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. Purpose
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. Introduction
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
Client identification
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.
Record-keeping
4.2 Interactive
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.
Jurisdiction
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.
4.6 Another
problem concerning jurisdiction is that interactive casinos are bound to be
situated outside
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.
4.9 The
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.
Licensing requirements
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.
5.5 In
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.
5.7 In
order to facilitate effective enforcement the legislation should also require a
licensed interactive casino to have a presence in
Capacity
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