PUBLIC STATEMENT 28 October 2013

Important lessons for the gambling industry on anti-money laundering and social responsibility controls

Ladbrokes Group

Introduction

Following Gambling Commission (“the Commission”) engagement with Ladbrokes Group1 ("Ladbrokes") in relation to a number of compliance and policy matters, the Commission wishes to draw to the attention of the gambling industry more widely a number of important lessons around the issues of potential money laundering and social responsibility in identifying players at risk. The Commission engaged with Ladbrokes from late 2012 to the summer 2013 to investigate its operations and controls, and identified three areas of learning for Ladbrokes and the wider industry:

Managing trading and the competitive nature of the trading room in combination with meeting regulatory obligations, including managing risk to the licensing objectives.

Identification of player risk across a range of products and platforms.

Managing anti-money laundering controls, including in connection with criminal investigations, and responsible gambling obligations.

At board level, Ladbrokes has co-operated with the Commission and has conducted itself with commendable candour and openness during our discussions. In addition, Ladbrokes’ senior management have stated that they wish to ensure the group continues to be seen as an industry leader in managing its anti-money laundering and social responsibility risks effectively. Ladbrokes is understandably keen to ensure that the learning generated by the challenges it has faced is made available to the gambling industry more widely.

Summary of obligations

All licensed gambling operators are required to have in place effective policies and procedures to identify and manage the risks to the licensing objectives arising from the business. Some of the findings from the Commission’s review in this case and across the industry highlighted the challenges inherent in assessing customer risk across a wide range of products and platforms, and have underlined the importance of addressing the challenge with sufficiently documented policies and procedures that are consistently and effectively applied.

1 'Ladbrokes group’ in this context refers collectively to a number of operating entities within the Ladbrokes group of

companies. These include, in particular but without limitation, Ladbrokes Betting & Gaming Limited (a company registered and licensed in England); Ladbrokes International plc (a company registered and licensed in Gibraltar) and Ladbrokes Sportsbook LP (a limited partnership registered and licensed in Gibraltar).

All licensed gambling operators are required to uphold the licensing objectives, to prevent gambling from being a source of crime or disorder, being associated with crime or disorder, or being used to support crime. In addition, all gambling operators have specific duties under the Proceeds of Crime Act 2002 (POCA). Some of the matters reviewed served to highlight some uncertainty as to the industry’s interpretation of duties under POCA, particularly in relation to how “consent” should be dealt with in gambling businesses. All licensed gambling operators are required to safeguard the licensing objective with regard to protecting vulnerable people from being harmed or exploited by gambling. This engagement highlighted the challenge faced by many gambling businesses in identifying potentially problematic behaviour among “high value” customers; and also drew attention to the difficulties faced by operators in identifying “social responsibility” risk among lower-spending customers.

Lessons learned:

In fully cooperating with the Commission’s review, Ladbrokes has acknowledged there were significant improvements required in its own procedures. Ladbrokes has undertaken, and continues to undertake, action to improve its own operations in the areas highlighted in this note. Generally lessons for the wider industry are:

Managing trading and the competitive nature of the trading room in combination with meeting regulatory obligations

Trading rooms for betting operators are increasingly critical to an operator’s competitive edge. All operators should be particularly careful to ensure that, in managing their trading room operations, they do not put at risk their regulatory obligations. In this case, Ladbrokes had allowed a situation to develop in which the trading function appeared to be subject to a substantially lesser degree of formal control than other parts of the business – a conclusion Ladbrokes had already reached and were acting upon following an internal assessment. This lack of formal control had led to real and significant vulnerabilities. From discussions with Ladbrokes and others, the Commission considers that such lack of formal control is likely to be widespread among larger betting operators (i.e. those with a trading room function). We therefore urge all operators to satisfy themselves, as a matter of urgency, that their own arrangements for the effective governance of trading room functions do not expose themselves to unnecessary and unacceptable risk to their ability to deliver the licensing objectives and comply with the conditions and codes attached to their licences.

Identification of player risk

The Commission accepts that Ladbrokes has systems in place to assess and monitor risk of various types, including money laundering and social responsibility risks. The focus of many risk management systems however, may lie disproportionately with the highest value customers and may mask risk arising from those customers who would not be considered “high value”. And, as experience from this and previous cases2 demonstrates, systems may also not be effective in identifying and linking specific

2 http://www.gamblingcommission.gov.uk/gh-press/news_archive/2013/areas_for_development_in_anti-.aspx

http://www.gamblingcommission.gov.uk/gh-press/news_archive/2013/weaknesses_in_anti-money_laund.aspx

player behaviour, risk and information across all remote and non-remote platforms, products and accounts. While the Commission accepts that it is likely to pose challenges for the industry more widely, Ladbrokes have acknowledged that, along with other operators, significant development of their systems is required before they can meet these fully. It is important that gambling operators accept and rise to the challenge of identifying the risk to all players, and not just high value customers, of problem gambling and link customer activity across a range of products. It is a theme that has emerged from other recent engagements, and the Commission encourages operators and the industry more widely to make further progress in building its capacity to identify those customers who may be problem gamblers or at risk, and intervene effectively.

