02Jul

Financial Action Task Force: June 2024 update to Grey List jurisdictions

2nd July 2024 Chris Biggs 67

The Financial Action Task Force’s (“FATF”) June Plenary concluded on 28 June 2024, with the announcement of changes to its list of Jurisdictions under Increased Monitoring (“Grey List”).

The changes to the Grey List are as follows:

Jamaica and Turkey are no longer subject to increased monitoring by FATF, due to “significant progress” in addressing the strategic anti-money laundering (“AML”) and counter-terrorism financing (“CTF”) deficiencies previously identified during their mutual evaluations. Even though these countries have been removed from the Grey List, they will continue to work with FATF and their local FATF-style regional bodies to continue improving their AML/CTF regimes.

Conversely, FATF have added Monaco and Venezuela to the Grey List, meaning these jurisdictions have committed to implement an action plan to resolve strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing within agreed timeframes.

FATF made no changes to its list of High-Risk Jurisdictions subject to a Call for Action (“Black List”), which at the time of writing includes the Democratic People’s Republic of Korea, Iran and Myanmar.

A full list of high-risk third counties on FATF’s Grey and Black Lists can be found on its website.

As discussed in our previous blog, the Gambling Commission recently reminded licensees in its Emerging money laundering and terrorist financing risks from February 2024 to conduct robust customer due diligence checks in relation to any customer relationships associated with the jurisdictions on the Grey List.

Additionally, holders of casino operating licences issued by the Gambling Commission are required by regulation 33(3)(a) of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 to conduct enhanced customer due diligence and enhanced ongoing monitoring in any business relationship with a person established in a jurisdiction named on the Grey or Black Lists (a ‘high-risk third country’).

Next steps

We recommend that all licensees review their AML/CTF policies, procedures and controls, including business risk assessments, to ensure appropriate measures are applied in relation to high-risk third counties including, from July 2024, Monaco and Venezuela. In addition, licensees should diarise the date of the next FATF Plenary meeting, so they can check if there are further updates. FATF’s next meeting will take place in October 2024.

Please get in contact with us if you require assistance reviewing your AML/CTF policies, procedures or risk assessments or with any other AML/CTF compliance matters.

13Jun

Gambling Commission AML updates: Changes to legislation

13th June 2024 Chris Biggs 74

On 24 May 2024, the Gambling Commission published four notices on its AML Hub, relating to recent changes to legislation and the Licence Conditions and Codes of Practice (“LCCP”) impacting the anti-money laundering (“AML”) and counter-terrorist financing (“CTF”) obligations of licensees.

These notices cover: (1) Scheduled LCCP update: new PML requirements; (2) High-risk third countries; (3) DAML exemption provisions for the regulated sector; and (4) Politically exposed persons.

We summarise each of the notices below.

Scheduled LCCP update: new PML requirements

On 1 May 2024, the Gambling Commission published its Summer 2023 consultation response, announcing it will introduce the changes to personal management licence (“PML”) requirements in the LCCP as proposed in the Summer 2023 consultation. For detailed analysis and insight into this announcement, as well as guides and tools for PMLs, please see our recent article White Paper Series: Changes to Personal Management Licences.

Specifically, the Gambling Commission will, from 29 November 2024, require the person responsible for a licensee’s AML and CTF function, as head of that function, to hold a PML. The Gambling Commission points out that this will include:

for holders of casino operating licences issued by the Gambling Commission (“Casino Licensees”):

the person responsible for compliance with The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (“MLRs”) (and appointed in accordance with the MLRs). Where appropriate, with regard to the size and nature of the business, this individual “will be a member of the casino’s board of directors (or equivalent management body if there is no board) or of its senior management…”; and
the person responsible for submission of reports of known or suspected money laundering or terrorist financing activity under the relevant legislation (and appointed in accordance with the MLRs), which will be the Casino Licensee’s nominated officer;

for holders of licences other than casino licences, where an individual has been appointed to submit reports of known or suspected money laundering or terrorist financing activity under the relevant legislation, that individual.

The above requirements apply to all licensees, except ancillary remote licensees. Small scale operators will also remain exempt from these requirements in accordance with licence condition 1.2.1 (6).

Key point

The Gambling Commission is now accepting PML applications for these roles and recommends that applications “should be submitted in good time so that the PMLs are in place on 29 November 2024.” Therefore, licensees must ensure PML applications for these roles (if they are currently occupied by individuals who are not PML holders) have been submitted and granted before the extended requirements come into force on 29 November 2024.

High-risk third countries

Casino Licensees are required by the MLRs to conduct enhanced customer due diligence and enhanced ongoing monitoring in any business relationship with a person established in a high-risk third country or in relation to any relevant transaction where either of the parties to the transaction are established in a high-risk third country.

With effect from 23 January 2024, the MLRs were amended by The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2024 to update the meaning of a ‘high-risk third country’.

Instead of referring to a separate schedule that contained the list of high-risk third countries, regulation 33(3)(a) of the MLRs now defines a “high-risk third country” as “a country named on either of the following lists published by the Financial Action Task Force as they have effect from time to time—

High-Risk Jurisdictions subject to a Call for Action;
Jurisdictions under Increased Monitoring;”.

The Gambling Commission has confirmed that it will update its The prevention of money laundering and combating the financing of terrorism guidance “in due course” to reference these changes.

Key point

In order to keep abreast of which countries are high-risk countries, Casino Licensees must refer directly to the lists published by the FATF of ‘Jurisdictions under Increased Monitoring’ and ‘High-Risk Jurisdictions subject to a Call for Action’. The Gambling Commission points out that these lists are updated 3 times a year on the final day of each FATF Plenary meeting, which is held every February, June and October. The dates of these meetings – which we recommend licensees diarise – are published several months in advance, in the FATF’s events calendar and the FATF list of countries are updated and published in full on the FATF website.

Defence against money laundering (“DAML”) exemption provisions

On 26 October 2023, The Economic Crime and Corporate Transparency Act 2023 (“ECCT”), updated the Proceeds of Crime Act 2002 (“POCA”) and introduced two new exemptions to money laundering offences that apply to casinos (and other businesses in the regulated sectors).

