Fantasy sports—informal fantasy games where groups of fans play against one another for fun or monetary gain over the course of a sports season—are a mainstream part of North American sports culture. The evidence is clear, think about the numerous emails exchanged by co-workers playing in office sports leagues, or how The League, a sitcom about a fantasy football league, is in its seventh season this year. Recently, fantasy sports competitions, as they relate to online daily fantasy sports (DFS) companies led by DraftKings¹ and FanDuel,² have turned this pastime into a lucrative industry.

These companies set up daily and weekly online games, based on similar concepts to traditional fantasy leagues. Fans pay an entry fee to a website (from tens to thousands of dollars), to play with an opponent or hundreds of opponents, with prize pools paying as much as $2 million to the winner.³

Companies are able to operate thanks to an apparent exemption of U.S. gambling laws that label DFS competitions “games of skill” rather than chance.⁴ The exception arguably means that the contests are lawful, but it is not clear who, if anyone, is supervising them for potential money laundering (ML) risks.⁵

Sports fans are all too aware of the titans of DFS—DraftKings and FanDuel—which in recent months have become aggressive advertisers, pouring millions of dollars into ads during sporting events⁶ and boasting valuations of more than $1 billion each and hundreds of millions of dollars in private investments.⁷

Assisted by investors like Major League Baseball, the NBA, Comcast, NBC and Google, DFS operators have been able to grow their business immensely. For instance, last September FanDuel said it was signing 20,000 to 30,000 players every day—a feat even the most prolific social media sites would envy. This influx of customers and money brings elevated ML risks to the financial system.

The Roots of DFS

To understand who ultimately bears the ML reporting burdens, it is necessary to understand the roots of DFS. The story begins, perhaps, in April 15, 2011—the Black Friday of online poker. On this date, the U.S. government unsealed an indictment that caused PokerStars and Full Tilt Poker to stop offering real money play to their U.S. customers.

This indictment was the result of United States v. Scheinberg, a federal criminal case against PokerStars, Full Tilt Poker and Cereus Poker Network, which alleges that the defendants violated the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 and engaged in bank fraud and ML in order to process transfers to and from their customers.⁸

The U.S. began regulating online gaming with the passage of UIGEA, which prohibits businesses from knowingly accepting payments, in connection with the participation of another person, in a bet or wager that takes place online and is unlawful under U.S. law.⁹

The law prohibited games like online poker, but permitted fantasy play competitions that were deemed games of skill and not chance.¹⁰

The law explicitly states that fantasy sports games do not count as betting if they have a few key attributes, including set prize pools, skill-based contests and if they do not rely on the outcome of any single sports event. FanDuel and DraftKings interpret this caveat as an exemption from gambling laws and design games to adhere to this definition of fantasy sports.¹¹

How DFS Works

Although there are many operational DFS companies that offer specific benefits, their basic model tends to be universal. DFS competitions are an accelerated variant of traditional fantasy sports, conducted over short-term periods, as opposed to traditional fantasy sports leagues that last an entire season.

Contestants create a profile at a DFS website and make a deposit by credit card, PayPal or in some cases, Bitcoin.¹² Companies attract new customers by offering bonuses on customer deposits, which customers use to play contests. The size and specific limitations of bonuses, which are typically a percentage of the deposit, changes from company to company.

Games are structured by DFS companies in the form of competitions (contests) where participants pay an entry fee and build a team of players in a selected sport while complying with a salary cap. Depending on their overall performance, participants may win a share or all of the predetermined pot. Entry fees fund prizes, and a portion of the entry fee goes to the provider as profit. Winners receive prompt payment, typically made on the day of the victory.¹³

Types of DFS Competitions

Each DFS company offers multiple contest formats that typically include the following:¹⁴

• Guaranteed prize pools (GPPs): As the most popular format, GPPs feature smaller buy-ins and top heavy payouts. More so than any other format, GPPs encourage players to take educated risks. GPPs may allow for multiple entries, meaning players can submit more than one roster.
• Double and triple-ups: Players that finish in the top half or third of the field—depending on the format—are rewarded with two to three times their buy-in, minus the profit that goes to the DFS company.
• Heads-up: Heads-up cash games feature the same payout structure as double-ups, but there is just one winner and one loser.
• Winner-take-all: This is a format typically associated with experienced players. Players compete in three to five man winner-take-all cash games, where the first place finisher receives the prize pool.
• Season: This is a season-long format that bridges the gap between daily and traditional fantasy sports.

