappear” in the electronic medium of eCommerce. In the opinion of the IGC, this applies across all forms of eCommerce where online gambling is but one of the sectors within this industry. A higher degree of cooperation between industry and governments is needed, ideally with a common, recognized set of regulations and standards. The Australian draft regulatory model for online gambling (the AUS Model) is indicative of the standard of regulatory oversight proposed for online gambling, a copy of which can be found at:
http://www.treasury.nt.gov.au/ntt/licensing/gaming/2The%20Aus%20Model.shtml
Essential components of a strict regulatory regime for online gambling, in addition to preventing potential money laundering, needs to include the establishment of player protection measures to safeguard minors, problem/compulsive gamblers and revenue and to ensure the integrity of products and probity of those involved. Attempts to prohibit rather than regulate the industry have resulted in driving some operators underground, ostensibly to jurisdictions with less stringent controls that do not wish, or intend, to cooperate with anti-money laundering (AML) measures as promoted by the FATF document and supported by the general community.
Tools, including data cross checks and age verification software, are currently available to the online gambling industry. Combined with computerized screening mechanisms (monitored by regulators) this will be more effective than existing land-based measures in satisfying regulatory oversight and compliance. Land based casinos do not offer an audit trail for cash transactions (i.e. table games versus gaming machines). This is a requirement for online gambling, which, when combined with a stringent player registration process, is a significant step in satisfying the know your customer (“KYC”) requirements.
Using software technology tools, online gambling operators can scrutinize “inconsistent” behaviour, capture and report the transaction, and freeze the funds pending investigation. When performed in conjunction with a licensing authority this is a potent weapon. The IGC contends that individuals / organizations that attempt to launder money are not risk takers and if they believe that there is a disproportionate risk associated with the transaction they will abandon their efforts. The IGC believes that a stringent regulatory environment increases their risk and would minimize attempts to launder money.
Other Threats Inherent in the Growth of Internet Commerce
Suggestions that the industry can easily lend itself to laundering have thus far proved unfounded as there has yet to be an instance when a customer has used a legal and well-regulated online gambling site to launder money. In fact, non-gambling eCommerce sites lend themselves more to this activity because of the undue attention paid to gambling sites and the lack of vigilance of these non-gambling businesses. What the FATF identifies seems to be those instances where an online gambling site was used to launder the proceeds of other crimes or when illegal online gambling sites launder the proceeds of their illegal activity. This type of activity can be perpetrated through any eCommerce “cash flow” business, especially where oversight is less stringent. There is no indication that legal online gambling sites have laundered money (the FATF Money Laundering Typologies 2000-2001 report, 1 Feb. 2001 - www1.oecd.org/fatf/FATDocs_en.htm).
In fact with online gambling, credit card association and ecash providers require that refunds (winnings or return of funds) are always returned to the originating source of the funds. The IGC is aware that its members have policies that prevent funds transfers to parties other than the individual who originated the transaction. Moreover, its members require that identification for material refunds be provided from one or more sources from the following list, a list that is similar to identity requirements that apply to casinos that operate in accordance with the same EU Money Laundering Directive as UK casinos:
· passports;
· tourist cards;
· driving licenses (with photo);
· national identity cards;
· military passports or ID cards;
· pensioners’ ID cards;
· student travel cards;
· government and corporate ID cards (but only if they carry a photo, first names, surname, date of birth, name of issuing body, issue number and bearer’s signature).
A more significant threat lies with online auctions where items with a minimal “real” cost can be “sold” for $1,000 and the profit then laundered at the online auction house. Further areas of concern include the use of spam and Internet Web sites to advertise an envelope stuffing work-at-home "opportunity" and use of the Internet to advertise "discount" Web hosting services. Such activities have been detected in the USA where the crimes have targeted consumers nationwide through junk email solicitations or fraud on eBay, Yahoo! and other popular Internet auction sites.
If regulated, conceivably there would be compliance to ensure that the industry satisfies KYC rules and reacts to change through enforcement mechanisms.