Exemption from authorised disclosure requirement

Section 182 of the ECCT enacted an exemption under sections 327, 328 and 329 of POCA which affects paying away funds under £1,000 when exiting a relationship with a customer, where there is knowledge or suspicion of money laundering or criminal property.

This means that if a Casino Licensee has knowledge or suspicion of criminal property, it can transfer money or other property owing or belonging to a customer for the purposes of exiting that customer relationship, without needing to submit an authorised disclosure to the National Crime Agency (“NCA”), provided the value is less than £1,000 and any customer due diligence measures required under the MLRs have been completed before transferring or handing over the money or other property.

Exemption for mixed property transactions

Section 183 of the ECCT, enacted an exemption under sections 327, 328 and 329 of POCA for mixed property transactions which allows Casino Licensees to “ring-fence funds they believe are criminal property and transact with funds outside of those ring-fenced funds” where they know or suspect that part – but not all – of funds held on behalf of a customer are criminal property.

This exemption will apply provided:

it is not possible, at the time the act (i.e., the Casino Licensee’s transfer of funds) takes place, to identify the part of the funds or property that is the relevant criminal property; and
the value of the funds in the account or accounts, or of the property so held, is not, as a direct or indirect result of the act, less than the value of the relevant criminal property at the time of the act.

Key point

In both of the above circumstances, Casino Licensees will still need to report their suspicions of money laundering to the NCA, but are not required to submit an authorised disclosure and obtain consent from the NCA to avoid committing money laundering offences under sections 327, 328 and 329 of POCA. Importantly, these exemptions do not apply to non-Casino Licensees, so those businesses continue to be subject to authorised disclosure requirements in the above scenarios.

Politically exposed persons

With effect from 10 January 2024, the MLRs were amended by The Money Laundering and Terrorist Financing (Amendment) Regulations 2023 (“2023 Amendments”) to address the treatment of Politically Exposed Persons (“PEPs”) who are entrusted with prominent public functions by the UK, their family members and known close associates (collectively, “Domestic PEPs”).

The 2023 Amendments introduce a proportionate and risk-based scale for regulated firms in their assessment of a Domestic PEP vs non-Domestic PEP. Specifically, this means that Domestic PEPs must still be subject to enhanced customer due diligence measures, but should, as a starting point, be treated as lower relative risk than non-Domestic (or foreign) PEPs.

We have previously discussed the 2023 Amendments in our article Treatment of Domestic Politically Exposed Persons under the Money Laundering Regulations.

Key point

Casino Licensees must bear in mind that it remains critical that the individual risks posed by PEPs are still assessed on a case-by-case basis: any risk factors identified that do not concern the customer’s position as a Domestic PEP, may still give rise to the obligation to conduct enhanced customer due diligence.

Casino Licensees should also note that the Financial Conduct Authority (“FCA”) is due to review and update its own PEP guidance by June 2024. Accordingly, the Gambling Commission’s guidance on the treatment of PEPs may be further updated, if there are amendments to the FCA’s guidance that the Gambling Commission considers should also apply in relation to Casino Licensees.

Next steps and Recommendations

Licensees should consider whether their money laundering and terrorist financing risk assessments, as well as their policies, procedures and controls, should be amended as a result of these changes and if so, ensure such amendments are prioritised.

Please get in touch with us if you would like assistance with PML applications, reviewing AML policies, procedures and risk assessments in the light of these updates, or with any other AML/CTF compliance matters.

01May

HM Treasury consultation: Improving the effectiveness of the Money Laundering Regulations

1st May 2024 Chris Biggs 93

On 11 March 2024, HM Treasury launched a consultation on Improving the effectiveness of the Money Laundering Regulations (the “MLRs Consultation”).

Background

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “MLRs”) place requirements on a range of businesses in the regulated sector (which includes casinos) to identify and prevent money laundering and terrorist financing.

In the MLRs Consultation, HM Treasury seeks views on proposed changes to improve the effectiveness of the MLRs as part of the Government’s wider programme of work set out in its Economic Crime Plan 2023-2026.

In the foreword to the MLRs Consultation, Baroness Vere, the Treasury Lords Minister, makes clear that “a key principle in the MLRs is proportionality” and that the Government is seeking to address areas of the MLRs where there is room to find a better balance between what is required of regulated firms (i.e. relevant persons within scope the MLRs, including casinos) and customers, and the risk of money laundering and terrorist financing.

Consultation Themes

The MLRs Consultation focuses on four core themes which we summarise below.

Making customer due diligence more proportionate and effective

Chapter 1 considers customer due diligence requirements, including enhanced and simplified checks, and explores key stakeholder concerns about the proportionality of the due diligence requirements. It further considers the various options to use the MLRs to achieve a “better balance” and support efforts to prioritise resource where it will have the greatest impact. The topics covered include:

whether the triggers for due diligence are sufficiently appropriate and clear, particularly for regulated firms that are not in the financial sector, such as casinos;
whether clarity can be provided to regulated firms on when to carry out ‘source of funds’ checks;
how best to support the use of digital identity when verifying customer identity;
when enhanced due diligence checks (“EDD”) should be required; and
if changes could be made to improve the proportionality and effectiveness of EDD in relation to High Risk Third Countries.

Strengthening system coordination

Chapter 2 considers a number of issues intended to strengthen the system coordination across the UK’s anti-money laundering and counter-terrorism funding (“AML/CTF”) regime. The changes proposed reflect in part the need to update the MLRs, to ensure effective cooperation as the system evolves to take account of new and emerging threats, technological change and changes to the legislative landscape. The topics covered are:

ways to ensure that key information sharing and collaboration gateways are open and useful;
whether Companies House should be added to the list of bodies with whom AML supervisors must cooperate; and
how regulated firms should use the National Risk Assessment of Money Laundering and Terrorist Financing to help target their compliance work.