Money Laundering Risk Obligations

The DFS exemption from the UIGEA means that DFS companies are not considered casinos and are thus not overseen by the Financial Crimes Enforcement Network (FinCEN). Jennifer Shasky Calvery, the director of FinCEN, 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.”¹⁵

Although DFS companies do not have a clear ML regulatory requirement, the large volumes of funds moved through these businesses make them a potentially high-risk business type.

Arguably the player-to-player transfers implied in DFS contests likely trigger legal anti-money laundering (AML) obligations for banks. Banks that transfer funds to and from DFS sites have little or no visibility into the contests, and will have a difficult time separating legal contestants from criminals.¹⁶

If illicitly derived funds are funneled through DFS contests, the onus of filing suspicious activity reports (SARs)¹⁷ cannot fall on DFS companies as they have no legal obligation and no clear avenue to file such reports. DFS companies might thus rely on the financial institutions (FIs) that bank DFS companies and/or their customers, or credit card processors and PayPal to address ML risk mitigation, including reporting suspicious transactions to the authorities.

DFS Money Laundering Typologies

There are some basic ML typologies associated with DFS that AML professionals should be aware of, including:

• “High-value transactions
• Ability to quickly receive payments from many users
• Potential use of fake names and creation of unverified accounts
• Quick intake and payment (for instance, FanDuel advertises same-day payment)
• Option to set up head-to-head match-ups and easily rig the outcome
• Ability to easily and repeatedly use the laundering mechanism/scheme
• Worldwide reach afforded by the Internet”¹⁸

Beyond these typologies, there are two potential arguments that authorities might pursue in order to hold FIs liable for their inability to satisfy regulatory risk requirements.¹⁹

DFS Money Laundering Risks

First, federal law criminalizes the failure to file a SAR if the SAR involved suspicious transactions aggregating more than $5,000 (for most financial institutions) and if it was done willfully.²⁰

A recent article by global law firm K&L Gates,²¹ outlined several ML risks associated with DFS businesses and with the massive payouts involved. In fact, DraftKings²² and FanDuel²³ both boasted expected payouts totaling over $1 billion dollars in 2015. AML compliance officers should be aware that many DFS websites “allow entry into multiple, high-dollar-value, single-day, head-to-head contests against only one other player, who can be specifically selected.”²⁴ If money is laundered through one of these contests and banks are unable to identify potential red flags associated with payout transactions, the failure to file SARs could be problematic. Red flags might include consecutive winning payments from DFS companies or relatively large transfers to DFS accounts, which do not correspond to a client’s expected income.

Second, FIs “must establish adequate AML programs appropriate for the risk level of their lines of business. These programs must include, at a minimum, the four pillars of AML compliance: (1) the development of internal AML policies, procedures and controls, (2) the designation of an AML compliance officer, (3) an ongoing employee AML training program and (4), an independent audit function to test AML programs.”²⁵ In this case, lack of training may cause AML investigators to miss red flags such as identifying a DFS customer who is continuously winning contests. Such activity is comparable to a customer who continuously cashes out thousands of dollars at a casino on a weekly basis.

Moreover, smaller DFS companies, whose games do not meet the narrow definition of fantasy play provided by the UIGEA, may be violating federal anti-wagering statutes. The UIGEA suggests that DFS is based on skill and not chance in part because no winning outcome is based:

1. “On the score, point-spread, or any performance or performances of any single real-world team or any combination of such teams; or
2. Solely on any single performance of an individual athlete in any single real-world sporting or other event.”²⁶

Contests based on racing or fighting are in danger of such a breach because of the single winner implied by the sports.

