Following a regulatory review by the UK Gambling Commission which resulted in a £600,000+ regulatory settlement, gambling businesses who allow others to use their technology via a different brand (often termed ‘white labelling’) should contact our specialist gambling lawyers for advice to ensure their systems and processes properly comply with the Gambling Commission’s requirements and with UK law. Our gambling solicitors can be reached via 0800 170 1538.
Gambling operators warned over third-party responsibilities
The UK Gambling Commission announced via its website on 6 May 2020 that following the commencement of a review of its operating licence under section 116 in August 2019, FSB Technology UK Limited has been required to pay a financial penalty of £600,000 and the Commission’s costs of £34,300 for its failure to ensure that several of its third-party websites complied with licence conditions and codes of practice. It has also had additional conditions imposed on its licence to ensure it conducts risk-based due diligence on new and current third-party partners it runs websites on behalf of.
FSB’s business model is based on a ‘white labelling’ arrangement including the contracting of provisions of its licensed activities to third parties. This arrangement places responsibility on the licensee to ensure that its third-party partners comply with the Gambling Act and the requirements imposed by theLicence Conditions and Codes of Practice (LCCP). However, the Gambling Commission’s investigation discovered that FSB did not have sufficient oversight of several third-party websites and did not itself have effective anti-money money laundering and social responsibility policies and procedures in place. It also failed to comply with LCCP on numerous occasions including failings within FSB’s processes aimed at preventing money laundering and protecting vulnerable people.
The three key failings included: a breach of the Licence Condition 12.11(2),(3) which require measures to be in place to prevent money laundering and terrorist financing, a failure to comply with Social Responsibility Code 3.4.1in respect of customer interactions, and due diligence and control failings relating to the white-labelling arrangement and supervision.
Breaches of AML Requirements
The anti-money laundering failings included a situation where a customer had not been required to provide adequate source of funds evidence and had gambled and lost circa £282,000 over a period of some 18 months. Another situation involved one of the third-party websites operating without sufficient oversight of VIPs and with a VIP team manager employed by the third-party website acting without adequate oversight and without sufficient AML training. The Commission also found that FSB’s own AML controls did not adequately address the risks posed by higher risk customers. These included, failing to establish and maintain appropriate risk-sensitive policies, procedures and controls relating to the management of its third party partners, a lack of adequate documentation and audit trail to demonstrate decision making, and inadequately resourced and trained compliance team and a failure to undertake account reviews to monitor the re-opening of accounts by third-party partners.
Social Responsibility Failings
The social responsibility failings included failures to protect problem gamblers. Commission officials found that FSB were failing to carry out customer interactions in compliance with Social Responsibility Code 3.4.1. FSB were permitting staff employed by third-party partners to carry out customer interactions with insufficient oversight and training as a result FSB was not ensuring that appropriate and meaningful customer interactions took place or were properly recorded.
Additionally, FSB failed to comply with Social Responsibility Code 3.5.3 in preventing one of its third-party partners from sending a marketing email to 2,324 customers who had previously self-excluded. This was compounded by FSB then emailing the affected customers with an apology rather than ensuring that no further contact emails were issued given that there should have been no contact with the self-excluded customers.
Inadequate due diligence on third parties
A further failing included a breach of Licence Condition 16.11 in permitting one of its third-party partners to use an inappropriate banner advertisement containing cartoon nudity which proved to be the unauthorised use of copyrighted material. The Commission found that FSB had failed to take reasonable steps in undertaking due diligence prior to entering into a contractual relationship with a third party. Had it done so, FSB would have identified obvious concerns that there was a risk the third-party could use such advertisements given its clear association to an unlicensed website with questionable repute.
FSB accepted that it did not carry out sufficient due diligence which would have identified concerns with regard to the international operator of the brand name which included the fact that the ultimate ownership of the company was unclear and the relationship between the company and the ownership of the brand name used was also unclear. In one of the other cases, FSB failed to assess the risks of entering into third-party contractual arrangements where there were links to an individual who was a Politically Exposed Person (PEP).
As a result of these failings, a condition has been added to FSB’s operating licence requiring it to conduct risk-based due diligence before entering into a relationship with a third-party partner, manage and evaluate its existing third-party relationships and carry out risk-based due diligence on all its third-party partners at least annually.
The Commission has highlighted that gambling operators should take account of the failings identified in their investigation and review the following matters and has warned businesses that they will face regulatory action if they do not properly manage all third-party websites they are responsible for:
- Is your governance, due diligence, contractual and audit arrangements effective and are you refreshing existing due diligence at least annually?
- Are your policies and procedures for identifying high risk customers for AML and SR customer accounts effective?
- Have you adequately resourced your AML and SR departments, so your staff are always able to put your policies and processes in place for all customers?
- Have your staff and your third-party partners received sufficient AML and SR training?
- Are you recording all customer interactions, including decisions not to interact with customers, and are these records available for colleagues to refer to when making decisions?
- Are your customers providing documentation to support their level of spend and loss, and not simply giving assurances?
This case highlights the importance for gambling businesses of engaging fully with specialist gambling lawyers such as our team to avoid compliance breaches. Any gambling business that faces a compliance assessment or receives notice of the commencement of a section 116 review by the Gambling Commission should contact our specialist lawyers. Our specialist gambling lawyers have detailed knowledge of these provisions and can assist if you have concerns or face a review of a gambling licence, including a section 116 review. We can be reached via 0800 170 1538.