Why iGaming Regulators Must Protect Player Funds

Safeguarding customer funds is fundamental to the integrity of remote gambling operations. Players will always be concerned whether their funds will be safe with the operator or not. Issues of trust and security are critical to a well-regulated industry.

There’s a certain amount of risks involved when depositing funds with an online gambling site. An infamous high-profile case that comes to mind is the Full Tilt Poker debacle. Jurisdictions like Alderney, Gibraltar, Isle of Man and Malta have imposed stricter regulatory measures to minimize the potential loss of customer funds at the hands of unscrupulous operators.

Imposing General Licensing Principles

Licensing principles that underpin most remote gambling regulatory regimes is the protection of the consumer, fairness and transparency in gambling. The crux of the matter it’s directed at minimizing criminal involvement within the industry. Several interrelated elements exist that helps to curb the loss of player funds. Before a license is issued, proper due diligence such as financial standing, fitness and propriety must be done first. Such licensing and compliance play a pivotal role and ensures a coherent, robust and healthy licensing system.

”Gambling regulators worldwide recognize that the best control is at the point of entry, and they take pains to ensure that no unsuitable applicant is granted a license in the first place.” Peter Dean, Former Chairman British Gambling Commission

Most jurisdictions nowadays scrutinize applicants before they grant a license, they must demonstrate how customer funds will be protected. That being said, contextual factors vary considerably from one jurisdiction to the next. What exactly are these factors? It includes the size of the operator and the amount of player funds it holds.

Traditionally, the protection of player funds focused on ensuring that operators could meet their potential liability in terms of payouts or winnings. One of the burning issues is where operators deliberately withhold large progressive wins by paying winnings over an extended period. For example, a progressive win of $250,000 will be paid out in installments of $5,000 per month until the player has been paid in full. A clause such as this is not in the best interest of the player nor is it in the spirit of fair gaming.

”Such Jackpot prizes may be awarded to the winners in up to 24 monthly installments if so decided by the Company at its sole discretion. The Company reserves the right, for a reasonable period of time, to review your jackpot win to ensure its validity.” Wicked Jackpots Casino

With bricks and mortar casinos, regulators require them to hold a certain amount of funds aside which reflects their potential exposure to customer winnings. This is often based on a worst case scenario. In September 2011, the British Gambling Commission removed the requirement for terrestrial casinos in the UK to maintain a gaming reserve. Evidence suggested that only a small risk existed that any given reserve would ever be required to be called upon.

The growth of community games such as online poker, compelled regulators to grapple with the issue of operators holding players’ ”stacks”, often on an ongoing basis. Consolidation in the market and the huge significance of liquidity in poker (and other P2P products), means that a few operators hold large amounts of customer funds. Once again the Full Tilt Poker saga comes to the fore. As a result, the issue of securing customer funds is no longer merely a question of covering potential exposure, but also protecting customer deposits. Not only will it protect player funds from misappropriation but against claims of creditors in the event of insolvency.

Operators That Embezzled Player Funds

In recent years several high-profile cases involved the loss of player funds. In 2004, the betting exchange Sporting Options allegedly used player funds instead of its own funds to support liquidity on the stock exchange. More recently, Worldspreads Limited, a spread betting subsidiary of Worldspreads PLC, listed on the Alternative Investment Market in London and the Irish Stock Market, ceased trading in March 2012. New management discovered that £13 million was ”missing” from player accounts.

In July 2012, Purple Lounge an online casino and poker website, licensed in Malta, ceased trading due to money it owed players. The Board of its holding company to shareholders and customers said, that the costs of 5050 Poker Limited long exceeded revenues. Meaning that the company used player funds to run the operation. It also stated that the Board had been ‘unaware’ of this because the management of 5050 Poker had presented false information. The company has been placed into liquidation.

