impact of 4th money laundering directive for online gambling

The 4th Money Laundering Directive and its potential impact for

online gambling operatorsPeter Howitt

http://www.ramparts.eu/

© 2010 KPMG LLC, an Isle of Man limited liability companyand a member firm of the KPMG network of independent member firmsaffiliated with KPMG International Cooperative ("KPMG International"), aSwiss entity. All rights reserved.

AMLD IV – Very High Level

There is a risk-based evidence-driven AML party in Europe…

and nearly everyone is invited

25/04/2023Ramparts is a European law firm based in Gibraltar. Ramparts is the trading name of Rampart Corporate Advisors Limited, Company registration No. 107531. We are qualified to advise on English, Gibraltar and EU law.

2



AMLD IV – High Level• Covers gambling entities (though

Gibraltar and the UK have applied the principles of the 3rd Money Laundering Directive to online gambling)

• Requires multi-level risk based assessments and evidence driven Risk Based Approach (“RBA”)

• Lots of practical elements yet to be determined and decided

• Unlikely to have practical operational impact for obliged entities until after 2016

• Likely to impact regulators, Govts, gambling operators and financial services firms

• Significant gear-change to more EU federal and State approach to AML where all key stakeholders have obligations for RBA

• Overall it is positive for the online gambling industry (particularly given evidential approach)

• However don’t underestimate: risk of even more cross-border legal

confusion and compliance costs law of unintended consequences; or the possibility of mis-use of AMLD IV


3



AMLD IV - Introduction• Recognition of need for AMLD IV to: • reduce cross-border complexity• safeguard from criminality and terrorism• safeguard economic prosperity of EU by

ensuring efficient business environment• contribute to financial stability and soundness

of the financial system• ensure consistency between EU and

international (particularly the FATF Recommendations)

• increase consistency (but not harmonisation) of national rules

• introduce harmonised criminal offence of money laundering across Europe (and certainty of the predicate offence of tax related crimes)

• Who Will be covered?–Very many people including all online

gambling operators for the first time (previously only land based casinos were covered) (Article 2)• General Approach:

–Sets some common standards but leaves MS, various regulatory bodies and obliged entities (“OE’s”) to assess risk and take adequate measures commensurate with risk for country, sectors, transactions and customers

–Less prescriptive than 3AMLD on what is considered high or low risk and the measures to be taken


4



AMLD IV - Headlines• Headlines

–Aimed at facilitation of cross-border information sharing and standards but minimum legal harmonisation in most respects

–SDD significantly reduced–CDD thresholds for traders for cash

transactions reduced from 15K to 7.5K–Minimum set of principle based rules for

administrative sanctions for breach–Tax crimes included as predicate offence for

defining criminal activity–All companies to hold and share information

on beneficial owners (no BVI approach)

–National Risk Assessments required and Nationals measures based on those NRAs

–Closer cross-border co-operation between FIUs and with EBA and other supra-national bodies (“SB’s”)

–CDD: simplified, standard and enhanced continue to be allowed but much more evidence and multi-variant risk-based focus for determining the risk and measures to be taken to manage and mitigate

–3rd Country Equivalence White List Removed (now RBA) and includes extra-territoriality provisions for FI Groups

–FI’s removed from ‘in principle’ SDD waiver


5



AMLD IV - Headlines• Headlines (continued)

– Risk based supervision recognised for regulators to allow better focusing of resources

–Increased PEP checking requirements for PEPs and their affiliates (domestic and international)

–MS required to identify, understand and mitigate AML risk by Risk Based Assessments (RBA’s)

–MS can gold-plate the Directive for national risks

–MS supported in RBA’s by supra-national EU supervisors bodies such as EBA and also Europol and also should share RBA’s between each other

–Obliged entities required to identify, understand and mitigate risks and to document and update assessment of risks

–All sectors (e.g. gambling) and all operator’s client’s sectors now to be subject to all relevant MS guidance + central (Federal) guidance + operator review and evidence

–Operators will need to know much more about their customer base and their customer’s business and beneficial owners

–Operators will need to document their risk assessed approach and findings even more

–Independent audit of the same will be required in many cases (for larger operators)

–The work of the EBA and other SB’s will be crucial in dealing with lack of harmonisation, cross-border issues, technical standards for defining and evidencing RBA


6



AMLD IV – Gambling Relevant• Recital 13:

–“the use of the gambling sector launder the proceeds of criminal activity is of concern” (is this statement risk based and evidence driven?)