Providing clarity on scope of the MLRs

Chapter 3 considers issues at the boundary of the AML/CTF regulation regime, and recognises that the regime, and the guidance that supports firms and supervisors to comply with it, needs to be kept updated to keep pace with wider regulatory and market changes following the UK’s exit from the EU. The topics covered are:

how the thresholds in the MLRs which are currently in Euros could be changed to Pound Sterling;
potential gaps in the regulation of trust company and service providers; and
how best to align registration and change in control measures for custodial wallet providers and cryptoasset exchange providers between the Financial Services and Markets Act 2000 and the MLRs.

Reforming registration requirements for the Trust Registration Service

Finally, Chapter 4 proposes a number of changes to the registration requirements for the Trust Registration Service, which are intended to increase transparency in relation to certain higher risk trusts, whilst reducing the administrative burdens on low-risk trusts.

Relevance to other open consultations

A. Reforms to the AML/CTF supervisory regime

The MLRs Consultation has been launched whilst the Government considers the responses to its June 2023 consultation on reforms to the AML/CTF supervision regime that was launched last year (see our previous article) (the “Supervisory Consultation”).

At the time of writing, no response to the Supervisory Consultation has been published. However, Baroness Vere confirms in the MLRs Consultation that the Government expects to determine the new model for the UK’s AML/CTF supervisory regime “in the coming months”. It is Baroness Vere’s intention that any amendments to the provisions in the MLRs pursuant to the MLRs Consultation will be supported by an improved supervision regime “further strengthening the UK’s overall regime for reducing economic crime”.

B. Cost of compliance survey

In parallel with the MLRs Consultation, HM Treasury is running a survey (the “Cost of Compliance Survey”) on the cost of compliance with the MLRs, in order:

to better understand how regulated businesses comply with the MLRs; and
to assess the impact of future changes to the MLRs.

You can view and respond to the Cost of Compliance Survey here.

Next steps

On 12 April 2024, HM Treasury announced it would be hosting a series of virtual, open roundtables to discuss the MLRs Consultation with interested stakeholders, including regulated businesses and their customers, supervisory bodies, law enforcement agencies, civil society organisations and members of the public. The first session for relevant persons regulated by HMRC and the Gambling Commission (i.e. casino licensees) was held on 18 April 2024. However, an additional session for all sectors and stakeholders will be held at 11am on Tuesday 7 May. Details for this session, including how to register, can be found here, and we encourage all casino operating licence holders (and other interested parties, including stakeholders) to participate in these roundtables.

We also recommend that casino operating licence holders (and other interested parties, including stakeholders) review and respond to the MLRs Consultation and the Cost of Compliance Survey.

Both the MLRs Consultation and the Cost of Compliance Survey are open until 11:59pm on 9 June 2024.

Please get in touch with us if you would like assistance preparing a response to the MLRs Consultation, or legal advice on any AML/CTF compliance matters relevant to gambling licensees in Great Britain.

11Mar

The Gambling Commission’s emerging money laundering and terrorist financing risks: February 2024 update

11th March 2024 Chris Biggs 118

The Gambling Commission released its most recent update on emerging money laundering and terrorist financing risks on 9 February 2024. This update covers five emerging risks that we set out in detail below.

Multiple cards and innovative payment methods

The Gambling Commission indicates that there are an increasing number of instances of “multiple stolen debit cards” being used to fund online gambling activities. Alongside virtual debit card products that allow multiple virtual debit cards to be linked to one bank account, these instances pose a significant money laundering and terrorist financing (“ML/TF”) risk.

The Gambling Commission points out the following (non-exhaustive) red flag indicators of which licensees should be mindful:

- the operator is unable to match the customer’s personal details with the card details;
- the operator does not have the ability to verify the card holder’s identity information; and
- there are multiple bank accounts being used to fund a customer’s gambling activity.

The Gambling Commission reminds licensees that they are required to have “robust customer due diligence and onboarding checks” in place. It points out that in accordance with Licence Condition (“LC”) 12 of the Licence Conditions and Codes of Practice (“LCCP”), licensees must review their ML/TF risk assessments as necessary in the light of “any changes of circumstances, including the introduction of new products or technology or new methods of payment by customers.” It also reminds licensees that they must consider whether checks on customer ID documents are sufficient to identify false, stolen or “mule” (third party) ID documents, in accordance with the identification and verification requirements set out in LC 17.1.1(1) and (4).

Risks associated with access to third party funds

The Gambling Commission states that customers who are in functions, roles or responsibilities that give them access to third party funds should be considered to present a higher inherent ML/TF risk. Such roles may include access to:

- the funds of vulnerable people;
- customer funds, in the case of banking, accounting or finance (for example);
- company funds; and
- charitable funds.

It points out that licensees should consider these risks at the start of the customer relationship and before any deposits are made, noting that in order to sufficiently identify these risks customer monitoring should be an ongoing process.

Updated FATF ‘grey list’

In stating that the Democratic Republic of the Congo, Mozambique and Tanzania have been added to the list of jurisdictions that are under an increased level of monitoring by the Financial Action Task Force (“FATF”), the Gambling Commission points out that these jurisdictions are placed on the FATF’s ‘grey list’ due to “strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing.”

It reminds licensees to conduct robust customer due diligence checks in relation to any customer relationships associated with the jurisdictions on the FATF’s grey list in order to mitigate the risk of ML/TF, including proliferation financing.

The above-listed countries were added to the FATF’s grey list on 27 October 2023. However, it is important licensees note that following the Gambling Commission’s February 2024 update, the FATF announced on 23 February 2024 that Barbados and Gibraltar have been removed from the grey list. The FATF’s recent announcement and full grey list can be found here.

Funds originating from crypto-assets

The Gambling Commission states that it is aware of cases of licensees “not sufficiently” considering the risks associated with customer funds where the funds have originated from crypto-assets. It reminds licensees that it considers crypto-assets to be high risk and it expects licensees to “appropriately scrutinise transactions throughout the course of customer and business relationships.”