The above mentioned examples and that of Full Tilt Poker demonstrate the increasing importance why regulators must compel operators to protect player funds. The question arises, whether player funds can really be protected. In his report to the Alderney Gambling Commission (AGCC), the regularly proceedings that lead to the suspension of Full Tilt Poker, Peter Dean said, ”Gambling regulators differ in the attitudes on this topic, which range from caveat emptor at one extreme to favoring a complete safety-net at the other, though total protection is not achievable in practice.”

How Does The Transfer Of Cash To Cyber Casinos Really Work?

Let us consider the movement of funds. When a player instructs his bank to transfer money from his own account to the account of the online gambling site, he losses control over it. Technically speaking, the player is not the legal owner of the funds any more. Rather the bank will have legal title to the funds, as such the player will be a creditor to the bank. According to English law it’s considered a chose of action: recognition of the bank that the player has deposited funds that must be repaid to him according to the terms of the contract between them.

Once the player instructs his bank to transmit funds to an online casino, those funds are generally exposed to a greater risk than when they were held by the player’s own bank. Under the terms and conditions of the gambling website, the player agrees to transfer funds to be deposited within the customer account of the operator. Once the funds are transferred, the player becomes a creditor to the operator.

Strictly speaking, the use of credit card providers and the relationship between the card provider and the player further complicates matters. In this case, the player authorizes the transfer of monies to the operator. Once the funds have been received into the bank account nominated by the gambling operator, legal title will be held by the casino’s bank. The gambling operator is now the creditor of the bank and the player now the creditor of the operator. It’s pretty evident that securing the safety of a customer’s money is not a straightforward task.

Trust Accounts

The use of trust accounts is routine in common law jurisdictions and not only in the gambling sector. In the United Kingdom for instance, lawyers deposit client funds in client accounts expressed to be trust accounts. If the professional is insolvent, the funds held in the client account are not the assets of the professional but remain assets of the client. Gambling operators normally have players’ funds trust accounts. Whether the monies in such a trust account are fully protected remains to be seen.

In the event of fraud or wrongdoing, trust monies remain vulnerable. For example, those required to give instructions to the relevant bank in respect of monies held on trust on behalf of players could act in such a way as to betray that trust. Clearly, regulators can establish mechanisms that significantly reduce the possibility of a rogue individual defrauding players in this manner.

In practice, weaknesses in any regulatory mechanism may exist. In the case of a trust account, individuals must instruct on behalf of the operator or the trust that the bank move funds in and out of the trust accounts. If they do so fraudulently or otherwise beyond the scope permitted by the customer, the protection is compromised.

How Can Player Funds Be Protected?

• Player funds must be monitored careful by regulatory authorities.
• Proper internal accounting practices.
• Account reconciliation. In particular between the players’ interactive gaming accounts balances and the balances  of funds held in segregated accounts.
• Accurate and timely reporting.
• Robust external audits.

As Peter Dean rightfully pointed out, no system can offer complete protection. For a trust account to work, it must meet the relevant legal requirements, the details of which are beyond the scope of this article. In the case of Full Tilt, which was not required to hold funds in trust accounts, the position may have been further complicated.

Not only were players allegedly mislead as to the level of protection afforded to the funds, but their accounts were credited with funds not yet received by the operator because of processing difficulties. This underlines why regulators must ensure that internal procedures are sufficiently robust and rigorously policed to make sure that customers gamble with funds that are actually in their accounts. Among other things Full Tilt Poker failed to meet compliance with required financial ratios and its license were subsequently revoked.

Conclusion

It might be argued, that if a player chooses to deposit funds with an operator, sufficient information must be provided to enable the player to make an informed choice. A consequence of the Full Tilt problems, may be greater customer awareness of the potential risks placed by the operators at the behest of regulators. It remains to be seen whether and how all regulators and collectively through organizations such as GREF (Gambling Regulators European Forum) choose to develop their requirements.

Reference

1. Regulating Internet Gaming, Challenges and Opportunities- Anthony Cabot and Ngai Pindell.