A Possible Money Laundering Scheme Utilizing DFS

Articles by Techcrunch.com²⁷ and USA Today²⁸ have outlined ways a criminal might launder money using DFS websites.

Suppose a criminal needs to launder $50,000 in cash and wants to use a DFS company to accomplish this. Since the criminal cannot make cash deposits to a DFS website, they might use smurfs to “buy money orders and split them between accounts at multiple banks,”²⁹ perhaps using stolen or falsified identification. For example, consider how one criminal organization used a single stolen identity to open 5,000 accounts with a combined turnover of $800 million at HSBC.³⁰

A more sophisticated money launderer might have his colluders open multiple DFS accounts, “provide the colluders with their login [information], install software that allows the user to mask their geographic location, and then simply leave their computer on at all times so that it can be remotely controlled by the money launderer from any location around the world.”³¹

Upon distributing the money, the money launderer could fund multiple DFS accounts with debit cards, credit cards or PayPal. They would then create a weekly fantasy football game and create lineups under multiple accounts. There would be a single “winning” account with funds that appear to be the legitimate proceeds from winning a contest.

If the person making the withdrawal has proper identification, they should be able to transfer the funds from the winning DFS account to a bank account. A DFS company might have controls in place robust enough to identify such illicit activities, however, since the business is not regulated, banks would have to take the company at its word.

Potential Steps to Mitigate AML Risks from DFS Sites and Users

When dealing with DFS-related activity, there are measures banks can take to mitigate risk emanating from DFS companies and their users.

If a bank chooses to onboard a DFS company, elevated know your customer (KYC) and enhanced due diligence (EDD) controls must be applied. Banks must understand the particular contests the companies offer and ensure that they adhere to the UIGEA’s definition of fantasy sports.

DFS companies must also offer guarantees that they are not offering their services to people residing in states that have outlawed DFS. Banks should also liaise with DFS companies to understand the company’s KYC controls and make recommendations or require conditions as necessary.

When accepting payments from a DFS company to bank customers, banks should also institute EDD measures

When accepting payments from a DFS company to bank customers, banks should also institute EDD measures. First, it should be assessed whether banks “are engaging in transactions in connection with DFS sites that are or may be operated unlawfully,” and second, banks should “update controls to block transactions associated with those sites.”³²

If the bank’s AML professionals are sure that the payments are coming from an established DFS site, they must still alert possible ML red flags, such as transactions aggregated over time in a consistent pattern (i.e., investigate consistent or routine winning).

In investigating such patterns, a distinction should be made between payments to DFS company employees versus DFS customers.

The Future of DFS

DFS companies have come a long way in a short amount of time. The money these companies generate and the partnerships they have developed are impressive, but such companies may have taken a gamble in building an industry that rests on an exemption to the definition of “betting.” Regulatory changes aimed at neutralizing this exemption to the UIGEA and state bans on their industry, could pose lethal threats.

It is probably fair to assume that FanDuel and DraftKings currently pay little tax as most of their profits have been spent on their massive marketing costs. Their non-UIGEA counterparts are, on the other hand, levied taxes against gross gaming revenue, not profit, at rates up to 70 percent in some states.³³

Traditional gambling companies (e.g., casinos) cope with such restrictions as the games they offer are inherently profitable. This may not be true for DFS, which has much of its revenue tied in with the large payouts it offers to ensure maximal growth. Changes in laws that would tax DFS companies in a similar way to gambling companies could halt their growth.

DFS companies also face the possibility that more U.S. states will continue to pass laws that prohibit them from offering their services to their residents. UIGEA does not prevent states from passing more restrictive measures, and fantasy sports have already been outlawed in seven states.³⁴

Notably, in November 2015, the New York State Attorney General ordered the “two biggest daily fantasy sports companies, DraftKings and FanDuel, to stop accepting bets from New York residents, saying their games constituted illegal gambling under state law.”³⁵ The probe by New York State’s Attorney General into the DFS industry has since expanded to include online media giant Yahoo Inc.³⁶

Given the New York Attorney General’s historic role as a consumer-protection advocate, this action may set an example to other states causing investigators to question if the DFS industry should operate without the regulations that govern legalized gambling.

