reventing criminal risks Plinked to the sports betting market DG HOME AFFAIRS Pilot project “New integrated mechanisms for cooperation between public and private actors to identify sports betting risks” Action Grants HOME/2014/PPXX/AG/SPBX Final Report JUNE 2017 2 © European Commission (EC), The French Institute for International and Strategic Affairs (IRIS) June 2017 Reproduction is authorised provided the source is acknowl- edged. The preparation of this Report has been coordinated by IRIS, with the cooperation of several partners: The University of Liverpool, the University of Hamburg, the Danish Gambling Authority, CK Consulting and Clairance Avocats. The content of the report does not necessarily reflect the view of each of these partners individually. 3 Content Introduction 4 First part: How the new features of organised crime create additional risks for betting markets 8 I. Criminal activities at world level 10 II. Criminal markets and profiles in the EU 12 III. Lessons from growing criminal activities 14 IV. Gambling as a traditional criminal activity: History and main reasons 20 V. When the evolution of criminal behavior meets sports betting 23 Second part: Betting and criminal activity 26 I. The mutation of gambling and betting through internet 27 II. Description of illegal activities and criminal risks associated with sports betting 42 III. Payment processing and associated risks in online gambling 75 IV. Mystery benchmark: evaluating the compliance of sports betting operators in the EU 85 V. Scale of risks related to sports betting 87 Third part: Recommendations to limit sports betting–related criminal risks 92 I. First objective: Monitoring and controlling the legal betting activity 93 II. Second objective: fighting against the illegal market 100 III. Third objective: Favouring national and international cooperation 105 Suggestion to finance the fight against criminal risks linked to sports betting 111 Conclusion 113 List of interviews 116 Annexes 118 4 Introduction Few activities or economic markets have had a trajectory similar to sports betting. When the Internet emerged in the mid-1990s, the sports betting industry could hardly imagine the meta- morphosis it was about to face. The products, the bookmaking, the revenues changed completely, as the market could be reached by any individual with Internet connection, anywhere in the world. Even more importantly, by enabling street bookmakers to balance their financial accounts online, betting websites have connected the multiple physical betting networks of any world region. This transformation escaped serious public regulation, which in any case remained at national level. Except for horse racing, even the organisers of sporting competitions themselves did not have a say in the governance of the activity. Twenty years after the start of online betting, the situation is totally different. Today, betting constitutes an emerging subject of states’ public policy. EU Member States (MS) led the way by progressively licensing betting operators, with Great Britain (GB) leading the movement with the 2005 GB Gambling Act.1 Nowadays, some states are also progressively opening up online markets internationally. Witnessing a rapid growth in illegal activity, governments are particularly interested in collecting tax revenues, consumer protection and responding to emerging threats to public order. Around 2005, the first major match-fixing scandals began to alarm unaware, unprepared sport organisa- tions and public authorities. It soon became necessary for states to give due regard to this activity. All EU Member States have now introduced some form of regulation or changed legislation with regard to betting activity. With certain exceptions, EU betting regulatory authorities have chosen to liberalise sports betting in order to control it, to dry illegal markets, to, address threats to public order and sports integrity and to create conditions for economic growth. When comparing all national situations, the regulatory model chosen by most EU MS is non-prescriptive, meaning that public regulators are in general letting operators assess risks and define appropriate security pol- icies (Anti-Money Laundering (AML), Know-Your-Customer (KYC), monitoring and alert systems) when it comes to fighting criminal or integrity risks. In response, the major part of the European betting industry has gradually set in place internal risk-management mechanisms, notably to cover their own financial risks. This liberal regulatory model, or philosophy, is led by countries like the UK and Malta which argue that the gambling marketplace is rapidly evolving and constantly creating new products and technologies. Therefore, an excess of requirements and regulations would rapidly become outdated and cumbersome. The licensing objective is most likely to be met if operators are obliged to amend their procedures as new developments occur rather than wait for new regulations to be enacted by an external agency.2 One illustration is the position of the GB Gambling Commission, which has no regulation with regard to virtual means of payment for operators: it clearly states that operators can, for example, allow Bitcoin transactions, if they can prove they are safe. As a result, in many cases in the EU, regulators have licensed various betting operators with- out clear and direct control over their identity or activities. Sometimes, regulators must trust the 1. Sports betting had been permitted in betting shops since 1961 but the new Act liberalised provision, for example by allowing advertising and explicitly recognising online channels. 2. However some operators state that they would prefer specific details of what they — and their competitors — are expected to do. They argue that if different operators apply different policies, competition may be distorted. For example, if a betting company sets a threshold for bet size such that any larger bets require customers to prove the source of their funds, the customer may respond by moving to a rival firm that does not apply such a threshold. 5 information declared by operators (revenues and other betting information, details about moni- toring and alerts, wider security procedures, etc.). In the meantime, many criminal cases interna- tionally and at EU level involve betting markets (and the gaming sector in general): conflicts of interests, employees or managers of betting operators linked to organised crime, match-fixing, money laundering, illegal betting (street level or online), fraud and phishing, etc. In the light of the current economic environment, with new, growing criminal risks (such as cyber- crime and match-fixing) and reduced public finances, this report proposes a pioneer evaluation of the criminal risks linked to the sports betting activity, a new (legal) economic sector at EU and international levels. Such a risk-assessment will lead to recommendations aimed directly at EU MS or European authorities, but it will analyse betting as a global activity especially given its transnational nature. Such an exercise is both necessary and difficult to conduct. There are several reasons for this: • Sports betting, in its current form, is a new activity and is changing rapidly. Older styles of sports betting have existed for a long time and became popular through “pools betting”-types of gaming (each entry must predict the outcome of each of a list of matches, often 12–15). And while it was possible in the UK from 1961, single-event fixed odds betting — and all other modern types of betting that emerged in the 1990s — became widespread through Caribbean and Asian betting websites, followed by European websites in the 2000s. Among the latest developments, high-fre- quency betting and decentralised betting symbolise the innovations that drive change in this field. In the face of such change, it is vital for public and private stakeholders to keep pace and adapt their levels of understanding and knowledge of the market. • Sports betting is still divided between retail (from legal betting shops to backstreet bookmakers) and online betting. The two activities are linked, since some betting operators offer opportunities to bet in their shops through Smartphone applications, and also since traditional bookmakers can access the online markets to cover their financial risk. A twinned market combines several features (especially the draining of a highly-liquid physical market and the transfer of these substantial cash assets into electronic bank money) which are, again, difficult to control. • It is estimated that a vast majority of bets are still taken illegally; meaning in a jurisdiction that did not authorise an operator to take bets within its territory.1 The EU has become an exception as almost all European States have legalised the activity, mostly by opting for a licence-regime. Despite legislation, a varying proportion of bets are placed through websites that are not licensed in the consumer’s jurisdiction. Some States are currently changing regimes or in discussion to do so (Canada, USA, etc.). However, outside Europe, many States still consider betting a sensitive activity either to be prohibited or else controlled by a state-owned monopoly (Brazil, Canada, China, India, etc.), even if many are debating a change in their betting regime. Meanwhile, a number of jurisdictions have become specialised in hosting betting operators and are deemed to be “offshore” jurisdictions (Gibraltar, Isle of Man, Curaçao, Malta, Cagayan). The fact that many 1. Around 82%