09/03/2016, 13:52Time for bookmakers to wake up and smell the coffee on AML rules | SBC News

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Time for bookmakers to wake up and smell the coffee on AMLrulesPosted by: Andrew McCarron March 9, 2016 in Comment, Latest News, UKComments Offon Time for bookmakers to wake up and smell the coffee on AML rules

Licensing expert David Clifton, of gambling consultancy CliftonDavies, takes a look at the recent movement by the regulator totighten up money-laundering processes and doesn’t see any goodnews for bookmakers.

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

It has also served to emphasise both the close inter-relationshipthat exists between the statutory responsibilities imposed onoperators to:

(a) prevent gambling from being associated with crime anddisorder 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 beseen to have been carried out, by operators in the fulfilment of those responsibilities.

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09/03/2016, 13:52Time for bookmakers to wake up and smell the coffee on AML rules | SBC News

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

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

(a) existing operational policies and procedures do not adequately address the above-mentionedresponsibilities or

(b) operators are failing to conduct their businesses in accordance with their own policies andprocedures.

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

In addition to the legal costs that will invariably be incurred and the liability for the Commission’sinvestigation costs that a recalcitrant operator will have to meet, a typical voluntary settlement proposalwill necessarily have to include divestment by the operator of such sum as represents the profits madearising 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 customersin question. This can lead to a very considerable sum disappearing off the bottom line. In the case ofPaddy Power, £280,000 was divested by way of a “voluntary contribution” to socially responsiblepurposes. That has been a relatively modest figure compared with the “substantial seven figure sum” thatbet365 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 reviewtheir 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 toconsider, arising from the failings in the way that Paddy Power handled relationships with two customersat one of its betting shops and with one of its online customers who was later convicted of seriouscriminal offences:

1. Do you have effective systems in place for staff at all levels of your business to ensure thatcommercial 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 socialresponsibility code provision 3.4.1 (that includes a requirement that a customer interaction policyshould include “circumstances in which consideration should be given to refusing service tocustomers 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, youconsider refusing service?

4. Can you demonstrate that your policies and procedures relating to AML adequately meet ordinarycode provision 2.1 (AML) particularly in relation to ensuring that an effective and risk-based approachcovers 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 thelicensing objective of keeping crime out of gambling, including the reporting of suspicions, and thatstaff 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 aboutcustomers’ sources of funds are appropriately risk-based, fit-for-purpose and, crucially, that they arebeing implemented effectively?

The first of the above questions focuses on the eternal dilemma all operators face of balancingcompliance 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 ongoingrequirement to take commercial considerations into account if the consequence of failure in respect ofthe former is the loss of the licence.

09/03/2016, 13:52Time for bookmakers to wake up and smell the coffee on AML rules | SBC News

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

Paragraph 17.1 of that document summarises key examples of the inter-relationship between statutoryresponsibilities 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 orspend inconsistent with apparent source of income) could be indicative of money laundering, but alsoequally 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 otherrisks (for example, spend that is inconsistent with the individual’s apparent legitimate income beingassociated with the proceeds of crime).

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

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

dc@cliftondavies.com

www.cliftondavies.com

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LCCPLCCP MONEY LAUNDERINGMONEY LAUNDERING PADDY POWERPADDY POWER REGULATIONREGULATION SOCIAL RESPONSIBILITYSOCIAL RESPONSIBILITY

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