Are Fantasy Sports Sites a Money Laundering Haven?

WASHINGTON — The proliferation of daily fantasy sports has been hard to miss in recent months.

Companies specializing in the business were some of the most aggressive advertisers in September, pouring millions of dollars into ad campaigns that were ubiquitous for most people watching sports.

But outside experts have been left wondering what kinds of controls firms that offer these contests are putting in place to prevent them from becoming money laundering hubs — and how careful banks should be when doing business with them.

"Everyone is watching this industry and everyone knows that the way to go here is through aggressive self-regulation, and that is the only thing that is going to prevent Big Brother from coming and regulating," said Jeff Ifrah, an attorney and founding partner at Ifrah PLLC who has experience representing the gaming industry and DFS businesses.

Jennifer Shasky Calvery, the director of the Financial Crimes Enforcement Network, said banks should understand the risks that fantasy sports companies could pose.

"It is like any business that they deal with … what is the model, what is the expected activity?" she said in an interview. "Just because it is new doesn't mean it is that different from the basics of how they should think about it."

But fantasy sports companies operate in a hazy area of regulatory oversight. The U.S. began regulating online gaming in 2006 with the passage of the Unlawful Internet Gambling Enforcement Act of 2006, which banned most forms of online gambling. The law left a carve-out, however, for fantasy sports contests that rely on skill rather than chance. The exception means the contests are lawful, but it's not clear who — if anyone — is supervising them for potential money laundering risks.

Calvery said Fincen does not oversee fantasy sports companies the way it does casinos, which have their own regulatory regime and money laundering requirements. But it is an area the agency is looking at.

"Here is a business that purports to have large volumes of funds moving through it," she said. "Like anything else, we will keep our eye on it."

Daniel Wallach, a gaming lawyer with Becker & Poliakoff, said more regulation of the burgeoning industry is inevitable.

The days of daily fantasy sports "operating in the unregulated space are numbered," he said.

Some fantasy sports firms said they already prepared for more oversight, and predicted it could ultimately benefit them.

Seth Young, who operates Star Fantasy Leagues, said his company has gone to great lengths to implement anti-money-laundering controls.

"If someone does not operate with [high] standards, that is a black mark for everybody else," he said. "We do a number of things to combat" money laundering.

Star Fantasy Leagues has built a monitoring system and follows "know your customer" rules, including verifying a person's age and ID with public records. The firm also cross-checks data with the Office of Foreign Assets Control to make sure its customers are not on the sanctions list.

"The curious thing is the business that we are in is an unregulated environment," Young said. "If we find some kind of activity that needs to be reported, we need to know who to send that to, so it would be good to have those questions answered."

But Ben Knieff, a senior analyst with Aite Group, said fantasy sports outfits pose risks for banks that do business with them.

They "are moving fairly large amounts of money" and "it is quasi-anonymous, so they should be running the same type of KYC and OFAC screening that any institution would be following," Knieff said. If there is a significant mistake and one of these companies ends up in hot water, "the bank is probably ultimately the one holding the bag from a regulatory perspective."

Perhaps as a result, banks so far have been careful about entering the payment processing space for fantasy sports operators.

"It is really not that easy to get payment processor approval from a bank," and only a few institutions are doing so, Ifrah said. "MasterCard and Visa are being very tough."

Steve Kenneally, vice president of payments and cybersecurity policy at the American Bankers Association, said the 2006 Internet gambling law allows banks to refuse to process transactions coming through fantasy sports firms.

The law "allows banks, if they choose, to reject all wagering transactions if they want to, even if they are considered lawful," Kenneally said.

Under the law, banks are required to block transactions that are associated with illegal Internet gambling, but have the freedom to accept or reject transactions from a company offering a game of skill. The law even allows banks to process the payment if such daily fantasy sports contests are illegal in the state.

Still, they can still pose a risk as lawmakers look at the issue.

"A change in the classification from unrestricted to restricted transactions could lead to compliance deficiencies, adverse examination findings, and even possible civil proceedings," Peter Dugas and Sharon Blanchette of FIS Global wrote in a recent note to clients. "The possibility of a financial institution knowingly accepting payments for unlawful gambling transactions is, by itself, a critical exposure for the safety and soundness of the financial institution, and efforts to manage and mitigate these deficiencies and risks must not be compromised by revenue interests."

With the proliferation of daily sports contests, more banks may want to take them on as clients. But that could be difficult until such firms are consistent in their approach to combating money laundering, observers said.

"We have seen even major operators like DraftKings take divergent positions from other major operators like FanDuel on core existential issues," said Chris Grove, a publisher at LegalSportsReport.com and a senior consultant at Eilers Research. "When I see that, it's not hard for me to imagine that there is also some divergence in the industry about how seriously they take AML."

Many of the operators do not require any more than a name, username, password and email to open an account. However, since most allow deposits to be made through a credit card or PayPal account, some fantasy sports firms are able to piggyback on the processors' systems to prevent illicit activity.

"From the point of placement … we don't see that as a risk because people can't sign up for these leagues and pay with cash," said Vasilios Chrisos, a principal with the fraud investigation and dispute services at Ernst & Young. "The accounts are funded via other financial institutions and the placement is happening elsewhere in the financial system."

Ifrah said fantasy sports firms could reasonably rely on credit card processors or PayPal to address money laundering risk. "When you think who the gatekeeper is, it is really the credit card," Ifrah said.

A PayPal spokesperson said the company carefully screens daily fantasy sports contests.

"One of the criteria we evaluate before granting approval is the merchant's own compliance programs to prevent money laundering," the spokesperson said. "Processing payments for fantasy sports providers is no different."

Yet observers said the businesses should be paying more attention to money-laundering issues.

"They could be doing more monitoring of how people are moving around," said Vikas Agarwal, a partner with PricewaterhouseCoopers' Risk Assurance Services Practice, noting that operators could be looking for a pattern of people throwing contests or looking for keywords when people are chatting on their platforms.

In a statement, the Fantasy Sports Trade Association said the industry is taking those risks seriously.

"Companies have instituted monitoring systems to identify and prevent fraudulent or suspicious transactions," the group said. "Were anyone to attempt to transfer money through head-to-head contests, their activity would be identified and blocked by fraud prevention teams."