DFS Operators Need To Diligently Adhere To Federal Laws

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Friday, November 20th, 2015 | Written by Charles Washington

As daily fantasy sports (DFS) sites prepare to take on regulators in a number of US states currently working on legislating the industry, it seems that they also need to be concerned with the increasing level of scrutiny aimed at their businesses by the federal government. One area of concern relates to money laundering, with a recent article in American Banker bringing to light the importance of DFS betting sites taking the necessary steps to ensure that they diligently adhere to federal anti-money laundering laws. At the same time, the article also points out the difficulties that financial institutions may face accepting funds from DFS sites if the operators involved are not putting the proper precautions in place.

Scope of Anti-Money Laundering Laws

Anti-money laundering laws are put in place in order to discourage organized crime and terrorist organizations from funneling money through financial institutions in order to “clean” funds or make it hard to trace back to illegal activities. All banks and financial institutions, including payment processing companies that handle credit and debit card transactions for websites, are required by law to put policies and procedures into place in order to prevent money laundering.

Online daily fantasy sports betting sites process financial transactions using payment processors that must comply with anti-money laundering guidelines, but that doesn’t mean that they’re not also responsible for taking steps to prevent illegally obtained monies from flowing through their site. There is already a precedent for online gambling operators being held liable for not preventing money laundering. After Black Friday, for instance, a number of online poker sites were found to be in non-compliance with anti-money laundering laws.

Land-based casinos are also subject to the requirements of anti-money laundering laws. The Venetian and Caesars were both levied with steep fines for not fully complying with the federal laws.

DFS Betting and Money Laundering

One of the most common ways that money launderers use online gambling to pass along funds is through player to player transfers. When money can change hands from one individual to another without any oversight, it’s incredibly easy to transfer money, which was why online poker sites were often targeted by money launderers.

Like online poker, daily fantasy sports betting also involves player to player transfers, but the very nature of the wagering would make it harder to ensure a successful transfer. Because winning depends on the performance of players in games and the results of the games are general knowledge to the public, it’s much more difficult to set up an automatic transfer.

So while it’s possible that players could use daily fantasy sports betting sites to launder money, the risk of this occurring does not seem to be very high. As a result, it’s clear that what’s at issue here isn’t really preventing money laundering but expecting daily fantasy sports betting sites to operate in compliance with laws. It does seem that the operators in the U.S. are beginning to take those steps. FanDuel has hired a former U.S. Attorney General to review their current regulations, and DraftKings has announced that they are also getting ready to hire a third-party for an external review.

DFS Sites Could Soon Face Federal Ban

While daily fantasy sports sites, such as DraftKings and FanDuel, frantically attempt to get their houses in order, they also face the possibility that their business model may already be deemed counter to the Internet Gambling Enforcement Act (UIGEA), and so may soon be banned at a federal level by the Department of Justice.

When the UIGEA was introduced in 2006, the DFS industry was granted a special carve-out, thanks in no small part by pressure from major sports leagues, as well as the fact back them the it was not viewed as gambling, but rather as a skill based game played among friends. With the increased marketing links between the DFS industry and major sports leagues, the DFS has since grown beyond all recognition, and is now a multi-million industry whose two main market leaders, DraftKings and FanDuel, are worth over $1 billion each.

As a result, Jim Leach, one of the original author’s of the UIGEA, and U.S. House of Representatives member for Iowa from 1977–2007, recently said that there was no longer a credible way in which “fantasy sports betting can be described as not gambling.” Together with the states of Nevada and New York now classifying DFS as gambling, and other US states, including California also investigating the DFS industry, it may just be a matter of time before the practice is legislated against at a federal level. Another possibility is that the Department of Justice may place it in the same category as sports betting, in which case the market could then be restricted to just those four states included in the Professional and Amateur Sports Protection Act of 1992. In any case, tough times lie ahead for the DFS industry, with a Black Friday scenario appearing to be one possible final outcome.