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In addition to gambling laws or skill game laws, the DFS industry also falls under the jurisdiction and coverage of federal anti-money laundering (AML) laws.
A recently published American Banker article (paywall) highlighted that the UIGEA is not the only federal law which may require review to determine compliance by the DFS industry. Quoting the head of the Financial Crimes Enforcement Network (FinCEN), the article highlighted the scrutiny banks might face in processing DFS-related transactions:
Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network, said banks should understand the risks that fantasy sports companies could pose:
“It is like any business that they deal with … what is the model, what is the expected activity?” she said in an interview. “Just because it is new doesn’t mean it is that different from the basics of how they should think about it.”
More from the AB story:
Calvery said FinCEN does not oversee fantasy sports companies the way it does casinos, which have their own regulatory regime and money laundering requirements. But it is an area the agency is looking at. “Here is a business that purports to have large volumes of funds moving through it,” she said. “Like anything else, we will keep our eye on it.”
While a number of commentators perhaps wishfully urge that DFS operators should be able to “reasonably” look to their payment processors and piggyback on those providers’ compliance, that idea did not stop online poker operators from facing money laundering accusations over non-cash transactions.
When Black Friday came to online poker, the Department of Justice stood by the door and collected everything it could from the “grey men” (to paraphrase the band Steely Dan) to the detriment of operators, payment processors and players. Banks may decide that if “Black Friday” comes again — this time for non-compliant DFS operators — the banks would prefer it not fall on them.
Regulated legal gambling operators across the U.S. already have been subject to review of their anti-money laundering compliance and practices. The heavy fines assessed against both the Venetian and Caesars for inadequate compliance have been widely reported.
Nor should anyone think this is just a “gambling” issue. That FinCEN might view DFS differently than casinos affects only the level of compliance required. FinCEN reviews and enforces anti-money laundering law across the U.S.; banks and payment processors are the most frequent stories making the news, not just gambling operators.
Nor is the scope of review limited just to cash businesses. The federal Bank Secrecy Act has real teeth, for banks as well as enterprises that move money from one place/person to another.
So, does a typical DFS operation trigger obligations under federal anti-money laundering law? Almost certainly, as it involves player-to-player transfers of value through contests run by the sites. Where heads-up contests abound, so do opportunities for an illicit transfer of value, taking advantage of perhaps inattentive, unregulated operators and their payment processors.
However, even heads-up DFS contests would seem a cumbersome route for laundering money between two participants, given the attention any significant direct transfers would draw. Given the public posting of game results, and some measure of know-your-customer practices attendant to processing of non-cash deposits, either by sites or their payment processors, the practice is unlikely to be widespread. This issue seems likely to be more of a compliance matter than an area of actual illicit activity by sites or their customers.
Still, at least one site, Star Fantasy Leagues has been preparing for this regulatory compliance need from Day 1, implementing know-your-customer and anti-money laundering practices long before the recent DFS upheaval.
The recent announcement by FanDuel of its hiring of a former U.S. Attorney General to review its internal controls will certainly look into the adequacy of both know-your-customer and anti-money laundering measures in place at that operator. DraftKings‘ external review is likely considering the issue, as well.
While DFS compliance with federal anti-money laundering laws is unlikely to reach the scale required of traditional casinos and sportsbooks, expect some clarity will be sought for the industry and customers going forward. Self regulation is unlikely to pass muster.
Ominously, the American Banker article seemingly raises a red flag that could affect DFS players’ ability to take advantage of the UIGEA’s fantasy sports carve-out to access even legal, regulated DFS operations in the future.