We Need To Talk About Money Laundering

January 6, 2015

The European Commission’s 3rd Anti Money Laundering Directive was passed in 2005 and we now have a proposal for a 4th one (AMLD4). This Directive could have a big impact on the casino and other gaming operations in Europe but I question whether it will be effective in reducing money laundering. Before going into some of the detail of the new proposals it is worth understanding what money laundering is, the history of the directive and what is driving the need to make changes.

To put it simply money laundering is taking untaxed/undeclared money (usually the proceeds of criminal activity) and making it disappear and reappear, usually somewhere else, as perfectly legitimate. There is a whole industry that has grown up around this involving corrupt lawyers, accountants and bankers.

The 3rd AML Directive was based upon the recommendations of the Financial Action Task Force (FATF), an intergovernmental body created in 1989 to combat money laundering and terrorist financing.  Amongst the gambling industry FATF singled out casinos as places where money laundering could take place and recommended that any person transacting more than $3,000 should be identified. The initial proposal from the Commission for the 3rd AML Directive contained language that Government licensed casino operators had to either identify and verify the identity of people at the point of entry to the casino or carry out the same procedure when the player reached a transaction threshold of €1,000; both buy in or cash out. There is also the obligation to report suspicious transactions. It is rather amusing when you read the preamble to the 3rd directive and it says, “Massive flows of dirty money can damage the stability and reputation of the financial sector….” It seems to me that bankers need no help on that score!

I was consulting for a large US casino group at the time the 3rd Directive was proposed and we thought the €1,000 threshold to be ridiculously low; creating work with no apparent value. So I embarked on a series of meetings within the Commission, other European institutions and national bodies responsible for AML to try to convince them otherwise.

My meetings with the officials from the department at the Commission that was responsible for the Directive was laughable. Firstly, when asked why €1,000 was chosen as the correct threshold they said it was because “casinos deal in cash and it seemed like the right number”!  Now that is a good example of evidence based policy if ever I saw one. Then when asked why other forms of gambling, such as betting had been left out they were shocked. They had not realised that there was a legal distinction between betting and gaming and betting was not included despite the fact that it would be easy to launder money in a retail betting shop; most have little supervision and a punter could place approximately €5,000 bet on each side of a tennis match, each bet being placed in different shops owned by different companies.  One bet would lose the other would win, the punter would take the cash and a receipt – voila, clean money – on average only losing the bookies’ margin.  The officials had not appreciated this when drafting the directive but it was too late.

When we met with European politicians and Country Representatives they tended to agree that a €1,000 cash transaction threshold was too low and could agree to a threshold of €3,000. One Representative said that it was obviously too low, “I often take more than €1,000 in cash on Saturdays to do the weekly shopping”! Perhaps we pay our European officials too much.

In the end there was considerable support for a €3,000 threshold with only the French publicly holding out for €1,000. Getting the Directive agreed was a priority and as is usual in within the EU final agreement requires horse-trading. They split the difference and settled for €2,000.

We succeeded in convincing quite a few people that the transaction threshold should be only for cash out and not for total buy ins too; losing money is not laundering money. Unfortunately, law enforcement saw things a little differently. In Europe, law enforcement officials believe spending undeclared/untaxed money is laundering and a crime and it is the operators responsibility to report a crime if they believe one is being carried out. I remember a discussion at the time with a British policeman who said that it was important to have the threshold on buy ins too because they wanted to know who was spending the money; it might be from the proceeds of crime. He then asked me if I could prove that a £5 note in my pocket had not, at some point, been the proceeds of crime! If we are really going that far then we have certainly lost the battle.

The US took a different position; casinos are considered to be “financial institutions” and they only required identification when a player cashed out more than $10,000 on the basis that losing money was not laundering money but there is still the requirement to report suspicious transactions.  After years of inactivity the US Department of Justice has started to investigate US casinos and last year Las Vegas Sands agreed to pay $47 million to the to settle what could have become a criminal suit for failing to report suspicious transactions totalling almost $45 million from one player. The player in question transferred large sums from many different places throughout Mexico; money that the US Department of Justice said was the proceeds of drug trafficking.

You would have thought with all this focus and effort the amount of money laundered in the world would be getting smaller but it is not. At a conference in 2013, organised to discuss AMLD 4, the then Commissioner, Michel Barnier, stated that since AMLD3 was passed in 2005 things have gotten worse with over €2,000 billion laundered in 2009, approximately 3.6% of the world’s GDP. It is estimated that about 75% of this comes from “white collar” crime.

Jeremy Carver, from Transparency International, at the same conference said that the City of London, as the largest money market in the world is where the largest amount of money is laundered and if we want to get serious about this we should be focussing our AML efforts and resources on the world’s primary money markets. His company believes that 80% of all money is laundered through banks and other institutions. FATF, having given British banks a clean bill of health in 2007 revised their findings in 2011 and said that there was a “woeful and total abdication” by the UK banks with regard to policing money laundering.

AMLD 4 is supposed to take a risk based approach rather than a rules based approach and it will be up to each Member State to implement the directive according to the risks each State perceives in their particular industry sector. This means that based on the risk assessed a rules based approach will be implemented – not much different then. It is proposed that betting and other forms of gambling be included this time around and there has been some consultation around the transaction threshold. The French, now joined by the Italians, arguing for the €1,000 transaction threshold. Other countries are not too concerned whether it should increase, remain the same or be reduced.

When AMLD 4 is adopted gambling operators will no longer be able to rely upon identifying their customers at the point of entry but will have to identify them (and so keep a record) when they hit the transaction threshold and record what efforts they took to verify the identity. The effort that the operator will have to make to verify the identity of the player will depend upon the approach each country takes and that depends on the country’s risk assessment. The requirement to identify and verify the identity of a customer could be a significant operational problem and one that will lead to masses of data being collected with no apparent value. There must be rooms full of suspicious transaction reports and they will be joined by mountains of records of the identity (and what was done to verify the identity) of customers who hit the threshold. The lower the threshold the more records and the more noise they will contain.

I, like Jeremy Carver can’t help thinking that we cannot see the wood for the trees. Yes, it might be true that we read reports of a drug dealer who goes to a casino and loses money but it is rarely with the intent to launder money, it is with the same intent that he might go to a restaurant or a cinema – for entertainment. Laundering money (and I mean in the real sense) in large, well-managed and regulated casinos, where most transactions are recorded on cctv are not the places where it happens – it is too risky for the launderer. If we are going to focus on the gambling industry then the real emphasis should be on beneficial ownership. Who are the real owners? Just as with off-shore banks if I were a criminal who needed to launder my ill-gotten gains, I would own a relatively small casino or bank in a country where licensing is easy and ownership opaque and use it to make my money clean. But that would fly in the face of political reality.

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