Common operator failings

The Gambling Commission states that there continues to be numerous instances of customers being able to deposit large amounts of money before the first anti-money laundering (“AML”) review can be undertaken by the licensee against a customer, due to insufficient and/or ineffective source of funds (“SOF”) checks and enhanced customer due diligence or KYC triggers.

It states that licensees have been identified as “failing to critically review SOF documentation” instead relying on electronic checks, which includes relying solely on open-source information, such as Companies House records, to verify SOF information. Other issues include licensees failing to provide sufficient guidance to staff on how to review and verify SOF information and to determine what supporting documents should be requested.

To mitigate these risks, the Gambling Commission recommends:

- setting realistic and effective monetary and non-monetary thresholds/triggers for determining when customer interactions should take place;
- carrying out such interactions earlier on in the customer relationship;
- ongoing customer monitoring (including monitoring all transactions or activity). The monitoring of customer activity should be carried out using a risk-based approach. Higher risk customers should be subjected to a frequency and depth of scrutiny greater than may be appropriate for lower risk customers; and
- considering geographical, customer, transactional and product risk in all customer relationships.

Next steps

As a reminder to licensees, LC 12.1.1(3) of the LCCP requires that all operating licence holders (with the exception of gaming machine technical and gambling software licences) ensure that their policies, procedures and controls for the prevention of money laundering and terrorist financing are “implemented effectively, kept under review, revised appropriately to ensure that they remain effective, and take into account any applicable learning or guidelines published by the Gambling Commission from time to time”.

We recommend that all licensees review their ML/TF risk assessments as soon as possible in the light of the Gambling Commission’s update. In addition to any necessary updates to their risk assessments, licensees must update their policies, procedures and controls to take into account any changes made.

Please get in contact with us if you require assistance reviewing your ML/TF risk assessment and/or your AML policies, procedures and controls.

02Feb

Gambling Commission source of funding guidance: Two steps forward and one step back?

2nd February 2024 Jessica Wilson 118

In July 2023, we discussed the trials and tribulations of source of funding disclosure and the lack of clarity provided by the Gambling Commission as to what is expected from applicants, licensees and their investors. At that time, our understanding was that the Gambling Commission would publish guidance on its website by the end of July 2023, although no guidance was published until the end of November 2023. Now that we have the Gambling Commission’s guidance, do we have a clearer understanding of what the Gambling Commission requires?

What we were expecting

By way of recap, source of funding involves establishing the legitimacy of the source of the capital and revenue finance used in the licensee’s operation. It is a complex area and the lack of formal or detailed guidance from the Gambling Commission has resulted in applicants and licensees playing a guessing game as to what they should be disclosing to the Gambling Commission and when. Over the years, the Gambling Commission’s expectations have grown to be burdensome and novel, following an unpublished approach.

We were hopeful that the Gambling Commission’s guidance, once published, would provide that much needed clarity for the industry, along with an explanation of the basis for the Gambling Commission’s requirements.

Our understanding was that the guidance would be non-exhaustive and include example source of funding scenarios. We also expected the guidance to explain how the Gambling Commission divides investors into two groups when determining its source of funding requirements – unregulated and regulated – and that set thresholds would be put in place to trigger source of funding requirements.

What we were given

The Gambling Commission’s source of funding guidance has been included as sections within its Change of corporate control web page and What you need to send us when you apply for an operating licence web page.

The guidance is defined as a “general overview of when and what source of funds evidence is required”, caveated with confirmation that the Gambling Commission will “assess each application on a case-by-case basis according to risk”. Whilst the guidance is clear on when source of funding evidence is required, there are still murky waters on what source of funding evidence is required.

The Gambling Commission has indeed divided investor types into buckets, but instead of two, there are three different buckets; (1) unregulated, (2) regulated banks or investment companies investing their own money, and (3) regulated banks or investment companies acting as intermediary for an investor or pool of investors i.e. investment funds / financial institutions.

Each bucket has multiple sub-categories, resulting in 12 different categories of investor.

Two steps forward and one step back

We are pleased the Gambling Commission has recognised (and listened!) that clarity was needed and decided to publish its source of funding guidance, giving the industry a basis for its source of funding requests. It is also positive that the Gambling Commission appears to be applying a risk-based approach as evidenced by the thresholds that trigger detailed source of funding requirements.

However, whilst helpful in some ways, the Gambling Commission’s source of funding guidance now raises new question marks:

We had hoped the guidance would be separate formal guidance specific to source of funding. However, the guidance is buried within the Gambling Commission’s existing web pages that relate to change of corporate control and operating licence applications. Does the guidance and its investor categories apply in other source of funding situations such as capital raises and share issues that do not trigger a change of corporate control? We would expect the Gambling Commission to follow the same approach, but the position is unclear.

We now have clarity on when the Gambling Commission expects detailed source of funding evidence, but what the Gambling Commission expects to be disclosed is still vague. For example, for unregulated entities the guidance states: “Typically for established entities the latest set of filed financial statements can be sufficient evidence…For recently established entities, evidence of how the entity has been funded is required”. In respect of unregulated individuals, the guidance states: “Evidence of the individual’s source of funds will depend on what the source of funds is but examples include bank statements, investment portfolio statements and P60s”. Importantly, the guidance lacks example source of funding scenarios, which we had expected. Unfortunately, the position of what must be disclosed is no clearer than it was before, and we can only rely upon our previous experience with the Gambling Commission.

The Gambling Commission has used a combination of fixed figure and percentage thresholds to trigger source of funding disclosure. We understand the Gambling Commission’s intention is to take a risk-based approach, but it is questionable how this can be achieved if fixed figure thresholds are used, as there is the possibility that it could capture all investors, or none. For example, if a licensee received a £40,000 investment from 25 investors, totalling £1m, those individuals would not trip the £50,000 threshold and no detailed source of funding information would need to be disclosed. Conversely, if a licensee received a £1m investment from 20 individuals amounting to £50,000 each, detailed source of funding evidence is required for 100% of the investment. Testing every £ would be a risk-free approach, and not a risk-based approach.

