Fred Gushin and Paul Bromberg of Spectrum Gaming Group examine some of the key concerns facing operators and regulators when it comes to the risk of money laundering in the live and online gaming space. This is the first article in a series by Fred and Paul relating to such regulatory, law enforcement and policy issues in Asia.
Anti-money laundering (AML) is a major aspect of effective casino control. Casinos and online gaming are generally considered by law enforcement and gaming regulators to be vulnerable to money laundering. Several countries in Southeast Asia have been on the “grey list” of money laundering countries, including Cambodia, Laos and the Philippines. This article will discuss the worldwide effort to combat money laundering in the gaming industry and highlight some of the key issues that land countries on the grey list.
Numerous jurisdictions have enacted laws and regulations and published guidance regarding AML and Combatting the Financing of Terrorism (CFT) compliance by the gaming industry. Historically, the primary focus of those efforts has been directed at land-based casinos where players are physically present and where there are significant internal controls in place with respect to the opening of accounts, cash management and record-keeping. With respect to online sports betting and online gaming, regulations and guidance related to AML/CFT are more limited, although the significant global expansion of online gaming has attracted considerable attention from regulatory and law enforcement authorities.
The Financial Action Task Force (FATF), the global AML watchdog based in Paris and comprising more than 200 countries and jurisdictions, sets international standards aimed at preventing money laundering, terrorist financing and the harm they cause to society. The FATF has issued numerous analyses and guidance documents, including “FATF 40 plus 9 Recommendations” on combatting money laundering and the financing of terrorism. These recommendations set forth the basic framework for detecting, preventing and suppressing money laundering and terrorist financing at banks and non-bank financial institutions worldwide. All members of the FATF have agreed to abide by its recommendations.
Casinos have been used, wittingly or unwittingly, numerous times as facilitators and enablers of money laundering, resulting in criminal investigations and sanctions by law enforcement and/or the FATF.
The Asia-Pacific Group on Money Laundering (APG), based in Sydney, conducts regular peer reviews throughout Asia for the FATF. They then issue reports and recommendations, which can lead to a country being placed under increased monitoring, also known as the “grey list”. Key issues include (see list beginning on opposite page):
1 SUSPICIOUS TRANSACTION REPORTS (STRS)
Whether the number of STRs filed with the local Financial Intelligence Unit reflects the scope of the gaming taking place. Casinos that attract international patrons, VIP play, that accept junket play and issue credit to players, will inevitably be required to file STRs. The failure to file STRs is an indication that the casino or online gaming company does not have sufficient controls in place to identify suspicious transactions or that the gaming establishment is intentionally failing to file these forms.
2 CORPORATE GOVERNANCE AND AML COMPLIANCE
Company Boards are expected to fully support AML compliance and governance issues. This requires that casinos now develop and implement meaningful procedures to “know your customer” (KYC) and to know the source of patron funds. The KYC requirement is fundamental to meaningful AML control and requires proper training of gaming employees. The recent well-publicized cases in Australia demonstrate the failures of company boards to oversee AML compliance and the resulting punishment. Compliance and Risk Management Departments must step up to the plate or put their casino operations at risk.
3 JUNKET OPERATIONS
The riskiest of all casino gaming vulnerabilities. Japan has decided to prohibit junkets by law while other Asian jurisdictions still rely, to varying degrees, on junket play. The Chinese junket industry has been under severe scrutiny as a result of the 10-year crackdown on corruption. Junket operations in Macau have been severely curtailed, and some of the best-known junket operators have been subject to criminal proceedings. Most Macau casinos have reduced their reliance on junket play, and many junket operators have gone out of business in Macau. Junket operations in any casino are seen as a red flag by law enforcement and the FATF. Governments that still permit junket play should have controls in place that will address this level of risk.
Whether the quality and scope of the licensing process are sufficient to identify beneficial ownership of the gaming operator is crucial. Also, whether a casino is being financed by clean or dirty money is always of concern, so the licensing process should include scrutiny of the financial integrity of the funds being used to finance gaming projects. This means that holding and parent companies will often be included in the licensing process.
The Philippines has a unique issue related to PAGCOR, which is both the gaming regulator and the operator of some 41 gaming facilities across the country. The APG and FATF have noted that this dual role is inconsistent and creates a conflict of interest. The Philippine government now seems to recognize this, and recent media reports suggest there are serious efforts to privatize the PAGCOR casinos.
Online gaming, attributable in large part to the layers of player anonymity provided by online sites combined with the sheer number of sites available, has proven to be a largely challenge-free environment for money laundering. Individuals can launder large sums of money by wagering them, or mischaracterizing them as wagering, as part of a “gambling transaction” and then collecting the payout as an alleged win. Because no physical money actually changes hands, it is difficult for law enforcement to follow the flow of funds.
The online gaming sites themselves provide an array of technological advantages to conceal player identities, from the use of unregulated digital currencies to proxy servers that can hide player locations. The introduction of digital financial products as the only medium of exchange significantly enhances those risks. There are several options for making online payments, including most notably credit cards and various alternative payment systems.
The developing trend involving alternative payment methos for online casinos has materialized around cryptocurrencies which are decentralized virtual currencies, meaning they neither exist in the physical world like cash, nor do they involve a bank, middleman or credit card company. As with other alternative payment methods, cryptocurrencies can provide layers of anonymity and secrecy that make them highly attractive targets for use in money laundering, terrorist financing and financial crime.
The fight by governments, assisted by the private sector, to assure AML compliance in the gaming industry is not going away. In fact, efforts to implement AML controls are becoming a higher priority for governments throughout Asia.