FINANCIAL INTELLIGENCE CENTRE
Portfolio Committee on Trade and Industry (National Assembly)
Presentation at Public Hearings: 22 August 2007
DRAFT NATIONAL GAMBLING AMENDMENT BILL, 2006 - COMMENTS OF THE FINANCIAL INTELLIGENCE CENTRE
1.1 The Draft National Gambling Amendment Bill, 2006 (“the Bill”) seeks to provide for the regulation of interactive gambling in the Republic. This document expresses the views of the Financial Intelligence Centre (“the Centre”) on the issue of interactive gambling within the Republic and provides the Centre’s comment on the Bill.
2.1 The Centre’s submission relates to its mandated objective to combat money laundering and terror financing and the threat that legalising interactive gambling will present to money launderers.
2.2 The Centre is a statutory body within the Public Administration. It was created for the purpose of identifying the proceeds of crime and the combating of money laundering and terror financing. The Centre’s functions include receiving, analysing and disseminating information reported to it, monitoring compliance by financial and other institutions (including casinos) with their obligations relating to the combating of money laundering and terror financing, and providing guidance to institutions and supervisors as to the performance by them of their functions relating to the combating of money laundering and terror financing.
2.3 Money laundering is the process through which the proceeds of crime are made to appear as legitimately acquired funds or assets. This includes any manipulation of money or property derived from criminal activity in order to misrepresent its true nature, source, location, disposition or movement of funds. The result of a successful money-laundering scheme is that proceeds from criminal activity are no longer associated with the activity. Illegally acquired proceeds appear to be legitimate income. Terror financing, on the other hand, refers to the process of manipulating funds (not necessarily illegitimately acquired) to hide their intended use for terrorist actions or support.
2.4 Money laundering is often described in theoretical terms as occurring in three stages: placement, layering and integration. It must be borne in mind, however, that these stages do not necessarily exist in the mind of the designer of a money-laundering scheme. They are generalisations based on the experience of investigators who have succeeded in uncovering such schemes. In no money-laundering scheme is there an exact and clearly defined delineation between these stages. Instead, the stages flow into each other creating an overlap between one stage and the next. The value of describing money laundering by reference to these stages is that it illustrates clearly the fact that a money laundering scheme is a process which relies on the integration of a number of transactions involving a variety of institutions.
2.5 Placement refers to the initial point of entry into the financial system for funds derived from criminal activity. The most common method of placing money in the financial system is to deposit it into a bank account. The illegally obtained money is often commingled with the legitimate income of a business. When the money is deposited, it becomes indistinguishable from the legitimately earned income of the business. To reduce the volumes of cash that have to be transported and deposited into bank accounts, the cash is distributed in small amounts among a large number of people who take the cash to financial institutions where it is deposited or converted into negotiable instruments.
2.6 Layering refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point and the end of the laundering cycle. The process entails the transfer of funds between different locations and the continuous conversion of these funds from one type of instrument to another. During the layering stage, the funds or instruments are distributed through the financial system by using a series of transactions including electronic wire transfers, shell corporations, false invoicing, and fictitious import and export transactions. These transactions are normally carried out through the facilities offered by institutions that are part of the legitimate financial sector. During the layering stage, the money that is laundered becomes virtually indistinct from ‘legitimate’ money in the commercial sphere.
2.7 Integration refers to the return of the funds to the legitimate economy for later extraction. At this stage the funds that have now acquired an appearance of legitimacy are collected and made available to the criminals to be enjoyed or reinvested into their criminal activities.
2.8 Government has committed itself to combating money laundering because it is inextricably linked to crime. If left un-checked money laundering places financial power in the hands of criminals. This power is used to corrupt public and private sector institutions and to perpetuate profit generating crime. This has consequential effects such as undermining the integrity of financial and judicial systems and tainting the credibility of the rule of law.
2.9 As a result Government has introduced laws to criminalise money laundering and also to impose regulatory controls on financial and other institutions (such as casinos) in accordance with international standards set by the Financial Action Task Force (“the FATF”). These control measures require institutions to identify their customers, keep records of their customers’ identities and transactions, report suspicious and unusual transactions by their customers and implement internal controls including systems to facilitate compliance with their obligations.