It is a step in the right direction that investment funds are considered by the Gambling Commission separately from other investors, with investment funds being placed in their own investor group. This is an acknowledgement from the Gambling Commission of the complexities of investments made through an intermediary. However, the Gambling Commission requires a “schedule of underlying investors” from the intermediaries but gives no detail as to what such schedule should include. In our view, it would be unnecessary to provide full details of underlying investors that do not meet the source of funding thresholds set out by the Gambling Commission, and that an anonymised schedule would be sufficient (and this has been sufficient in the past based on our experience). However, if the Gambling Commission does require personal details of all underlying investors, this will continue to be problematic for investment funds who often have complex confidentiality agreements in place with their underlying investors.

FCA regulated entities that are underlying investors behind an investment fund are not treated the same as regulated entities that have made a direct investment. FCA regulated entities that have made a direct investment only need to disclose source of funding evidence if their investment is 10% or more of the total investment amount. However, if the FCA regulated entity is investing through an investment fund, that threshold percentage is reduced to 5%. It is not clear to us why there is a difference, particularly as FCA regulated entities should carry a lower risk, and our view is that there should be consistency.

On 15 December 2023 the Commission launched a consultation in respect of proposed changes related to financial penalties and financial key event reporting. One of the proposals is to introduce a new requirement for gambling licensees to submit a key event to report details of (a) individuals who acquire the equivalent of £50,000 or more worth of new shares in a rolling 12-month period, or (b) entities that acquire the equivalent of £1m or more worth of new shares in a rolling 12-month period. This proposal intersects with the source of funding guidance as it follows the thresholds for unregulated individuals and entities. The consultation states that if the financial key event creates a new controller, no key event notification is required as long as all of the information that would be included in the key event is included in the CoCC application. However, should a CoCC take place whereby the licensee issued £11m of new shares, with £1m of which being acquired by an FCA-regulated entity (equating to 9% of the investment, so they are not a controller), that entity would not be required to disclose its funds under the guidance (as it is less than 10% of the investment), but would be required to disclose under the proposed key event, as it is £1m or more. The proposal is subject to consultation, but we believe it is important that the Commission takes a consistent approach to the thresholds at which source of funding evidence must be disclosed.

We are pleased that the Gambling Commission has finally published some source of funding guidance and it is certainly a step in the right direction. However, there are still areas of uncertainty and new questions that have been raised. We wait to see how the Gambling Commission puts the guidance into practice.

How we can help

Harris Hagan can navigate you through your engagement with the Gambling Commission on source of funding, minimising disclosure for you and your investors wherever possible, as well as offer source of funding training, tailored to the specific needs of your business. If you would like to discuss further, please do get in touch.

21Dec

Treatment of Domestic Politically Exposed Persons under the Money Laundering Regulations

21st December 2023 Chris Biggs 124

On 14 December 2023, the UK Government laid The Money Laundering and Terrorist Financing (Amendment) Regulations 2023 (SI 2023/1371) (“Amendment Regulations”) before Parliament. The Amendment Regulations will amend The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”), to address the treatment of Politically Exposed Persons (“PEPs”) who are entrusted with prominent public functions by the UK (“Domestic PEPs”).

Amendments to the MLRs

The Amendment Regulations will introduce a requirement in the new paragraph 3A of Regulation 35 of the MLRs, stating:

“For the purpose of the relevant person’s assessment under paragraph (3), where a customer or potential customer is a domestic PEP, or a family member or a known close associate of a domestic PEP—

a) the starting point for the assessment is that the customer or potential customer presents a lower level of risk than a non-domestic PEP, and

b) if no enhanced risk factors are present, the extent of enhanced customer due diligence measures to be applied in relation to that customer or potential customer is less than the extent to be applied in the case of a non-domestic PEP.”

Regulation 35 will also be amended to include definitions for ‘domestic PEP’, ‘non-domestic PEP’ and ‘enhanced risk factors’, the latter of which means “risk factors other than the customer’s or potential customer’s position as a domestic PEP or as a family member or a known close associate of that domestic PEP.”

In a statement to the House of Lords, Baroness Vere of Norbiton, the Treasury Lords Minister, reiterated that domestic PEPs, or a family member or known close associate of a domestic PEP, must be treated as “inherently lower risk” than non-domestic PEPs by banks and other regulated firms. Baroness Vere further specified that the Government is making this change “to ensure that banks and other regulated firms take a proportionate and risk-based approach to the treatment of domestic PEPs”, which aligns with the Government’s approach to combating money laundering (“ML”) and terrorist financing (“TF”).

The Amendment Regulations will come into force on 10 January 2024.

Takeaway points for Casino Licensees

As a class of ‘relevant person’ listed under the MLRs, holders of a casino operating licence issued by the Gambling Commission (“Casino Licensees”) must comply with the MLRs.

Casino Licensees must therefore review and update their policies, procedures and ML/TF risk assessments to ensure they take into account the Amendment Regulations.

Please get in contact with us if you require assistance with reviewing your ML/TF risk assessment and/or your AML policies, procedures and controls.

12Dec

Gambling Commission releases its updated risk assessment of money laundering and terrorist financing in the British gambling market

12th December 2023 Chris Biggs 135

On 30 November 2023, the Gambling Commission published its updated money laundering and terrorist financing risk assessment for the British gambling industry in 2023 (the “ML/TF Risk Assessment”). The release of the updated ML/TF Risk Assessment has been a long time coming: the Gambling Commission had not updated its ML/TF Risk Assessment since December 2020.

The Gambling Commission sets out that the purpose of the ML/TF Risk Assessment:

“…is to:

provide a resource for the industry in informing their own ML and TF risk assessments
provide the Commission’s support to HM Treasury’s National Risk Assessment
inform and prioritise licensing, compliance, and enforcement activity to raise standards in the industry and meet duties under …”

Key points of note are:

The Gambling Commission reminds casino licensees to consider their obligations in the light of the update to the Regulations in September 2022 which requires those businesses to identify, assess, understand and mitigate the risk of proliferation financing.