–“Obligation for all gambling operators to conduct CDD for single transactions of EUR2,000 [& consider applying to wagers and winnings]”(Comment: The statement and the hard-coded more-restrictive treatment of gambling cause some concern).• Recital 23:

–OE’s can rely on 3rd party introducers or partners to carry out CDD but regulatory obligations remain with OEs

• Recital 31:–Data protection sensitive sharing of

information for fraud prevention not extended to gambling OE’s - only FI’s and competent authorities (however as PSP’s are FI’s there is scope for operators to benefit indirectly)

–Gambling means ‘any service involving wagering in games of chance including those with an element of skill such as lotteries, casino, poker and betting transactions’.


7



AMLD IV – Gambling Relevant• Articles

–MS can extend scope to more categories of obliged undertakings (Art 4) and may adopt stricter provisions (Art 5)

–The MS RBA will be used to consider application of additional measures by local OE’s (Art 7)

–MS must ensure OE’s identify and assess AML and TF risks taking account of various risk factors including customers, countries, products, services, transactions and delivery channels (Art 8) proportionate also to nature and size of the OE

–Operators to document, update and make available their RBA’s to the authorities

–Well documented policies, controls and procedures required for OE’s senior Compliance Officer usually required but

depends on size and nature of the OE an independent audit may be required of

policies, controls and procedures when appropriate for size and nature of the business

(Art 8)


8



AMLD IV – Gambling Relevant• Articles - CDD

–CDD required, inter alia, for business relationships and occasional transactions amounting to EUR15,000

–However, gambling OE’s can only benefit from a EUR2,000 occasional transaction limit(Art 10)(Comment: Looks like targeting of gambling sector as higher AML risk prior to evidential stage)

–CDD includes: Identification on the basis of independent source

(verification issues) Identification beneficial owner =25% (B2B

issues)

(Art 11)

–However risk based approach to above but taking account at least of variables specified in Annex 1 re: Purpose of relationship, level of deposits/assets and size of transactions Regularity/duration of relationship

–Verification to take place before (or MS may allow during based on risk) establishment of business relationship or carrying out the transaction or must terminate and may need to report to FIU why CDD not provided

–Applies to all new and existing customers (Art 12)


9



AMLD IV – Gambling Relevant• Articles - SDD

–SDD allowed with MS approval–OE’s must however still ascertain that the

relationship or transaction represents lower risk(Art 13)

–Indicative factors for lower risk contained in Annex II include: public companies and administrations customers in EEA and other low risk territories products where risk is managed by other factors

such as purse limits (e.g. some e-money)(Art 14)

EBA and other SB’s to issue guidelines (within 2 years) addressing SDD issues (Art 15)

• Articles – EDD–EDD required in certain circumstances

specified in Directive (foreign, local and international PEPs most relevant - still risk based)

–Applies to family members and close associates of PEPs (Art 21)

–Must also take account of indicative higher risk factors in Annex III including:

- nominee shareholder companies- personal asset holding vehicles- non face to face relationships- geo-risk- national and SB guidelines

(Arts 18 & 19)


10



AMLD IV – Gambling Relevant• Articles – Reliance on 3rd

Parties–Can rely on other OE’s or even persons meeting

AMLD IV equivalent obligations for certain CDD (identification and verification, beneficial ownership, purpose of relationship)

–Must have ability to request copies of all documentation and data used by such party for identification and verification on demand

–MS must allow Home and Host regulator to consider reliance on Group entities (that are not OE’s) if following same AML policies(Arts 24 & 26 & 27)(Comment: Article 27 implies that AML supervision should be based on Home State and only Host State for local branches and subsidiaries but it does not enshrine this. This means MS are allowed to continue to determine that the AML of the Host MS (where the consumer is) applies even to incoming EEA operators regulated in their Home State.)