What the Future Holds: Nations Begin Debate on Online Gambling Regulation
In its Consultation Paper on money laundering (CP46), the UK’s FSA (Financial Services Authority (“FSA”) as enshrined in the Financial Services and Markets Bill), recognized that a comprehensive, regular and effective training program is vital in the fight against money laundering. This clearly is the role that the IGC expects to play with its membership and in conjunction with bodies such as the FATF.
With the FATF Consultation Paper emphasis on KYC, online gambling operators, like financial institutions, do not have the benefit of face-to-face transactions, relying instead on the technology and pragmatic solution to overcome this impediment. The FSA’s new anti-money laundering measures, as a first big step, require affected parties to take as many as four separate pieces of evidence of an individual’s identity as part of acceptable KYC procedures.
Moreover, most operators, partly in response to regulatory requirements in their respective jurisdiction, require their licensees, during the registration process, to obtain information from customers that can be used to verify their identity - name, personal residence address, date and place of birth telephone number and email address, etc. This information can be cross-referenced with credit card registration information, wire instruction and other similar information. The confirmation information plays an important role with the release of unusually large refunds or deposits.
Furthermore, financial institutions that contribute to the deposit cycle contribute to the verification process with their at-source checklist. These include credit card issuers, financial institutions that maintain the customer’s bank accounts from which wires are transacted and emerging e-cash intermediaries.
Technology will continue to provide the tools to identify suspicious transactions and the record keeping to account and report these transactions and suspicious transactions.
Proper regulatory oversight and compliance will incorporate laws and procedures to ensure the suitability of owners, managers and others involved in gambling activities.
Regulatory Recommendations for Online Gambling
The IGC endorses oversight and regulation of online gambling to prevent money laundering and underage and compulsive gambling. Specifically, the IGC endorses the following recommendations from the UK Review of Gaming, activities that would have already been adopted by responsible, reputable online gambling operators:
30.32 We recommend that all punters who register to play online should be properly identified before they are permitted to play. The Gambling Commission should issue guidelines to ensure that identification standards are comparable with those of off-line casinos.
30.33 We recommend that online operators should make any payments only to the debit or credit card used to make deposits into the punter’s account (to the amounts permitted under card association rules), or by cheque to the punter.
The IGC also supports the recommendations of the UK’s Department for Culture, Media and Sport in their review of the Review of Gaming in the UK. In these cooperative environments between government and industry, AML controls become an integral part of the overall regime and all parties work, in their mutual interest, for a corrupt and crime-free environment.
Relevant authorities should consult with industry, especially leading industry groups such as the IGC, to achieve a cooperative resolution to issues confronting the industry and government. The forum for this cooperation could well be in the context of self regulatory organizations working in conjunction with groups such as the Council of Europe and the institutions of the European Community. These bodies have been formulating positions on matters such as money laundering, customs, and immigration violations. A cooperative program on a range of gambling cooperation matters would supplement other awareness-raising and training activities.
It could be done, for example, in tandem with the regulated industry and/or with international governmental organizations. The IGC foresees a key role for the association in this process, including, but not limited to, ensuring that appropriate training programs are made available (including assistance to develop) to its members.
In the medium to long term, interested governments may want to construct a framework to deal comprehensively with a wide range of gambling regulation matters. The most efficient structure would involve appropriate industry groups such as the IGC in a forum to exchange ideas to deal with emerging problems in the regulation of online gambling.
The Challenge of Globalization
New technology, specifically the Internet, and the resulting borderless marketplace has complicated traditional gambling issues and facilitated new types of gambling, including government products.
The acceptance of a global market for online gambling is a reality unless the Internet itself it banned, which is unlikely. Rather than allow the industry to continue in uncharted territory, regulation is needed to solidify, instill confidence and to create a new revenue source. Otherwise, some online gambling will continue unregulated and move underground.
Lastly, the question of prohibition needs to be addressed. The IGC urges FATF to move away from any recommendation to deputize sectors within an industry, for example ISPs, and instead focus on working with members of the online gambling industry to develop workable controls and regulation.
The IGC looks forward to further discussions and to participating in the development of a regulatory model for the online gambling industry. The IGC would welcome the opportunity to meet with the FATF secretariat and is committed to working with FATF to advance the common cause of industry and governments. Please contact Mr Rick Smith, Executive Director, at (604) 732-3833 or via email at rick.smith@igcouncil.org.
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