The overall risk rating for each gambling sector has not changed since the Gambling Commission’s previous risk assessment from 2020 (the “2020 ML/TF Risk Assessment”).

The methodology applied by the Gambling Commission to assess the risks in the British gambling industry has been developed from its 2020 ML/TF Risk Assessment and it therefore recommends that the ML/TF Risk Assessment is read in conjunction with the 2020 ML/TF Risk Assessment.

Licensee requirements

Licence Condition (“LC”) 12.1.1 of the Licence Conditions and Codes of Practice requires that all operating licence holders (with the exception of gaming machine technical and gambling software licences):

conduct a risk assessment addressing “the risks of their business being used for money laundering and terrorist financing”;

following the completion of that risk assessment, ensure they have “appropriate policies, procedures and controls to prevent money laundering and terrorist financing”; and

ensure that their policies, procedures and controls for the prevention of money laundering and terrorist financing are “implemented effectively, kept under review, revised appropriately to ensure that they remain effective, and take into account any applicable learning or guidelines published by the Gambling Commission from time to time”.

Licensees must therefore ensure that they review the ML/TF Risk Assessment in detail, with a view to:

reviewing and refining (as applicable) their own money laundering and terrorist financing risk assessment in the light of the ML/TF Risk Assessment; and

updating their policies, procedures and controls to take into account any changes made to their risk assessment.

Please get in contact with us if you require assistance with reviewing your money laundering and terrorist financing risk assessment and/or your AML policies, procedures and controls.

11Jul

HM Treasury consultation: Reform of the anti-money laundering and counter-terrorism financing supervisory regime

11th July 2023 Chris Biggs 151

On 30 June 2023, HM Treasury published its consultation on reform of the anti-money laundering and counter-terrorism financing supervisory system (the “Consultation”). Released as part of the Government’s commitments within its Economic Crime Plan 2023-2026, the Consultation offers stakeholders the opportunity to provide their views on four possible models for improving the UK’s anti-money laundering and counter-terrorism financing (“AML/CTF”) supervisory regime. The Consultation also seeks responses in order to determine whether there is a need for a more formalised system of sanctions supervision, noting that most AML/CTF supervisors do not have explicit powers to supervise sanctions compliance and controls.

In the Consultation’s preamble, the Treasury Lords Minister Baroness Penn emphasised the Government’s motivations for its proposals:

“Money laundering is the lifeblood of organised crime… Terrorism financing threatens national security and facilitates atrocities we have suffered here in the UK and across the rest of the world. To protect the integrity of the UK’s financial and professional services sectors, we must also do more to address illicit finance linked to corrupt elites…”

The current situation

Presently AML/CTF is regulated by various supervising authorities which oversee businesses that conduct activities classified under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “MLRs”). Three statutory supervisors regulate various sectors under the MLRs, specifically: the Gambling Commission for the casino industry; the Financial Conduct Authority for financial institutions; and HMRC for a number of business sectors, including real estate agency businesses and accountancy, trust or company service providers not supervised by another authority or professional body. In addition, Professional Body Supervisors (“PBSs”) are responsible for supervising legal and accountancy firms.

However, in HM Treasury’s 2022 Review of the UK’s AML/CTF Regulatory and Supervisory Regime the Government concluded that, whilst there had been continued improvement to the regime, some weaknesses in supervision may need to be addressed through structural reform. The 2022 review set out four possible models for a future AML/CTF supervisory system and the Consultation further develops these four models, assessing them against three consultation objectives: (a) supervisory effectiveness; (b) improved system coordination; and (c) feasibility.

The proposed models

1. OPBAS+

In 2017, the Government created the Office for Professional Body Anti-Money Laundering Supervision (“OPBAS”). OPBAS was designed to ensure robust and consistent supervision of AML/CTF across the nation’s 22 PBSs. The Consultation proposes that OPBAS be given enhanced powers to increase the effectiveness of supervision by the PBSs.

The Consultation states this proposal would be most immediately feasible, as no structural changes would be required to the current regime. Evidently, this proposal would have little to no impact on the Gambling Commission’s regulation of AML/CTF, however it is possible that the Gambling Commission may seek to mirror any additional accountability mechanisms that this model would introduce.

2. PBS Consolidation

The Consultation proposes that instead of enhancing OPBAS, the number of PBSs be reduced. Specifically, either two or six PBSs would retain responsibility for AML/CTF supervision, whereby two oversee the legal and accountancy sectors respectively across the UK, or two PBSs oversee the legal and accountancy sectors respectively in England and Wales, Scotland and Northern Ireland. Two further variants proposed under this model relate to HMRC’s supervisory role for accountancy and trust or company service providers being removed or reduced.

Again, this model would retain the current system of supervision by PBSs but would reduce the inconsistency and complexity of the current system due to the number of PBSs. It is unlikely that this model would significantly impact the Gambling Commission’s regulation of AML/CTF.

3. Single Professional Services Supervisor

The Single Professional Services Supervisor (“SPSS”) model, as the name suggests, proposes that one single public body (existing or new) supervise all legal and accountancy sector firms for AML/CTF, and possibly some or all of the wider sectors currently supervised by HMRC. The Consultation suggests that the SPSS would be independent of any ministerial department, but accountable to HM Treasury. Its nature as a public body, accountable to Parliament, may be considered more appropriate: (a) because of the broad set of intervention powers it will hold; (b) because its policy remit can be set out in legislation; (c) to facilitate better information sharing; and (d) because it will be more flexible.

Again, it is unlikely that this model would significantly impact the Gambling Commission’s regulation of AML/CTF.

4. Single Anti-Money Laundering Supervisor

The Consultation’s proposal for a Single Anti-Money Laundering Supervisor (“SAS”) represents the most significant proposed change to the AML/CTF supervisory regime in the UK, and one that would change how Licensees are regulated in respect of AML/CTF.