• Articles – Record Keeping–Must maintain CDD records in accordance with

national law and requirements for min of 5 years and no greater than 10 years and customer transaction data for min of 5 years and then deleted unless covered by additional MS legal requirements(Art 39)

–MS must maintain comprehensive statistics for purposes of the national RBA including on size and importance of covered sectors and SAR’s, investigations and court proceedings relating to AML and CT

–Consolidated reports to be provided to the Commission(Art 41)


11



AMLD IV – Gambling Relevant• Articles – Policies,

Procedures & Training–Group wide AML required for multi-nationals–Must also cover group companies outside of

Europe–SB’s to provide Group AML guidelines

(Art 42)–Training of relevant employees

(Art 43)

• Articles – Supervision–Gambling operators must be authorised and

persons who effectively direct or control the entities must be fit and proper

–On-site inspections allowed for FI’s, CI’s and gambling OE’s

–OE’s with branches or subsidiaries must respect Host State MS AML too(Arts 44, 45)Comment: very loosely drafted Article and not clear what the on-site inspection requirement means across borders. Also continues to leave open ability for Host MS to regulate incoming OE’s operating under cross-border freedom of services basis.


12



AMLD IV – Gambling Relevant• Articles – Sanctions

–Civil, administrative and criminal fines permitted–Directors and responsible persons of an OE can

have measures applied to them directly–Competent authorities will co-operate across-

borders to allow effective supervision, investigation and sanctions

–Sanctions for systemic failings in CDD, STR’s,, record keeping and internal controls must include possible: public name and shame cease and desist withdrawal of authorisation suspension of manager or director fines of 10% total annual turnover (corporates or

EUR5m (individuals) 200% of profits gained/loss due to the breaches(Art 55 & 56)

–Legal persons (corporates) can be subject to sanctions for omission or failure to exercise control or supervision by any authorised agent, controller or decision maker(Art 57)


13



AMLD IV – Major Issues•It is all about cross-border issues for

online operators •Home State AML usually applies but in

7- 9 States the AML of the country of the customer may also be applicable

•Home State AML can also apply for operators with local agents, group companies and even commercial partners (see, e.g. e-money sector debacle)

•a 2012 EBA Report highlights the god-awful mess which is current AML law and practice for EMIs and PIs (note an FOI to the EBA on this Report was recently rejected)

•PEP checking is a major issue where you have customers in multiple territories who you need to check for local or foreign or international political exposure

•Confusion over which laws apply and which FIU's to report to will persist (particularly in gambling)

•Online gambling is new to many AML structures in Europe - likely to mean that it does not work well, is not evidence based or is subject to further gold-plating during transposition


14

http://www.esma.europa.eu/system/files/jc_2012_086_e-money_report_-_december_2012.pdf

http://www.asktheeu.org/en/request/report_on_the_application_of_aml%23incoming-1346



AMLD IV – Gambling Relevant• Compliance Costs

–Significant compliance costs managing AML in a field which is fragmented and for which the AML practice is not often published or known outside of banking and similar services (= duplicative compliance)

• Lobbying and Stakeholder Participation–Gambling operators and associations

must ensure that the industry lobbies effectively for tailored National and Supra-national RBA’s relating to gambling and online gambling

–There is no obvious supra-national body for gambling (a deficit in the Directive that will likely lead to sector discrimination, lack of evidence and policy based transposition)

–Possible need for locally appointed AML representatives to report in local language (= multiple reporting)

–Risks that courts will not wish to intercede where an MS states legal preventative action against operators based on AML (even if not risk-based or evidence based)


15



Timelines• Timelines

–Draft Proposed 04/02/13 following consultation with large number of stakeholders in 2012

–Likely to take significant time to be finalised, agreed and published (2013/2014)

–Pending formal adoption by European Parliament

–Two year timeline for transposition thereafter (2016+)

–Based on 3rd AMLD effective date of Transposition may be even later in many MS (2018+)

–Practical guidance to be issued by Central European Bodies such as EBA within 2 Yrs of transposition

• Final wording will depend significantly on:–Influence of Key Member States

(particularly UK & Germany)–Lobbying by all affected industries–SB’s and National Regulators / FIU’S input–Other Interested Parties input and

coordinative efforts (e.g. GBGA, EGBA, RGA, EMA)


16

http://www.gbga.gi/

http://www.egba.eu/

http://www.rga.eu.com/

http://www.e-ma.org/



Some e-money lessons• 1st E-money Directive

–The 1st e-money Directive (2000) intended to open up certain stored value payment products wider than just banking sector

–Very poor uptake in Europe compared to anticipated with some exceptions (e.g. UK private sector products and Italy public sector products)

–Many countries did not support/understand the industry or approve operators for the sector

–Legislation was poorly drafted and had many unnecessary commercial restrictions


17

• Enter 2nd EMD (2009) in which the EU required:

–a degree of harmonisation to avoid fragmentation or gold-plating of some licensing or operational requirements

–alternative payment service providers are deemed important for social access and for health of a diverse financial system

–less commercial restrictions on unrelated business allowed by EMI's

–increased use of SDD to encourage product take up

–lower capital requirements



Some e-money lessons• Enter German transposition

–The response by Germany to implementation of the 2nd EMD and the related PSD was something of a surprise.

