Understanding the Fraud Landscape in Online Gambling

Revenues of online gambling companies are also reaching new heights and gaining critical legality throughout the US. The global online gambling market is growing at an annual rate of nearly 12% and is expected to reach $127.3bn by 2027. The liberalisation of online gambling regulations in the US, the Netherlands, and other countries are helping accelerate this growth.

To operate, online gambling companies require digital payments and third-party service providers as gateways for payments.

Criminal activity a constant danger

Gambling is a leading area of concern for anti-money laundering (AML) efforts because criminal activity is a constant danger. Gambling is used by criminals to launder funds and obscure the origins of money obtained through illicit activities. In gambling, it’s commonplace for players to frequently lose as much as 80% or more of their invested funds.

A recent scam in Turkey, in which $10m was laundered over Twitch, made global headlines and highlighted the risks involved in this space.

Gaming operators are required to carry out AML compliance programmes to combat these threats. However, fintechs that process payments for online gambling companies only have limited visibility into the players, and no ability to trace the source of the funds or know how thoroughly the gambling companies have conducted their customer due diligence and Know Your Customer (KYC) checks.

Outdated legacy AML systems heighten risk

Using outdated legacy AML systems increases the risk of these ‘nested’ payments being processed incorrectly and exposing the gambling company, fintech and processing banks to regulatory compliance fines.

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Unlike brick-and-mortar casinos, online gambling sites do not have the luxury of meeting customers in person for identification purposes. As such, false or stolen IDs could easily be used to facilitate money laundering. Other risks include such activities as peer-to-peer gambling like poker, where funds can be moved from one player to another. In some cases, third parties or agents can obscure the source or ownership of the money being gambled.

Regulators such as the UK Gambling Commission have also raised significant concerns regarding how adequately Customer Due Diligence (CDD) and KYC checks are conducted by gambling businesses.

In the high-risk online gambling industry, there are several areas of concern for fintechs as they process payments and monitor for money laundering, including:

Low-level transactions, high volume turnover

The high volume of transactions in online gambling creates activity monitoring challenges for payment providers, increasing risk. On the other hand, low-level transactions are common in gambling and don’t necessarily meet the minimum threshold for CDD monitoring.

Financial criminals commonly exploit this situation to engage in a money laundering method known as “smurfing,” or making multiple and numerous transactions of minimal amounts to evade safeguards.

Criminals sometimes conduct smurfing through a network of different bank accounts. By making small transactions, they can evade suspicious activity radars.

Limited visibility using ACH

Gambling companies that use fintechs to pay out to clients typically make electronic payments through the Automated Clearing House (ACH) network, using faster payment schemes that automatically move funds from one bank account to another in a cost-effective and often real-time manner.

ACH transfers take place in batches or individual real-time messages, are almost entirely automated, and are processed through a central clearing house. The real-time messages are also irrevocable in some countries unless fraud can be categorically proven. Transactions are missed frequently due to poor AML controls and are very difficult to revert.

ACH transfers used in domestic payment processing only give basic details such as the sender and beneficiary of the transaction, as opposed to SWIFT transfers, which provide greater transparency, including details of the transaction route.

The problem of nested payments for banks

In fintech-processed money transfers that originate from online gambling, the processing bank only sees the identity of the customer and doesn’t always have information regarding the gaming company or the fintech.

This payment method can create the problematic situation of “nested payments” from the bank’s perspective by adding another layer in the transfer process. Nested payments have been a concern for banks for several years, and the inability of basic rules controls to identify this risk typology has led to the accelerated adoption of AI behavioural controls that stop these payments in their tracks.

Benefits of AI solutions

Using AI-powered solutions, banks and fintechs can gain a full picture of the transaction and analyse every entity along the chain of payments emanating from online gambling. With machine learning-based systems, the amount of data is not an obstacle to finding abnormal behaviour patterns and anomalies that indicate activity such as money laundering. By highlighting risk factors and creating pseudo customer identities, AI can pinpoint complex risk patterns and guide payment service providers and banks to suspicious cases.

Shaun Smith-Taylor is senior director and global head of solutions at ThetaRay