The SAS, which would be a public body, would undertake all AML/CTF supervision in the UK, with the Gambling Commission and the other existing statutory supervisors and PBSs relinquishing their AML/CTF supervisory duties entirely. Similar to the SPSS model above, the SAS would benefit from being an operationally independent public body ultimately accountable to Parliament and HM Treasury.

The Consultation acknowledges that supervisors should take a risk-based and data-led approach to their AML/CTF supervision and it goes without saying that unless seamless communication and data-sharing between supervisors exists, there will be inconsistencies. One overarching supervisory body, such as the SAS, may therefore be best placed to consider data from all sectors and apply a consistent standard of AML/CTF regulation.

From Licensees’ perspective, there has been confusion about the Gambling Commission’s approach to AML/CTF for some time, particularly in relation to the inevitable cross over between AML/CTF and safer gambling, affordability and vulnerability. Licensees may therefore consider that the SAS model will introduce consistency to the AML/CTF supervision of casinos that operate in the UK and introduce a more proportionate and coherent regime. However, Licensees should note that were the SAS model to be introduced, they would be faced with: (a) dual regulation which will inevitably introduce an additional burden; and (b) supervision by the SAS, a newly created regulatory body that will almost certainly have less industry expertise than the Gambling Commission.

Responding to the Consultation

Whether or not the SAS is the favoured model will be influenced by the responses and evidence submitted to the Consultation. The Consultation is open until 30 September 2023. HM Treasury encourages responses to be submitted through its secure online survey, but responses can also be emailed to [email protected]. We recommend that all Licensees review and respond to the Consultation.

Please get in touch with us if you would like assistance with preparing a response or with any AML/CTF compliance or enforcement matters.

With credit and sincere thanks to David Whyte for his invaluable co-authorship.

03Jul

White Paper Series: Cashless payments – finally bringing the land-based sector into the digital age?

3rd July 2023 Bahar Alaeddini 164

In the year ending March 2021, nearly £910 million was generated from gaming machines in Great Britain (excluding those located in pubs). In total, there were nearly 170,000 gaming machines located in bingo premises (41%), adult gaming centres (35%), betting premises (15%), family entertainment centres (8%) and casinos (4%). In the period April 2020 to March 2021 (during the pandemic), the largest revenues, by a country mile, were generated by gaming machines located in bingo premises (41%) and adult gaming centres (35%), with revenues slowly declining in most sectors. There is no reliable data on the number located in pubs, or associated revenues, but the figure is likely to be in the region of 70,000.

A lifeline in the White Paper is the proposed review of cashless payments on gaming machines with the plan to remove the current legislative prohibition, set out in the Gaming Machine (Circumstances of Use) Regulations 2007 (the “2007 Regulations”), banning cashless payments directly on gaming machines.

The original purpose of the prohibition was to protect players from over-spending as it was assumed players would have more control over their play if they were playing with cash, providing natural interruptions in play by stopping their gambling to obtain more cash. The lack of a break in play is viewed as a lost opportunity for the player to consider whether they wish to continue to play and spend more.

The lifeline offered in the White Paper is hugely positive and could result in the long-overdue modernisation of the land-based sector, bringing it into the digital age.

Cash is dead

Since the 2007 Regulations, especially with the advent of contactless payments and global pandemic, non-cash payments have grown exponentially. Use of cash has declined across society with the expectation that it will not be used by 2035. In 2011, 72% payments in pubs were made by cash and, in 2020, this reduced to only 13%. In 2021, almost a third of all payments in the UK were made using contactless. This societal change has negatively impacted the land-based sector beyond belief, and it has been compounded by pubs no longer giving cashback and ATMs being removed. We now live in a world where hardly anybody uses cash. I – almost exclusively – use Apple Pay and regularly leave the house without cash or a bank card!

The restriction on using debit cards directly on gaming machines (credit cards are banned) has meant the land-based sector has been left behind. Whilst industry has been creative and found ways to make indirect debit card payments and protect players (in collaboration with DCMS and the Gambling Commission), take up has been slow and these are “not a fix-all solution”.

2018 Gambling Commission cashless advice

In March 2018, and in response to significant payment innovations in the retail economy, the Gambling Commission published advice on cashless payments in gambling premises (which remains in force), crystallising its position and key considerations for operators, as follows:

tracking play and collecting better data on player behaviour to make an informed assessment of those at risk of gambling-related harm;
providing tailored safer gambling information to players including transactional information on money spent/withdrawn;
player-led controls to enable better self-management such as a player’s own spend or withdrawal limits; and
the importance of gathering data both before and after the implementation of any measure to demonstrate the impact of control measures.

The guidance places responsibility squarely on operators to consider what measures are most effective and appropriate to their businesses. Further, it acknowledges the lack of evidence to suggest the optimum duration of a break, but sets out the expectation that, wherever possible, players should at least cease gambling and physically leave the gaming machine. Where players can access new gambling funds with only a limited or no physical break from the gaming machine, operators must nevertheless ensure players are otherwise provided a break from, or an interruption in, gambling before those funds can be used. The guidance also states the Gambling Commission “may consider taking regulatory action in individual cases if, for example, an operator was to increase the risk of harm to its customers without providing appropriate mitigations.”

DCMS will work with the Gambling Commission to develop “specific consultation options for cashless payments” (expected Summer 2023). DCMS is clear that any new or additional player protection measures will need to be in place before the legislative prohibition is lifted.

The Gambling Commission’s view is that the onus is on industry to demonstrate cashless payments can be offered without increasing gambling harm or crime. So, what does this mean for industry?

The White Paper has created a staggering volume of work for both DCMS and the Gambling Commission. As such, all proposals will not be treated equally, and a sceptical view is that cashless will not be a priority. As an important lifeline, it will require great effort by industry to keep it high on the agenda for DCMS and the Gambling Commission. One way to achieve this would be through an industry code, backed by evidence wherever possible, and promoting the associated benefits of cashless payments given, for example, low test-purchasing scores for gaming machines in alcohol-licensed premises. The greater the industry support, the more likely it is the proposed reform will be delivered in a timely, sensible and workable way.

