financial intelligence centreREPUBLIC OF SOUTH AFRICA

Presentation to the Portfolio Committee on Trade and Industry on Online Gambling

2 March 2012

Presentation by: Pieter Smit

DISCUSSION POINTS

• Indicate South Africa’s international obligations in respect of online gambling from a money laundering / terror financing perspective

• Indicate vulnerabilities associated with online gambling from money laundering / terror financing perspective

• Indicate regulatory challenges in enforcing compliance in respect of online activities

INTERNATIONAL OBLIGATION

• Money Laundering: Objective is to hide the fact that crime has taken place - proceeds from crime are no longer associated with that activity, illegitimately acquired proceeds appear to be legitimate income

• Terrorist Financing: Objective is to hide the fact that terrorist activity will take place or is being facilitated

INTERNATIONAL OBLIGATION

• Financial Action Task Force (FATF) – South Africa is a member of the intergovernmental standard setting body on combating money laundering and terrorist financing (AML/CFT)

• FATF Recommendations set out the essential measures that countries should have in place to pursue money laundering/terrorist financing

• FATF Recommendations apply to financial and non-financial institutions including casinos – casinos include online, land and ship based casinos

INTERNATIONAL OBLIGATIONS

• Casinos should be subject to a comprehensive regulatory and supervisory regime that ensures that casinos have effectively implemented the necessary AML/CFT measures

• There should be legal and regulatory measures to prevent criminals or their associates from holding or being the beneficial owner of or a significant or controlling interest in or being an operator, of a casino

• Casinos should be effectively supervised for compliance with AML/CFT requirements

INTERNATIONAL OBLIGATIONS

• Regulators for casinos should have adequate powers to perform their functions including adequate powers to monitor and sanction – ensure that they have human, financial and technological resources to carry out their regulatory functions effectively

• Online gambling carry specific risks as it is non-face-to-face business – unable to verify customers physical appearance against photographic identification documents - need to rely on new technologies to verify identities of players

Transfer from one account to another

VULNERABILITIES

Person transfers funds into his on-line

gambling accountfrom a bank

account

Person conducts minimal or no gambling

Person instructs on-line casino

to transfer funds from

gambling account to different

bank account

Funds have moved from one account and possibly from one person

and/or one location to another with a break in the transaction trail in the on-line casino’s records

Opposing losing and winning bets

VULNERABILITIES

Two persons play on-line poker in

a game where the bets are not large

They place large enough bets to scare off

the other players

One person then deliberately loses

to the other

The “winner” has the funds paid into the bank

account of his choice

Funds have moved from one person and/or location to

another with a break in the transaction trail

in the casino’s records

Use by operator as a front

VULNERABILITIES

Person acquires domain and sets

up “on-line casino” for

registered punters only

Person opens bank account for

on-line casino

Criminal associates register

as “gamblers”

“Gamblers” lose to the casino and transfer funds from bank

accounts to casino account

Funds have moved from one person and/or location to

another with a break in the transaction trail

in the casinos’ records

VULNERABILITIES

Online flower shop, pet supply store etc.

On-line gambling institutions providing services illegally in US

US Banks processed financial

transactions to online gambling

institutions

Defrauded by setting up front corporations

& websites to disguise payments to online

gambling institutions

VULNERABILITIES

• Use of gaming facilities by on-line punters to transfer funds from one person to another and/or from one location to another

• Use of on-line casino by operator as a front to receive funds from and to persons and/or locations

• Increased money laundering risk because of possibility of collusion for the movement of funds

• Traceability of individual transactions and access to records is difficult.

• Alternative methods to establish and verify players’ identities in instances of non-face-to-face interaction

• Absence of human intervention means less or no possibility to detect suspicious activity through interactive casino facilities

VULNERABILITIES

• Proper implementation of customer identification and verification measures and record keeping is essential as it provides an audit trail for law enforcement and regulators in the event that a financial investigation is necessary - preservation of an audit trail of transactions for regulatory and law enforcement authorities is often the biggest part that an operator can play within an AML/CFT regime

• Investigations and supervision are hampered if records of financial transactions with South African link are located in foreign jurisdictions

REGULATORY CHALLENGES

• Supervisors must have powers and capability to access punter and transaction information held by an operator

• Criminal investigators must have powers and capability to access punter and transaction information

• Essential that all documentation and transaction records are located in South Africa/readily accessible without jurisdictional issues and international cooperation arrangements etc.

REGULATORY CHALLENGES (CONT)

• Challenges in respect of monitoring gambling websites based in foreign countries that will target South Africancustomers but will avoid any regulatory accountability – customers may not even realise that a particular website is foreign and illegal

• Regulators must have the recourses to not only supervise licensed operators but also to identify unlicensed/illegal operators and deny them access to South African market

REGULATORY CHALLENGES (CONT)

• Need to be measures in place to identify and curb South African players from participating in online gambling activities of operators outside of South Africa jurisdiction/ unlicensed operators – role of Financial Surveillance?

• Monitoring of financial transactions to identify illegal operators or to interrupt financial flows to illegal operators is necessary, but can be circumvented through fraudulent activity of operators

REGULATORY CHALLENGES (CONT)

Criteria for evaluating whether a form of gambling should be included in the legislative framework or not

• Potential abuse of online gambling must be considered in developing criteria for evaluating whether a new form of gambling should be included in the legislative framework or not

• Measures that preclude criminal involvement in the gambling industry generally and more specifically in the new forms of gambling must always be part of the equation

CONCLUSION

Criteria for evaluating whether a form of gambling should be included in the legislative framework or not

• Propose that betting exchanges and online poker not be allowed, but if so operators would have to be subject to all the regulatory measures against money laundering and terrorist financing as required by FIC Act

• Regulatory action should be possible against Internet Service Providers that host unlicensed/illegal casinos (consider inclusion of ISPs in licensing framework)

CONCLUSION (CONT)

DISUSSION

General Information: www.fic.gov.za

Telephone: 012 641 6000