2.10 In addition, the FATF’s international standards also pertain to the supervision of compliance by casinos (including interactive casinos) with their regulatory obligations. These standards require South African supervisory authorities to ensure that casinos are subjected to a comprehensive regulatory regime which includes that:
3. Concerns over possible abuse of interactive gambling facilities
3.1 It is important to note that the money laundering process very often is dependent on the ability to transfer funds from one person to another or from one location to another while concealing the identities of the parties involved, or obfuscating the reasons for the transfers taking place. The Centre suggests that interactive gambling inherently contains features that lends itself to abuse in this regard.
3.2 The FATF, in its Report on Money Laundering Typologies (2000-2001), refers to the risks pertaining to internet gambling in terms of the following:
“Given the scenario, it seems that internet gambling might be an ideal web-based service to serve as a cover for a money laundering scheme through the net.”
3.3 This concern is based on certain features of internet-based entities which are inherently linked to abstract nature of such entities:
3.4 The abuse of interactive gambling facilities may come from two sources. On the one hand a person posing as an on-line punter may be taking advantage of the nature of an interactive casino and its facilities in order to transfer funds from one person and/or location to another thus involving the casino unwittingly in a part of a money laundering process. On the other hand the interactive casino may be established by its operator as a front to provide the operator access to a medium for the transfer of funds under the cover of association with an apparently legitimate business.
3,5 There are many examples of how the medium of an interactive casino can be abused in the course of a money laundering scheme:
Using a credit card charge-back
Andy, using the legitimate credit card of his friend, Ben, logs onto a gambling site and opens an account. Andy has Ben’s permission to use the credit card. The credit card account contains the proceeds from Andy’s sale of drugs. Andy promptly loses the money on-line.
Ben contacts his bank and claims that his credit card facility has been used without his permission. The bank arranges for a ‘charge-back’ from the online casino to Ben which is effected by an electronic transfer from the casino’s account.
The effect is that funds have been moved from one person to another and from one location to another. However, the transaction trail based on the records of the bank where the credit card account is held, will reflect a perfectly justifiable and apparently legitimate reason for the transactions without drawing attention to the effective movement of the funds from Andy to Ben.
Using two or more credit card accounts
Andy registers with an off-shore interactive casino using the name on a credit card which he acquired using his own identity or a false identity provided to the bank. He opens a player’s account with the casino and credits it from the credit card account which holds the proceeds from the sale of drugs.
After performing little or no gambling he ends his playing session and instructs the casino to pay out the funds in his player’s account to another account which is held with a bank in a different location and is subject to the control of another person.
The effect of this series of transactions is the same as described above in that the funds effectively have been transferred from one person and location to another. The transaction trail based on the records of the bank where the credit card account is held, will reflect only reflect that money was transferred to the account of the interactive casino, which may or may not be identifiable as a casino account. Since the records reflecting the effective transfer of the funds are under the control of the interactive casino which is hosted in a different jurisdiction, investigators will be unable to identify that step in the process.
Using a combination of interactive and land-based gambling
Andy follows the same process of registering and opening a player’s account with an interactive casino as described in the previous example. The interactive casino has the branding of a group of land-based casinos with casino resorts in off-shore locations.
Andy visits one of the casino resorts and arranges for the credit balance in his on-line player’s account to be made available to him in the form of casino chips. He then redeems the chips and requests the cashier to pay the funds by means of an electronic transfer into a bank in a different location and is subject to the control of another person. In a variation on this example Andy could also had over the chips to his associate, Ben, who then redeems the chips and obtains a cheque in his favour from the casino.
The effect of these transactions is the same as described in the previous example.
Opposing winning and losing bets
Andy and Ben register with the same interactive casino and arrange to log-on to the casino at a certain time and elect to play poker. The amounts they try to play with soon scare away the other on-line players and ultimately only Andy and Ben are left playing.
Andy deliberately loses to Ben with the effect that Andy’s player’s account is debited while Ben’s is credited. Ben later requests the positive balance in his player’s account to be transferred to two accounts held with banks in two different locations.
Again the effect of these transactions is the same as described in the previous examples.