Cashless industry code

Two of the challenges of developing an industry code are, firstly, gaming machines are in different types of gambling premises (each with their own unique “person, product, place” considerations), highlighting the difficulty of agreeing standards or codes of practice. By way of example, pubs are not regulated premises by the Gambling Commission. They are automatically entitled to offer gaming machines as part of their alcohol licence granted by the local licensing authority. Pubs and gambling premises will very likely have different baselines and priorities, and industry must inevitably set higher standards. The industry is better placed to do so and both DCMS and the Gambling Commission will expect them rise to the challenge. It is unclear what this means for pubs, particularly given their unsupervised nature, but given the 84% test purchasing fail rate (in 2019), they would be best placed to embrace a cashless industry code through amendment of the Social Responsibility Charter for Gaming Machines in Pubs issued by the British Beer and Pub Association.

Secondly, there are several types of cashless payment technologies each with different functionality. Unless banks facilitate player protection tools (for example, through online banking), physically or virtually presenting a debit card is very different from using a cashless gaming app or eWallet which connects to a gaming machine.

A practical solution would be to develop a cross-sector industry cashless code to reflect best practice and aim to install a minimum set of standards to address issues of risk. The central commitment would be to allow cashless payments whilst minimising the risks of gambling-related harm and protecting players. Standards may include the following:

a meaningful forced delay before the funds can be used (for example, 2 minutes, although in a cross-sector industry code it might be sensible to steer away from prescribing a timeframe);
personalised financial limits (deposit/spend) with clear messaging and calls to action;
personalised time limits with clear messaging and calls to action;
time and money spent totals with clear alerts;
prescribed maximum deposit in a single transaction or day etc.;
time-outs;
transaction history (ideally, searchable by last 24 hours, last week, last month etc.);
self-exclusion;
safer gambling messaging;
tracking player data to provide targeted messaging and/or interventions;
automatic disconnection from the gaming machine after inactivity with credit returned;
digital age verification to prevent underage gambling;
withdrawals must only be made to registered / the same card; and
restricted to one debit card.

Once agreed with DCMS and the Gambling Commission, compliance with the industry code could be incorporated as a licence condition in the Licence conditions and code of practice and/or gaming machine technical standards.

At the appropriate juncture, we will of course be happy to assist clients with their responses to the consultation where that would be helpful.

With credit and sincere thanks to Jessica Wilson for her invaluable co-authorship.

30Jun

Judgement by the company you keep: Licensees’ responsibilities for third parties

30th June 2023 Chris Biggs 161

On 19 June 2023, the Gambling Commission released its new hub addressing licensees’ responsibilities for third parties (the “Hub”). In its announcement, the Gambling Commission explained that the Hub sets out its expectations and requirements for licensees which enter into business relationships with third parties. This includes white label and other unlicensed partners.

The announcement comes as a warning to licensees who contract with third parties. There is a strong undertone of compliance in the announcement, reminding the industry that the Gambling Commission’s release of the Hub follows its recent “enforcement action against operators for failures related to due diligence checks on third parties.”

What is included in the Hub?

Primarily, the Hub sets out the Licence Conditions and Codes of Practice (“LCCP”) including social responsibility code provisions (“SRCP”) that impose obligations on licensees relating to their business with third parties.

SRCPs

The Hub sets out the following relevant SRCPs:

SRCP 1.1.2 Responsibility for third parties – all licences

This SRCP applies to all licensees who contract with third parties for the provision of any aspect of their business related to their licensed activities, and makes clear that they are responsible for third parties. It also requires licensees to ensure any contracted third parties conduct themselves, in so far as they carry out activities on behalf of the licensees, as if they were bound by the same licence conditions and subject to the same codes of practice.

SRCP 1.1.3 Responsibility for third parties – remote

This SRCP applies to all remote licensees.

The Gambling Commission further explains the requirements imposed on licensees by SRCP 1.1.2. It reiterates that it expects licensees will: (1) conduct adequate due diligence on third parties to “ensure (amongst other things) that they are competent and reliable”; and (2) have sufficient oversight and controls in place to ensure all activities are carried out in accordance with the LCCP.

The Gambling Commission warns that a failure to maintain adequate control of third parties can result in regulatory action against licensees, including suspension or revocation of an operating licence.

White label partnerships

There is limited detail included within the Hub specific to white label partnerships. However, the Gambling Commission importantly reminds licensees that the responsibility for compliance of all B2C gambling websites, including white labels, sits with the licensee and cannot be transferred to any other party. Licensees must know their customers and implement their controls to minimise any risk to the licensing objectives. A failure to do so may bring into question the licensee’s suitability to hold a licence.

The Gambling Commission directs licensees to section 7 of its Compliance and Enforcement report 2019 to 2020 for guidance on how it expects licensees to conduct their white label partnerships.

Early action after the White Paper

Echoing the Gambling Commission’s commitment in its Advice to Government, the White Paper sets out that:

“To ensure all licensees fully understand their responsibilities when entering into such arrangement, the Gambling Commission will consolidate existing information and good practice for operators on contracting with third parties, including white labels.”

Given the Hub was released less than two months after the White Paper, the Gambling Commission will consider this announcement as a box ticked, despite the relatively basic information provided.

Additional requirements or new guidance has not been published. This is, as expected, following the Gambling Commission’s view (as stated in its Advice to Government) that it considers the existing legislative and regulatory framework provides sufficient controls to address the current risks.

The release of the Hub is a timely reminder to all licensees contracting with white labels or other unlicensed third parties for any aspect of their business in Great Britain, that they, as the licensees, are ultimately responsible for the third parties with whom they contract.

Key takeaway

We recommend that all licensees review their policies, procedures and controls relating to third parties, including due diligence processes and contractual agreements to ensure they are fit for purpose and mitigate the risk of regulatory enforcement action, as the Gambling Commission will judge licensees based on the company they keep.

Please get in touch with us if you would like assistance with any due diligence, compliance or enforcement matters, or any aspect of your business and its arrangements with third parties.