Arguably, it is in the best interest of the DFS industry that their operators willingly and proactively regulate themselves by initiating top tier KYC, EDD and AML controls. This might appease state regulators and allow DFS companies to continue building their industry in the thin piece of regulatory property the UIGEA has given them.

Leonardo Real, manager capital markets investigations, AML FIU, Bank of Montreal, Toronto, Ontario, Canada, leonardo.s.real@gmail.com

Edited by: Peter Warrack, CAMS, director risk intelligence, Bank of Montreal, Toronto, Ontario, Canada, peter.warrack@bmo.com

The opinions and views expressed in this article are those of the author and do not represent the views of the Bank of Montreal or its subsidiaries.

1. https://www.draftkings.com/
2. https://www.fanduel.com/
3. Joe Drape and Jacqueline Williams, “Scandal Erupts in Unregulated World of Fantasy Sports,” New York Times, October 5, 2015, http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html
4. Ibid.
5. Ian McKendry, “Are fantasy sports sites a money laundering haven?,” American Banker, October 9, 2015, http://www.americanbanker.com/news/law-regulation/are-fantasy-sports-sites-a-money-laundering-haven-1077178-1.html
6. Ibid.
7. Thomas Barrabi, “Daily Fantasy Sports Regulation: FanDuel CEO Nigel Eccles Expresses Support to Ensure Consumer Protection,” International Business Times, October 29, 2015, http://www.ibtimes.com/daily-fantasy-sports-regulation-fanduel-ceo-nigel-eccles-expresses-support-ensure-2161922
8. David McLaughlin and Beth Jinks, “Online Poker Companies in Accord with U.S. on Players’ Money,” Bloomberg Business, April 20, 2011, http://www.bloomberg.com/news/articles/2011-04-20/online-poker-companies-reach-accord-with-u-s-on-players-access-to-money
9. “Unlawful Internet Gambling Enforcement Act of 2006—Overview,” FDIC, https://www.fdic.gov/news/news/financial/2010/fil10035a.pdf
10. Joe Drape and Jacqueline Williams, “Scandal Erupts in Unregulated World of Fantasy Sports,” New York Times, October 5, 2015, http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html
11. Ira Boudway, “How will the government change the game for daily fantasy sports?,” Bloomberg Business, October 15, 2015, http://www.bloomberg.com/news/articles/2015-10-15/how-will-the-government-change-the-game-for-daily-fantasy-sports-
12. “Bitcoin Fantasy Sports,” http://www.bitcoinsportsbookreviews.com/bitcoin-fantasy-sports/
13. “Playing Daily Fantasy Sports for Dummies,” http://www.dailyfantasysports101.com/basics/
14. “Star Fantasy Leagues: Fact Sheet,” Legal Sports Report, http://www.legalsportsreport.com/starfantasy-leagues-review/
15. David Gzesh, “Next Up for Daily Fantasy Sports: Clarification of Anti-Money Laundering Compliance,” Legal Sports Report, October 30, 2015, http://www.legalsportsreport.com/5717/dfs-anti-money-laundering-compliance/
16. Lawrence Uebel, “How I Would Launder Money with DraftKings,” TechCrunch, October 25, 2015, http://techcrunch.com/2015/10/25/how-i-would-launder-money-with-draftkings/
17. Suspicious activity report (STR) in Canada.
18. Mark A. Rush, Joseph A. Valenti and Benjamin J. Risacher, “Is money being laundered through your financial institution using daily fantasy sports sites?,” K&L Gates, October 29, 2015, http://www.klgates.com/is-money-being-laundered-through-your-financial-institution-using-daily-fantasy-sports-sites-10-29-2015/
19. Ibid.
