American Banker wants to know whether the explosion in daily fantasy sports startups is creating “havens for money laundering.” It’s difficult to say. People have theorized that online betting is an ideal platform for money laundering, but few actual cases exist. (See one noteworthy exception.)
As an exercise, I imagined how I would use DraftKings to launder money. Doing so provided a good picture of possible controls that might mitigate these businesses’ vulnerabilities and improve the case for regulating them rather than banning them altogether.
Let’s assume I’m a lieutenant in a local drug gang. I need to make $50,000 of drug money look legitimate. How does DraftKings help me accomplish this?
I first need to somehow change the funds from cash to deposits. Vasilios Chrisos, an Ernst & Young fraud expert cited by American Banker, stated, “From the point of placement…we don’t see a risk [for daily fantasy sports] because people can’t sign up for these leagues and pay with cash.” To get started, then, I’ll most likely need a bank or some other account that will accept cash.
To lend the funds a slight air of legitimacy, and to avoid the scrutiny that might come with depositing all the money in one location, I could have several of my subordinates buy money orders and split them between accounts at multiple banks using either stolen or falsified identities. (To get a sense of how easy this is to do for a well-equipped criminal organization, consider that one group used a single stolen identity to open 5,000 accounts with a combined turnover of $800 million at HSBC). I would keep the deposits significantly smaller than $2,000 apiece for two reasons: that is the DraftKings monthly deposit limit and I would like my money to be cleaned quickly rather than over the course of months; and smaller deposits will draw less attention from the banks.
Once I had my money distributed, I would deposit the funds to new DraftKings accounts — either directly with credit or debit cards, or after first moving through an online payments service like PayPal. Finally, I would create a private weekly fantasy football game and enter lineups for each of my accounts. Once that week’s games had finished, I would have a single “winning” account whose funds would appear to be the legitimate proceeds of betting.
Establishing robust controls and submitting to regulatory oversight are crucial.
I still have to get my money out of the winning DraftKings account, and this appears to be the primary bottleneck. Though it is relatively easy to create an account with minimal information, DraftKings does have controls when it comes to removing funds. However, these appear to revolve primarily around ensuring that the person conducting the withdrawal has proper identification, which, even if it is stolen, we should be able to provide. From the perspective of the bank, we now have “clean” winnings from a legitimate betting site. We will have a bank statement reflecting the funds’ legitimacy and access to move them wherever we might wish to use them.
It is possible, of course, that the DraftKings risk team is robust and skilled enough to monitor for simple cases of money laundering like the example here. But the important takeaway is that, unless they are regulated and subjected to audits, we can do nothing but take their word for it.
The banks which transfer deposited funds to and from daily fantasy sports sites have little or no visibility into games, and will have a very difficult time separating legal bettors from criminals. Detecting even this simple, collusive funds concentration scheme can only be done by DraftKings itself.
While some fantasy sports companies claim they can “piggyback on the processors’ systems to prevent illicit activity,” that in no way accounts for strategic risks such as private games that are inherent to the businesses themselves, and which can only be addressed with internal controls. (Nevermind that many of the businesses they hope to rely upon have their own compliance issues.)
If DraftKings and other daily fantasy sports operators hope to establish long-term businesses and survive the onslaught of regulatory scrutiny they are now facing, establishing robust controls and submitting to regulatory oversight are crucial. There is no longer any reasonable hope of relying solely upon special exemptions from the many laws which apply to their peers.