Time for bookmakers to wake up and smell the coffee on AML rules

cliftondavies-davidcliftonLicensing expert David Clifton, of gambling consultancy Clifton Davies, takes a look at the recent movement by the regulator to tighten up money-laundering processes and doesn’t see any good news for bookmakers.

The recent publication on the Gambling Commission’s website of a public statement highlighting failures in Paddy Power’s anti-money laundering (AML) and social responsibility processes is the latest in what is becoming an increasingly long line of very public admissions by gambling operators that their handling of customer relationships has not met required standards.

It has also served to emphasise both the close inter-relationship that exists between the statutory responsibilities imposed on operators to:

  • (a) prevent gambling from being associated with crime and disorder and
  • (b) protect vulnerable people from being harmed or exploited by gambling

and the fundamental importance of the enquiries and assessments that need to be carried out, and be seen to have been carried out, by operators in the fulfilment of those responsibilities.

The Gambling Commission has considerably tightened up its investigative and enforcement approach to such matters in recent years, as other betting operators such as bet365, Coral and Ladbrokes have discovered to their cost. It has also sounded a warning to other operators in bold print on the front page of the Paddy Power public statement that “the issues identified in this statement are likely to form the basis for future compliance assessments of gambling operators”.

It is fairly common knowledge that despite the intention that such public statements should constitute the sharing of “valuable learning” with the industry, the Commission is becoming increasingly concerned that insufficient attention has been paid to them by licensed operators, as evidenced by the repeated findings that either:

  • (a) existing operational policies and procedures do not adequately address the above-mentioned responsibilities or
  • (b) operators are failing to conduct their businesses in accordance with their own policies and procedures.

It seems inevitable that the time will come when the Commission’s patience runs out and an operator found to have similar failings in its AML and social responsibility controls will face a review and possible revocation of its operating licence. Such an outcome would have obvious and predictably disastrous consequences for the business in question. However, another reason why operators should not rest on their laurels is that achieving the voluntary settlements that have resulted in all the public statements to date is not a cheap exercise.

In addition to the legal costs that will invariably be incurred and the liability for the Commission’s investigation costs that a recalcitrant operator will have to meet, a typical voluntary settlement proposal will necessarily have to include divestment by the operator of such sum as represents the profits made arising from the failings identified by the Commission and accepted by the operator.

It matters not whether any money laundering actually occurred on the part of the customer or customers in question. This can lead to a very considerable sum disappearing off the bottom line. In the case of Paddy Power, £280,000 was divested by way of a “voluntary contribution” to socially responsible purposes. That has been a relatively modest figure compared with the “substantial seven figure sum” that bet365 agreed to pay to conclude the Commission’s investigation into its failings back in 2014.

It follows from what I say above that all licensed betting operators should study carefully, and review their policies and procedures in light of, the Paddy Power public statement accessible here.

That statement helpfully identifies the following six specific questions that operators are advised to consider, arising from the failings in the way that Paddy Power handled relationships with two customers at one of its betting shops and with one of its online customers who was later convicted of serious criminal offences:

  1. Do you have effective systems in place for staff at all levels of your business to ensure that commercial considerations do not outweigh the need to comply with the licensing objectives?
  2. Do your policies and procedures fully meet the requirements set out in the LCCP, including social responsibility code provision 3.4.1 (that includes a requirement that a customer interaction policy should include “circumstances in which consideration should be given to refusing service to customers and/or barring them from the operator’s gambling premises”)?
  3. Can you demonstrate that when a customer displays clear indicators of being a problem gambler, you consider refusing service?
  4. Can you demonstrate that your policies and procedures relating to AML adequately meet ordinary code provision 2.1 (AML) particularly in relation to ensuring that an effective and risk-based approach covers both washing ‘dirty’ money and the spending of proceeds of crime?
  5. Can you demonstrate that all relevant members of staff understand their duties in relation to the licensing objective of keeping crime out of gambling, including the reporting of suspicions, and that staff in key positions have sufficiently broad, up-to-date and accurate knowledge?
  6. Can you demonstrate that the policies and procedures in place for obtaining information about customers’ sources of funds are appropriately risk-based, fit-for-purpose and, crucially, that they are being implemented effectively?

The first of the above questions focuses on the eternal dilemma all operators face of balancing compliance responsibilities on the one hand with commercial considerations on the other. However, without adequate fulfilment of the compliance responsibilities, there could well turn out to be no ongoing requirement to take commercial considerations into account if the consequence of failure in respect of the former is the loss of the licence.

It would be advisable therefore for all betting operators to remind themselves not only of LCCP social responsibility code provision 3.4.1, but also the Gambling Commission’s “Advice to operators (excluding casino operators): Duties and responsibilities under the Proceeds of Crime Act 2002” that can be found here.

Paragraph 17.1 of that document summarises key examples of the inter-relationship between statutory responsibilities to which I have referred above in this article, stating that:

“Operators should be mindful that some risk indicators (for example, a pattern of increasing spend or spend inconsistent with apparent source of income) could be indicative of money laundering, but also equally of problem gambling, or both. There may also be patterns of play (for example, chasing losses) that appear only to be indicative of problem gambling, but could also be considered as a proxy for other risks (for example, spend that is inconsistent with the individual’s apparent legitimate income being associated with the proceeds of crime).

“While patterns of play may be one indicator of risk, operators should satisfy themselves that they have asked, or are prepared to ask, the necessary questions of customers when deciding whether to establish a business relationship, maintain the relationship or terminate the relationship. In summary, it is perfectly plausible that an individual attempting to spend criminal proceeds or launder money could also be a problem gambler, but one does not necessarily follow the other. The responsibility is on the operator to be in a position to understand these dynamics and mitigate any risks to the licensing objectives.”

With the forthcoming implementation within the UK’s domestic legislation of the fourth EU Money Laundering Directive and the seemingly inevitable inclusion of the betting industry within the ambit of the Money Laundering Regulations, now is most certainly the time for all operators licensed by the Gambling Commission to “wake up and smell the coffee” before they find themselves placed under at least the same level of scrutiny that the Commission has recently focused on Paddy Power.

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