–Despite the purpose and structure of 2EMD being to encourage the market Germany introduced gold-plated AML restrictions and requirements (exceeding 2EMD)

–Germany's AML structure is based on the normal AML territoriality principle (this means they could not enforce the new AML provisions against foreign EMIs)(Comment: given Germany's resistance to the e-money sector it had no domestic EMI's and many German companies had obtained license in the UK in order to passport back into their cultural home-base)

–Germany therefore focused on severe limitations for any locally established distributors or agents of EMI's

–Made it almost impossible for EMI's to work with local petrol stations, shops etc. where prepaid cards would usually be sold

–Made EMI distributors subject to direct AML requirements with no legal justification/evidence base

–Severely reduced use of SDD–Relied on minimum harmonisation effect of

AML legislation –E-money sector tried to reason with the

German authorities (there was a muted public legal response by a stunned e-money industry – though an ECJ case would have had strong grounds)


18



Some e-money lessons–The behaviour of the German politicians

and regulator was genuinely a surprise to the whole industry who continued to try to negotiate thinking that a misunderstanding must have occurred

–Some grounds to state that Germany could be accused of a genuine exercise in bad faith (or at least highly re-active) during transposition of 2EMD

–The effect (as noted to the Commission by the EMA in their 2112 response to the consultation process for reform of AMLD III) was to quickly reduce the fledgling e-money sector relating to German consumers by 60%

–These issues have helped pushed forward the need for EBA and similar SB support to help avoid defensive regulatory responses in markets dominated by ‘foreign’ European operators

–Ironically German failed to support e-money industry when it started, failed to grant E-money licences, failed to transpose European law requirements and then appeared aggrieved that it did not have control and oversight over its own domestic market (a familiar issue in online gambling)

–E-money industry will now be subject to EBA guidelines and oversight to support the e-money sector and reduce the lack of consistency and fairness (hopefully)


19



Some e-money lessons• BE PREPARED:

–German treatment of e-money (which was a regulated financial service subject to a second maximum harmonisation directive) should be understood and considered very seriously by the online gaming industry

–Inclusion of online operators within AMLD IV and continued allowance of minimum harmonisation means that operators could easily find they are forced to close down a market (or significantly restrict it) on unjustified AML grounds

–AML grounds less easy to challenge (and for which the sanctions would be significant) where Treaty arguments under freedom of services may have much less effect

–If AML is mis-used the online industry has significantly more resources than the e-money sector and is used to referrals to the ECJ

–However, unlike cross-border arguments under EU Treaty laws, the seriousness of claims of AML breach and the ability to cut off access to local partners and customers with such claims may mean that the operator may have effectively lost the market before they win any case

–All interested parties in this sector should take time to understand the German e-money debacle of the last few years - forewarned is forearmed.

–Hopefully it will not materialise but ‘hope for the best and plan for the worst’


20



Final Thoughts• AMLD IV means:

–Gambling operators can demand evidence (and not policy) based law

–However OE’s must do the same and ensure they take evidence based RBAs

–OE’s required to prove their views on risk of sectors, geography, clients, due diligence, training and monitoring, PEP checking etc.

–Likely to lead to very significant increase in compliance costs and use of third party service providers

–Must engage with cross-border stakeholders to help them understand risks and mitigations in your sector

–Gambling industry should: demand a supra-national authority that takes

account of online gambling within Europe based on evidence

engage with relevant stakeholders for gambling to issue guidelines on applicable AML rules for cross-border operators and to ensure no unwarranted extension of AML obligations to partners

prepare for potential mis-use or lack of understanding of the sector or plain poor transposition of AMLD IV in a manner that restricts cross-border operators (particularly where local gambling law restrictions are not lawful under European law – “back-door”)


21


Thank you

Peter Howitt, Ramparts Lawwww.ramparts.eu


impact of 4th money laundering directive for online gambling

Documents

kpmg llc

eu law

member firm

european law firm

low risk

online gambling industry

eu federal

company registration