Taken to the cleaners?

By Michael Ellen, Partner, Regulus Partners

Why the industry and regulators need to seek common cause to pursue shared objectives

"He who seeks to regulate everything by law is more likely to arouse vices than to reform them." Baruch Spinoza (a very influential 17C dutch philosopher)

Balancing acts are tricky - ask any regulator. Leave too much to market forces and sooner or later those forces will bite you on the bum; over-legislate and you may find yourself the proud owner of watertight regulations that operators seek to bend or avoid at every opportunity.

Generally, the public interest is best served by laws which provide proportionate protection against harm without stifling legitimate commerce.

So it goes with gambling - an industry which (in Britain) has, by and large, benefited from well-balanced regulation – so far.

However, the forthcoming application of the EU's Fourth Directive on Anti-Money Laundering (“4 AMLD") has prompted fears in the remote sector that the balance between protection and commerce may be moving out of kilter. If correct then the consequences for Britain's regulated market could be damaging.

This is not a question of the narrow parochial interests of gambling. Even the most blinkered industry executive would refrain from suggesting that the well-being of the industry should be placed above the state's need for protection against the toxic and destabilising effects of money-laundering. Instead, it's a question of whether the solution (i.e. its regulation) is proportionate to the problem. If not, the regulations may cause the migration of customers from regulated, responsible (and now tax-paying) businesses to unlicensed operators - and in doing so undermine the very objectives that the legislation is designed to achieve.

At the moment, the Danish Gambling Authority (DGA), which regulates one of the most liberal demand-side regimes in Europe, claims that 90% of play by Danish residents is on domestically licensed sites. Meanwhile, the Dutch government has set as a licensing objective for its new remote regulator a target of regulating 75% of Dutch resident player activity. By comparison, the French regulator (ARJEL) probably captures less than 50% of French players’ remote gambling spend, despite attempts to enforce. Italy and Spain lie somewhere in the middle, again shaped by their regulatory approach.

UK, Denmark, and now the Netherlands are aligned with the commercial ethos of attracting players, promulgating the merits of regulation and regulated sites and in this way effectively working to discourage players from straying toward low-to-no regulation offshore sites when seeking a flutter online.

It remains to be seen whether this approach wins out in Europe more broadly. The fact that legislation has generally moved in the opposite direction (with bureaucracy trumping pragmatism) for such a long time suggests not (though there is an encouraging liberalisation pipeline from both Italy and Spain).   Accurate analysis of the state of the industry is needed to support policy if we are to move into an informed and constructive era of political involvement in gambling: facts speak far louder than opinion and the industry has for too long been much longer on the latter than the former.

However, too often the key vested interest (and the strongest voice) in the room in any National or EU debate on remote gambling has been the protection of state monopolies – which has emerged as a key obstruction in the development of co-ordinated EC remote gambling standards.

Under its new Latvian presidency, Brussels has given priority in its legislative program to 4 AMLD, which represents seven years of Brussels’ thinking on money laundering. It builds on 3 AMLD, which is incorporated in the UK Money Laundering Regulations 2007.

Seven years has not been enough time to agree what should fall inside the central definition of remote gambling, so that sports betting – ironically seen by many informed onlookers as being at the top end of money-laundering risk within the sector (because of the possibilities around exchanges and off-market transactions) – may fall outside the general ambit of 4 AMLD as it is implemented in each Member State.

The Directive, as presently drafted (and now close to final approval), tightens the requirements around the remote casino operator’s ability to accept player deposits. It requires due diligence to be undertaken on the ownership credentials for every transaction (a term itself subject to interpretation, potentially causing a patch-work of requirements across states) over €2,000. This introduces very unwelcome interruption to play for many (crucial) higher-value players (potentially a fillip to black-market operators), unless the state regulator chooses to make, and subsequently justify, a risk-based exception for the relevant product. The underlying logic given for the change is that because the player is not present at a remote casino, its business falls into the highest risk category for money laundering.

Logical enough, you may say; the problem is that it is not supported by either practical experience or academic research. Over the last decade, the International Monetary Fund’s jurisdiction reviews of each of the major offshore centres for e-gambling operations have identified a consistent theme of low volume reporting of suspicious transactions, relative to other e-commerce activity.

The work of Professor Michael Levi of Cardiff University (one of our most respected experts on organised crime) explains why this is so. Quite simply, regulated online gambling does not present an attractive environment for money laundering due to three key factors:

1.    depositors are properly identified

2.    all transactions are recorded digitally and are subject to scrutiny, exception analysis and then retention

3.    money is returned to the same (identified) card/ account source as the deposit originated from i.e. the known, named, identity-verified player

Money laundering activity does occur in remote gambling; but the regulated sector is a very difficult place to do it successfully. Regulators already know this, yet the imminent implementation of 4 AMLD in Europe will cause major disruption to the industry, and according to informed commentators, “gambling and payment firms will need to lobby governments on a nation-by-nation basis when countries start to implement it”.

The onus is on the industry and regulator alike to ensure that the implementation of policy is based upon facts rather than myth and supposition. The regulators are unlikely to boast of their success in controlling money laundering while the ability of operators to inform the debate is hampered by political and media prejudice against the industry

The application of disproportionately restrictive pressures on regulated operators seems likely to improve market conditions for illegal operation, where money laundering is much more likely to prevail. By the same token it buries the regulator in work that would not otherwise rank so highly on a risk-adjusted scale.

And so the industry and regulators face yet more fragmented jurisdictional requirements on which to build their compliance systems, around a threat which on current evidence seems low; the clear evidence presented on the effects of the difference between ‘good’ and ‘bad’ regulation seemingly lost in translation.

So that is the problem – what is the solution?

Enlightened operators and enlightened governments have a shared interest in the development of healthy regulated remote gambling markets (and the successful suppression of unregulated companies). In order to achieve this (and to ward off the threats from ill-considered European legislation), companies need to do more to find common cause with those who regulate them - an antagonistic relationship serves the purposes of neither party. They also need to deploy facts to demonstrate the efficacy of their position.

An obvious initial step for both parties would be the commissioning of independent research into the extent of money-laundering within remote gambling and how this splits between regulated and unregulated sites. Only by first understanding the problem can we hope to apply effective remedies. Without such research, the interests of the operator and regulator will remain prey to the unintended consequences of Brussels bureaucracy.