Managing anti-money laundering controls, including in connection with criminal investigations, and responsible gambling obligations

The Commission’s engagement with Ladbrokes and with other operators has highlighted that there is a very broad range of interpretation of anti-money laundering obligations and practice in the industry, particularly in relation to when it is appropriate to seek consent to transact under circumstances where money laundering is suspected. While the Commission accepts that Ladbrokes acted in good faith within its own interpretation of its duties, following the engagement between Ladbrokes and the Commission it was agreed that there was a clear need for significant improvements, particularly in relation to the following:

taking early opportunities to prevent potential money laundering, and

transparency and recording of decision making

maintaining an audit trail that demonstrates all risks to the licensing objectives have been properly considered and managed appropriately.

On a more general point, Ladbrokes reported to the Commission that it saw its scope for action constrained in relation to (1) its obligations under the Proceeds of Crime Act 2002 to report potential criminal activity and continue normal operations while investigations take place and (2) the regulatory obligation to protect the vulnerable. This is a view that has also been put forward by some industry organisations and other operators. The Commission considers such views to be misguided and has set out its views in detail in correspondence with the Association of British Bookmakers and the Remote Gambling Association. The Commission intends to augment its guidance in order that operators might more easily understand how to deliver their concurrent obligations of identifying and interacting with players at risk and observing their obligations under POCA. The revised guidance is likely to cover the importance of seeking appropriate consent. In the meantime, operators are encouraged to maintain an effective audit trail, make sure consent is properly considered and a range of information sources appropriately to make judgments about risk and suspicion.

Next Steps

The Ladbrokes Board has been open and co-operative throughout this investigation, making clear its determination to indentify and remedy any weaknesses and to do so in a way that enables the Commission to share the lessons more widely. The Commission accepts that Ladbrokes have made, and continue to make serious efforts to address

the areas of potential vulnerability that have been identified within its organisation. Ladbrokes have made clear their intent to co-operate further in helping work with other industry organisations and the Commission to ensure better policy and compliance across the betting sector and the gambling industry more widely. The Commission will further engage with Ladbrokes to assure itself that the specific work in hand is effective in addressing the issues raised.

Notes to editors

1. The Gambling Commission (the Commission) regulates gambling in the public interest alongside its co-regulators local licensing authorities. It does so by keeping crime out of gambling, by ensuring gambling is conducted fairly and openly, and by protecting children and vulnerable people from being harmed or exploited by gambling. The Commission also provides independent advice to government on gambling.

2. The Commission and licensing authorities are responsible for licensing and regulating all gambling in Great Britain other than the National Lottery and spread betting, which are the responsibility of the National Lottery Commission and the Financial Services Authority (FSA) respectively.

3. See the terms & conditions section of our website for information on legal advice.

Further information

Further information is available from the Commission’s website at: www.gamblingcommission.gov.uk

John Travers on 0121 230 6700 or 07852 124624 or communications@gamblingcommission.gov.uk

Keeping gambling fair and safe for all

Victoria Square House

Victoria Square

Birmingham B2 4BP

T 0121 230 6666

F 0121 230 6720

www.gamblingcommission.gov.uk

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Paddy Power Holdings LtdFailures in anti-money laundering and social responsibility controls

Public statement February 2016

The issues identified in this statement are likely to form the basis for future compliance assessments of gambling operators

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1 Introduction

The Gambling Commission has identified a number of serious failings on the part of Paddy Power Holdings Ltd (Paddy Power) in relation to keeping crime out of gambling and protecting vulnerable people from being harmed or exploited. We wish to draw the attention of the gambling industry more widely to a number of lessons from those failings.

Licensed gambling operators have a legal duty to ensure that their gambling facilities are provided in compliance with the Gambling Act 2005, the conditions of their licence and in accordance with the licensing objectives, namely:

to prevent gambling from being a source of crime or disorder, being associated with crime or disorder or being used to support crime

to ensure that gambling is conducted in a fair and open way

to protect children and other vulnerable people from being harmed or exploited by gambling.

We identified failings in the way Paddy Power handled relationships with two customers (customer A and customer B) at one of its shops and with one of its online customers who was later convicted of serious criminal offences (Mr Cooney)1.

Paddy Power had social responsibility and anti-money laundering policies and procedures in place, had delivered training to staff and had systems for monitoring internal compliance. However, we identified that the procedures in place were not fully in line with guidance published by the Gambling Commission, not all staff involved in the identified incidents fully understood Paddy Power's own policies and their internal compliance monitoring had failed to identify the issues relating to the customers.