4. Vulnerabilities of interactive gambling to money laundering abuse
4.1 The Financial Intelligence Centre Act (“the FIC Act”) requires casinos, including interactive casinos should they be able to operate legitimately, to establish and verify the identities of their customers. In a face-to-face environment the institution would confirm the information supplied by the customer by having sight of certain original documentation such as an identity document. In a non-face-to-face environment the institution in would be required to take additional steps to confirm the client’s identity to compensate for the fact that a physical comparison of the client’s appearance cannot be made with an identity document. In this regard reliance cannot be had on the fact that the customer is using an identity which has already been verified by another institution such as a bank as the institution has no assurance that it is dealing with the same person whose identity had been verified by the other institution. This would make it very difficult for interactive casinos to meet the customer identification requirements of the South African legislation.
casinos, if licensed will inevitably be hosted in foreign locations. As a result all the information pertaining to
transactions involving South African customers will be captured and located
outside the borders of
Ongoing monitoring and reporting
4.3 The same difficulty referred to above relating to the non-face-to-face nature of an interactive casino’s business applies to the subsequent relationship with the customer, as the casino will not be able to establish whether it is the same person conducting online transactions as the person who originally registered with the casino.
4.4 In addition the absence of human intervention means that he interactive casino will not be able to detect suspicious or unusual activity through its facilities where customers are abusing the medium of the internet to transfer funds among persons and locations.
4.5 The borderless nature of the internet makes it difficult to determine the appropriate jurisdiction with responsibility for the licensing and supervision of interactive gaming service providers. This will negatively impact on compliance with the FIC Act by interactive casinos where the casino operator is situated outside the country.
problem concerning jurisdiction is that interactive casinos are bound to be
Supervision and enforcement
4.7 The key to an effective regulatory system is an effective licensing regime which is able to ensure that unscrupulous operators do gain entry to the South African environment. This implies strict probity checks to ensure that criminals do not obtain controlling interests in interactive casinos. The accuracy of such probity checks in respect of off-shore operators may, however, be undermined as the regulatory authorities will not have access to the type of information such as criminal record information and tax status which should form part of the probity check.
4.8 The costs of regulation of the interactive gaming industry are likely to be substantial, because of the cross-border nature of these activities. It will require the appointed supervisor to monitor and enforce compliance with the legal obligations that apply to interactive casinos such as the measures contained within the FIC Act. This implies that the supervisor will be undertaking some measure of examinations of the businesses of interactive casinos, including off-shore casinos to measure compliance. This also entails that the supervisor will be able to take action in cases of non-compliance including enforcing remedial action and revoking a license.
revocation of a license, as in the case of preventing unlicensed interactive
casinos from operating in the South African environment, raises serious
concerns over the ability to enforce an effective licensing regime. Studies in countries such as
5. Possible mitigation of risks
5.1 The Centre believes that there are a number of matters which should receive further consideration and should be provided for in the Amendment Bill in order to reduce the risks of abuse in an interactive gambling environment for money laundering and terror financing purposes.
5.2 The first of these is the issue of licensing and the probity checks that will be carried out. The centre suggests that the legislation should be framed in such a way that the elements of such checks, including criminal background checks and tax status are made clear and that the regulator is in a strong position to deny an application for a license if access to satisfactory information on these matters cannot be obtained.
Preventing non-compliant and unlicensed casinos from doing business
5.3 The legislation should clearly provide the regulator with the power to block unlicensed interactive casinos from carrying on business in a South African environment. This should also apply in cases where a license is revoked or suspended as a result of non-compliance with measures such as the FIC Act. This implies that further study should be undertaken as to the practical applicability of measures at the regulator’s disposal to exercise these powers.
Flow of funds
5.4 The legislation should expressly provide the regulator to block the flow of funds to an unlicensed interactive casino. This should also apply in the case where a license is revoked or suspended due to non compliance with the casino’s statutory obligations.
addition certain types of transactions should be prohibited activities for
interactive casinos that are licensed in
Jurisdiction and domicile
5.6 The issues of jurisdiction and domicile need to be comprehensively addressed. The legislation should require a licensed interactive casino to expressly subject itself to all applicable South African legislation. This should not only include the provisions of the applicable gambling legislation, but also the legislation relating to money laundering and terror financing and the investigation of criminal offences such as the Prevention of Organised Crime Act, 1998, the FIC Act, the Protection of Constitutional Democracy against Terrorist and Related Activities Act, 2004, the Criminal Procedure Act, 1977 and the National Prosecuting Authority Act, 1998.
order to facilitate effective enforcement the legislation should also require a
licensed interactive casino to have a presence in
5.8 In addition to matters to be provided for in the Bill, serious attention should be given to the issue of capacity to supervise compliance with the Bill and other legal obligations should be addressed before the proposed amendments take effect.
Director: Financial Intelligence Centre
20 August 2007