Report Previews Potential Implications for the United States

The European Commission (“Commission”) recently released its 2022 Supranational Risk Assessment Report (“SNRA Report”) to the European Parliament and Counsel regarding the “risk of money laundering and terrorist financing affecting the internal market and relating to cross-border activities.”  The SNRA Report analyzes, on a broad scale, money laundering and terrorism financing risks and proposes a plan of action to address them.  The Report also examines more specifically “sectors or products where relevant changes have been detected.” 

The SNRA Report flags the “Gambling Sector” as a “high risk” area of Anti-Money Laundering (“AML”) and Countering the Financing of Terrorism (“CFT”) concern, with a particular focus on online gambling.  According to the Commission, online gambling presents a particularly high AML/CFT risk due to factors such as “the non-face-to face element, [and] huge and complex volumes of transactions and financial flows.”  The potential use of e-money and virtual currencies, as well as the emergence of unlicensed online gambling sites, exacerbates this risk.

As the European Union (“EU”) considers how to tackle the potential risks of online gambling, the United States is simultaneously grappling with the rapid expansion of online gambling and online sports betting in particular.  Before May 2018, when the Supreme Court struck down a 1992 federal law that effectively banned commercial sports betting in most states, Nevada was the only state with legalized sports betting in the United States.  Although California ballot Proposition 27, which would have legalized online and mobile sports betting in California, failed to pass during last week’s national and state elections, more than 30 states still have legalized some form of sports betting, and there is politial pressure to continue to expand online gambling and other forms of gaming.  As Americans jockey for the immense potential receipts that the expansion of online gambling can bring, it may be worth taking a page out of the EU’s book in order to consider the potential money laundering and terrorist financing risks that can accompany it.

The SNRA Report

The SNRA Report is comprised of two documents: the main Report, which is shorter and more general, and a much lengthier, more detailed Staff Working Document (“Working Document”).  The Working Document’s introduction and section pertaining to online gambling is here.   

This is the Commission’s third SNRA Report – the first was published in 2017 and the second in 2019.  The SNRA Reports have been published in response to the requirements of Directive (EU) 2015/849 and Directive (EU) 2018/843 (the 4th and 5th Anti-money Laundering Directives respectively), which mandated the Commission to conduct an assessment of specific money laundering and terrorism financing risks affecting the internal market and relating to cross-border activities.

Online Gaming and AML/CFT Risks

The Working Document defines online gambling as “any service which involves wagering a stage with monetary value in games of chance, including those with an element of skill, such as lotteries, casino games, poker games, and betting transactions that are provided by any means at a distance, by electronic means or any other technology that facilitates communication, and at the individual request of a recipient of services.”  As noted, the Working Document suggests that online gambling presents a particularly high AML/CFT risk due to a huge volume of complex, non-face-to face transactions.  The Working Document does not differentiate among online gaming products because the “relevant risks, threats and vulnerabilities appear to be primarily linked to the nature of online transactions rather than to specific forms of online gambling.”

The Working Document presents the following “risk scenarios” associated with online gambling:

  • A perpetrator uses gambling sites to deposit illicit funds and to request the pay-out of winnings or unplayed balance.
  • Legitimate online gambling accounts are credited with dirty funds (cashing in) followed by gambling on only small amount of funds, transferring the remaining funds to a different player (or to a different online gambling operator).  The remaining funds are cashed out as if they were legitimate gambling earnings.
  • Crime organizations may use several “smurfs” (experienced players who use new accounts to play anonymously on a game server to deceive other players into thinking they are new to gambling) betting directly against each other using dirty funds.  One of the “smurfs” will receive all of the funds as an apparent winner, who will then cash out the funds as if they were legitimate gambling earnings.  Crime organizations also may purchase online casino accounts containing funds already uploaded by noncriminal players at a higher price than the real one.
  • Crime organizations also may invent and bet on fictitious (non-existing) matches or events to ensure winnings.

The Working Document states that “online gambling appears to offer a low-cost opportunity to launder money,” particularly for organized crime groups.  Further, “[o]nline gambling in virtual assets provides a great opportunity for cybercriminals and this technique was used in recent ransomware attacks.”  Although emerging regulatory standards for crypto-assets may ameliorate the risks associated with exchangeable gaming tokens that qualify as crypto-assets, “the use of crypto-assets is spreading fast and the number of transactions is expected to increase significantly in the coming years.”  The Working Document similarly points to the possibility for use of prepaid e-money/cards in online gambling transactions as increasing anonymity and therefore risk. 

Another area of concern is “an increased trend in the creation of unlicensed gambling sites which are not subject to customer due diligence, record-keeping and reporting requirements.”  Such sites are operating entirely outside of the law, and can have “major effects” on EU markets when they incorporate outside of the EU but nonetheless “engage easily with EU customers over the internet.”

The Working Document also bemoans a concern that is familiar to financial institutions in the United States:  “Representatives of online gambling operators note that financial intelligence units do not offer feedback on suspicious transaction reports that are submitted[.]”  This lack of feedback “causes difficulties for operators on individual cases (where it is unclear whether funds should be paid out to a player who may in turn take action against the operators) and prevents improvements being made to AML practices in general.  This may even discourage future reporting.”  As we have blogged, the lack of feedback from law enforcement and regulators to financial institutions on what Suspicious Activity Reports are actually useful has been an industry complaint in the United States for many years – a problem which the Anti-Money Laundering Act seeks to address.

The Maximum Risk Level

Building on an analysis of the perceived threats and vulnerabilities, the SNRA assigns a numerical “risk level” to each sector in an effort “to identify the circumstances under which the services and products a given sector provides could be abused for [money laundering and terrorism financing] purposes.”  The risk and vunerability level scores range from a score of (1) for “low significance” to a score of (4) for “very significant.”  Notably, the SNRA assigns an overall estimated risk level score of (4) to online gambling for both money laundering and terrorism financing. 

Risk Mitigation

The Working Document observes that the risks associated with the lack of face-to-face contact in online gambling can be mitigated generally by implementing proper verification measures, as well as by the fact that electronic gambling offers “the possibility to track all transactions.” 

Finally, the Working Document makes many specific recommendations for governments and regulators to consider in order to reduce the risks presented by online gaming, including:

  • Improving cooperation between “relevant authorities” (i.e., financial intelligence units, law enforcement and gambling regulators) “so they can better understand the risk factors inherent to online gaming and provide efficient guidance.”
  • Improving cooperation between relevant authorities and online gambling operators in order to, inter alia, strengthen customer due diligence requirements and the detection of suspicious transactions, particularly when gambling platforms are used across borders; organize training sessions for industry staff and compliance officers; providing more clear guidance on the AML/CFT risks inherent in online gambling; and raising the awareness of online gambling operators regarding emerging AML/CFT risks, such as the use of virtual currency or unauthorized online gambling operators;
  • Improving feedback from financial intelligence units to online gambling operators about the quality of suspicious transaction reporting and ways to improve such reporting, including by providing information about exactly how reporting is used; and
  • Ensuring that specific safeguards for non-face-to-face business relationships are used, such as electronic identification.

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