Paddy Power has co-operated fully with us and acknowledges that it:

failed to have and apply a customer interaction policy which complied with social responsibility code provision 3.4.1(1)(c), which is a condition of its licence, as it did not include: “circumstances in which consideration should be given to refusing service to customers and/or barring them from the operator’s gambling premises”

interpreted the duty to be socially responsible in relation to potential problem gambling as being limited to monitoring and interacting with customers, rather than considering refusing service

had, despite being aware that customer A displayed signs of having a serious gambling problem, asked staff to encourage him to continue to visit and to spend. This was grossly at odds with the licensing objective of preventing vulnerable people from being exploited by gambling

had an anti-money laundering (AML) policy which was inadequate in that it did not include reference to the spending of the proceeds of crime and therefore failed to take into account our published advice2 and guidance3 about managing the risks of money laundering

failed to respond appropriately to suspicions of money laundering in relation to customer B

failed to take reasonable steps to establish customer A’s and Mr Cooney’s sources of funds.

The specific issues identified are detailed below. We expect gambling operators to take note of these issues and consider them in light on their own operating procedures and processes.

The gambling industry should be on notice that the issues identified in this statement are likely to form the basis for future Commission compliance activity.

1Only Mr Cooney is named in this statement as no information about the other two customers is in the public domain. 2The advice note applies to all licensed operators except casino operators. 3The guidance note applies to operators providing gambling facilities under remote and non-remote casino licences.

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2 Issues

Customer A

Customer A usually used fixed-odds betting terminals at a branch of Paddy Power. In early 2014, regional staff decided they needed to look into the source of the money customer A was using for gambling, in order to manage the risk of money laundering. However, Paddy Power obtained incomplete information, based only on the customer’s own account and staff’s belief that he or his family owned a number of restaurants. Although staff noted that they needed to obtain further information, including the names of the restaurants involved, there is no evidence that it was obtained.

Paddy Power subsequently recorded interactions with customer A, which raised concerns that he may be a problem gambler. In mid-May 2014, shop staff became aware that customer A was working five jobs to fund his gambling and that he had no money. However, customer A had indicated to shop staff that he was comfortable with his level of gambling spending. Shop staff escalated this issue to more senior staff who decided they needed to continue monitoring customer A.

On 20 May 2014, the manager of the shop informed a more senior member of staff that customer A would be visiting the shop less frequently. The response from the senior staff member advised the shop staff that steps should be taken to try to increase customer A’s visits and time spent in the gambling premises. Paddy Power accepts that this advice, in the circumstances, was erroneous and directly conflicted with its own policies and procedures designed to meet their responsibility to prevent gambling being a source of harm to their customers.

The shop manager recorded some discomfort about how to reconcile commercial and Social Responsibility (SR) considerations, concluding that staff would monitor customer A’s spending and provide good customer service in the hope that his spending would increase in future once he was in a more comfortable situation.

Staff subsequently recorded further interactions with customer A, who indicated that he was comfortable with his spending. However, a shop manager also recorded that customer A was spending heavily and that he looked unwell and as if he had not slept for a while.

The first recorded instance on which Paddy Power signposted customer A to sources of help with problem gambling was in August 2014 when a member of staff bumped into him off the premises. The staff member recorded that customer A had lost all of his jobs, was homeless and had lost access to his children. Customer A did not visit the shop again after this interaction.

In response to our enquiries about this matter, Paddy Power initially responded that it was satisfied that staff had followed social responsibility (SR) procedures, as evidenced by seven recorded communications with customer A. Paddy Power said that during every interaction, staff had signposted customer A to sources of help but this is not reflected in the recorded evidence relating to that period.

Questions for operators to consider

1. Do you have effective systems in place for staff at all levels of your business to ensure that commercial considerations do not outweigh the need to comply with the licensing objectives?

2. Do your policies and procedures fully meet the requirements set out in the Licence Conditions and Codes of Practice (LCCP), including social responsibility code provision 3.4.1?

3. Can you demonstrate that when a customer displays clear indicators of being a problem gambler, you consider refusing service?

