FINANCIAL INTELLIGENCE CENTRE REPUBLIC OF SOUTH AFRICA FINANCIAL INTELLIGENCE CENTRE Presentation to Trade and Industry Portfolio Committee 22 August 2007

financial intelligence centre REPUBLIC OF SOUTH AFRICA Provide background information on the Financial Intelligence Centre and money laundering Provide examples as to how interactive gambling may be used for money laundering purposes Propose mitigating measures for combating the threat of money laundering in the interactive gambling industry

FINANCIAL INTELLIGENCE CENTRE REPUBLIC OF SOUTH AFRICA FINANCIAL INTELLIGENCE CENTRE Objectives: Principle objective of the Centre is to identify the proceeds of unlawful activities Combat money laundering activities and the financing of terrorist and related activities Make information collected by it available to investigating authorities, intelligence agencies and the South African Revenue Services Exchange information with similar institutions in other countries

MONEY LAUNDERING financial intelligence centre REPUBLIC OF SOUTH AFRICA MONEY LAUNDERING Is the process through which the proceeds of crime are made to appear as legitimately acquired funds or assets Is done through a series of steps with the combined effect of concealing or disguising the true nature, source, location, disposition or movement of the proceeds

MONEY LAUNDERING financial intelligence centre B Crime generates money REPUBLIC OF SOUTH AFRICA MONEY LAUNDERING Crime generates money B Funds from bank accounts used in host of transactions Funds from various locations converged in apparently legitimate businesses B Money deposited into various bank accounts Funds from businesses enjoyed by criminals or re-invested in further crime

WHY COMBAT MONEY LAUNDERING financial intelligence centre REPUBLIC OF SOUTH AFRICA WHY COMBAT MONEY LAUNDERING It is inextricably linked to criminal activity Undermines the integrity of the banking and financial systems Undermines democracy and the rule of law Takes the profit / incentive out of crime

MEASURES TO COMBAT MONEY LAUNDERING financial intelligence centre REPUBLIC OF SOUTH AFRICA MEASURES TO COMBAT MONEY LAUNDERING Identify customers Keep records of customers and transactions Report suspicious and unusual transactions Institute internal controls

INTERNATIONAL STANDARD ON SUPERVISION financial intelligence centre REPUBLIC OF SOUTH AFRICA INTERNATIONAL STANDARD ON SUPERVISION Casinos must be subject to a comprehensive regulatory and supervisory regime Casinos must be licensed to prevent criminals from having a controlling interest in a casino Casinos must be effectively supervised for compliance with requirements to combat money laundering This applies to all casinos, whether on-line or land-based

USE OF INTERACTIVE GAMBLING financial intelligence centre REPUBLIC OF SOUTH AFRICA USE OF INTERACTIVE GAMBLING Use of gaming facilities by on-line punters to transfer funds from one person to another and/or from one location to another Use of on-line casino by operator as a front to receive funds from and to persons and/or locations

USE OF INTERACTIVE GAMBLING financial intelligence centre REPUBLIC OF SOUTH AFRICA USE OF INTERACTIVE GAMBLING Transfer from one account to another Person instructs on-line casino to transfer funds from gambling account to different bank account Person transfers funds into his on-line gambling account from a bank account Person conducts minimal or no gambling Funds have moved from one account and possibly from one person and/or location to another with a break in the transaction trail in the on-line casino’s records

USE OF INTERACTIVE GAMBLING financial intelligence centre REPUBLIC OF SOUTH AFRICA USE OF INTERACTIVE GAMBLING Combination of on-line and land-based casino Person draws credit from on-line gambling account in chips while associate buys small amount of chips Person transfers funds into his on-line gambling account from a bank account Person and associate goes into land-based casino Funds have moved from one person and/or location to another with a break in the transaction trail in the casinos’ records Person hands chips to associate who cashes out and receives a cheque or bank transfer from the casino

USE OF INTERACTIVE GAMBLING financial intelligence centre REPUBLIC OF SOUTH AFRICA USE OF INTERACTIVE GAMBLING Opposing losing and winning bets One person then deliberately loses to the other Two persons play on-line poker in a game where the bets are not large They place large enough bets to scare off the other players Funds have moved from one person and/or location to another with a break in the transaction trail in the casino’s records The “winner” has the funds paid into the bank account of his choice

USE OF INTERACTIVE GAMBLING financial intelligence centre REPUBLIC OF SOUTH AFRICA USE OF INTERACTIVE GAMBLING Use by operator as a front Criminal associates register as “gamblers” Person acquires domain and sets up “on-line casino” for registered punters only Person opens bank account for on-line casino Funds have moved from one person and/or location to another with a break in the transaction trail in the casinos’ records “Gamblers” lose to the casino and transfer funds from bank accounts to casino account

AREAS OF CONCERN financial intelligence centre REPUBLIC OF SOUTH AFRICA AREAS OF CONCERN International concerns over interactive gambling relate to features of an on-line casinos as internet-based (virtual) entities: Non-face-to-face acquisition of customers Ongoing relationship with customers in a virtual environment Uncertainties about jurisdiction over business of virtual entities

AREAS OF CONCERN financial intelligence centre REPUBLIC OF SOUTH AFRICA AREAS OF CONCERN Identification and verification of clients Conventional methods of identifying clients cannot be applied where interaction takes place in a non-face-to-face environment Possibility that individuals other than the account holder will be able to perform transactions on the account Record-keeping Impediments to ongoing money laundering investigations if records of electronic transfers and other South African financial transactions are located in foreign jurisdictions Reporting of suspicious and unusual transactions Absence of human intervention means less or no possibility to detect suspicious or unusual activity through on-line casino’s facilities

AREAS OF CONCERN financial intelligence centre Jurisdiction REPUBLIC OF SOUTH AFRICA AREAS OF CONCERN Jurisdiction Operators based outside South Africa where South African laws do not apply Not always possible to determine where operator is based or which country has jurisdiction over activities Supervision and enforcement Capacity and resources to enforce licensing requirements and legal obligations on rogue or unlicensed operators Difficulty to carry out probity checks if information is located off-shore Impossible to carry out compliance examinations and checks where operation is located off-shore Impossible to institute criminal investigation and prosecution against off-shore entities

RECOMMENDED MITIGATION MEASURES financial intelligence centre REPUBLIC OF SOUTH AFRICA RECOMMENDED MITIGATION MEASURES Require strict application of probity checks to ensure that criminals do not acquire a controlling interest in on-line casinos Require methods preventing rogue or unlicensed on-line casinos from making (or continuing to make) their services available in South Africa Require methods of preventing money flow to rogue or unlicensed on-line casinos Require methods of forcing licensed operators to subject their operations to the jurisdiction of all South African laws Require methods of forcing operators to establish a presence in South Africa which includes a locally based gateway to provide services to South African based gamblers

RECOMMENDED MITIGATION MEASURES financial intelligence centre REPUBLIC OF SOUTH AFRICA RECOMMENDED MITIGATION MEASURES Require methods of ensuring that compliance by on-line casinos with legal obligations such as customer identification will be supervised including the ability to examine compliance through inspection of on-line casino’s systems and records Require methods of ensuring that supervisors can take action against licensed on-line casinos where they fail to comply with their legal obligations Require methods to ensure that transaction related information will be held in South Africa where it can be accessed by South African law enforcement agencies

THANK YOU FOR YOUR ATTENTION! financial intelligence centre REPUBLIC OF SOUTH AFRICA THANK YOU FOR YOUR ATTENTION!