4

Customer B Customer B was a longstanding customer at one of Paddy Power’s shops. In August 2014, a shop manager suspected that she was using gambling facilities to launder Scottish bank notes by placing them into gaming machines and then requesting a pay out on a debit card. The shop manager raised these concerns with more senior staff and was advised to pay out as normal. Over the next six months, the shop manager escalated suspicions that customer B was laundering money to more senior members of staff on at least four occasions. The more senior members of staff told him that, as the notes involved were British currency and were not stained or counterfeit, it was unlikely that the money was being laundered. None of the reported suspicions was forwarded to Paddy Power’s Money Laundering Reporting Officer (MLRO) for consideration. The shop manager was repeatedly told by more senior staff that he needed to ‘substantiate’ his allegations before any action could be taken. His suspicions, which we consider to have been reasonable in the circumstances, were repeatedly overruled by middle management. On 12 January 2015, Paddy Power became aware that police had concerns that Scottish notes that were the proceeds of crime were in circulation in London. In light of that, Paddy Power decided to undertake ‘enhanced due diligence’ checks on customer B to verify that she had a legitimate source of funds. It was not possible to validate the customer’s ownership of a business she claimed to own. On 21 April 2015 (after we had made initial enquiries about this matter) Paddy Power informed customer B that she was now barred from the business. Paddy Power subsequently submitted a suspicious activity report (SAR) to the National Crime Agency. Paddy Power’s initial response to our enquiries about this matter was that it had followed its money laundering policy in relation to customer B. Paddy Power now accepts that the shop manager had a basis to be suspicious and that the response by more senior staff to the suspicions raised by the shop manager were, in the circumstances, incorrect. In particular, the shop manager’s concerns should have been escalated to Paddy Power’s MLRO. To reduce the risk of recurrence, Paddy Power has updated its Anti-Money Laundering Policy for Retail and accompanying training materials and has required members of staff to complete training programmes on anti-money laundering issues

Questions for operators to consider

4. Can you demonstrate that your policies and procedures relating to anti-money laundering adequately meet ordinary code provision 2.1 (anti-money laundering), particularly in relation to ensuring that an effective and risk-based approach covers both washing ‘dirty’ money and the spending of proceeds of crime?

5. Can you demonstrate that all relevant members of staff understand their duties in relation to the licensing objective of keeping crime out of gambling, including the reporting of suspicions, and that staff in key positions have sufficiently broad, up-to-date and accurate knowledge?

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Mr Mark Cooney In the late stages of the investigation referred to above, we became aware through media coverage that in September 2015 Mr Mark Cooney had pleaded guilty to fraud offences relating to the theft of over £250,000 from six customers at two banks where he worked. He had been sentenced to 28 months’ imprisonment. The Police confirmed that Paddy Power had provided them with information indicating that Mr Cooney had spent a significant amount on its remote gambling facilities during the same period4. We asked Paddy Power to look into this matter to determine whether the case demonstrated any failings in its systems for keeping crime out of gambling. Paddy Power confirmed that Mr Cooney opened an account with them on 21 April 2014. His level of spending triggered a need to undertake ‘enhanced due diligence’, which was undertaken in September 2014. This involved:

confirmation that there was no negative open-source media coverage relating to Mr Cooney

open-source information that he had previously bought a house valued at £125,000

confirmation that he was not listed on any sanctions registers. Paddy Power made no direct enquiries to Mr Cooney about the source of the funds he was gambling. Paddy Power deemed Mr Cooney to be ‘medium risk’, and recommended that further information should be obtained. However, no further information was obtained from or about Mr Cooney. Paddy Power acknowledged that it failed to follow the policies and procedures it had in place for undertaking due diligence checks on customers of its online business.

Questions for operators to consider

6. Can you demonstrate that the policies and procedures in place for obtaining information about customers’ sources of funds are appropriately risk-based, fit-for-purpose and, crucially, that they are being implemented effectively?

4 The remote gambling facilities in question, which included remote casino facilities, were provided by Paddy Power Holdings Ltd, which has been licensed by the Commission since 1 November 2014.

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3 Voluntary settlement

In accordance with our Statement of principles for licensing and regulation the Commission has accepted a voluntary settlement from Paddy Power consisting of:

The commissioning of a review of Paddy Power’s AML and SR controls across its retail estate and its AML controls in its remote business to be undertaken by a third party at its expense

An agreement to the publication of a public statement by the Commission to share learning with the industry and the public

An agreement to share learning from the cases with the remote and non-remote sectors in a format to be agreed with the Commission

A commitment to amending policies and procedures to address the shortcomings identified in the course of the investigation

The payment of £280,000 in total to an agreed socially responsible cause, which represents a sum to remove any profits made from the three customers in question and a voluntary payment in lieu of a financial penalty

Agreement to contribute £27,250 to the Commission’s costs in investigating this matter

4 Conclusion

We consider that this case provides valuable learning for operators, who should consider reviewing their legal obligations regarding the prevention of money laundering and ensuring that vulnerable people are not harmed or exploited by gambling.

Gambling Commission February 2016

Keeping gambling fair and safe for all

For further information or to register your interest in the Commission please visit our website at:

www.gamblingcommission.gov.uk

Gambling Commission

Victoria Square House

Victoria Square

Birmingham B2 4BP

T 0121 230 6666

F 0121 230 6720

E info@gamblingcommission.gov.uk

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