20. “FinCEN Suspicious Activity Report (FinCEN SAR) Electronic Filing Instructions,” FinCEN, October 2012, https://www.fincen.gov/forms/files/FinCEN%20SAR%20ElectronicFilingInstructions-%20Stand%20Alone%20doc.pdf C.F.R. Ch. X
21. Mark A. Rush, Joseph A. Valenti and Benjamin J. Risacher, “Is money being laundered through your financial institution using daily fantasy sports sites?,” K&L Gates, October 29, 2015, http://www.klgates.com/is-money-being-laundered-through-your-financial-institution-using-daily-fantasy-sports-sites-10-29-2015/
22. Gregg Easterbrook, “DraftKings and FanDuel Are Not Your Friends,” New York Times, October 6, 2015, http://www.nytimes.com/2015/10/07/upshot/the-big-winners-in-fantasy-football-and-the-rest-of-us.html
23. https://www.fanduel.com
24. Mark A. Rush, Joseph A. Valenti and Benjamin J. Risacher, “Is money being laundered through your financial institution using daily fantasy sports sites?,” K&L Gates, October 29, 2015, http://www.klgates.com/is-money-being-laundered-through-your-financial-institution-using-daily-fantasy-sports-sites-10-29-2015/
25. Mark A. Rush, Joseph A. Valenti and Benjamin J. Risacher, “Is money being laundered through your financial institution using daily fantasy sports sites?,” K&L Gates, October 29, 2015, http://www.klgates.com/is-money-being-laundered-through-your-financial-institution-using-daily-fantasy-sports-sites-10-29-2015/
26. “An act relating to fantasy sports contests,” January 30, 2015, http://lawfilesext.leg.wa.gov/biennium/2015-16/Pdf/Bill%20Reports/Senate/5284%20SBA%20CL%2015.pdf
27. Lawrence Uebel, “How I Would Launder Money with DraftKings,” TechCrunch, October 25, 2015, http://techcrunch.com/2015/10/25/how-i-would-launder-money-with-draftkings/
28. George Pataki and James Thackston, “Online Gambling a Bigger Risk Than You Think: Column,” USA Today, January 30, 2014, http://www.usatoday.com/story/opinion/2014/01/30/online-gambling-terrorists-column/5055941/
29. Lawrence Uebel, “How I Would Launder Money with DraftKings,” TechCrunch, October 25, 2015, http://techcrunch.com/2015/10/25/how-i-would-launder-money-with-draftkings/
30. Jerome R. Corsi, “Whistleblower Explains ABCs of Money Laundering,” WND, February 23, 2012, http://mobile.wnd.com/2012/02/whistleblower-explains-abcs-of-money-laundering/
31. George Pataki and James Thackston, “Online Gambling a Bigger Risk Than You Think: Column,” USA Today, January 30, 2014, http://www.usatoday.com/story/opinion/2014/01/30/online-gambling-terrorists-column/5055941/
32. Mark A. Rush, Joseph A. Valenti and Benjamin J. Risacher, “Is money being laundered through your financial institution using daily fantasy sports sites?,” K&L Gates, October 29, 2015, http://www.klgates.com/is-money-being-laundered-through-your-financial-institution-using-daily-fantasy-sports-sites-10-29-2015/
33. Ira Boudway, “How will the government change the game for daily fantasy sports?,” Bloomberg Business, October 15, 2015, http://www.bloomberg.com/news/articles/2015-10-15/how-will-the-government-change-the-game-for-daily-fantasy-sports-
34. Brad Reagan and Devlin Barrett, “FBI, Justice Department Investigating Daily Fantasy Sports Business Model,” Wall Street Journal, October 15, 2015, http://www.wsj.com/articles/fbi-justice-department-investigating-daily-fantasy-sports-business-model-1444865627?mod=LS1
35. Walt Bogdanich, Joe Drape and Jacqueline Williams, “Attorney General Tells DraftKings and FanDuel to Stop Taking Entries in New York,” New York Times, November 10, 2015, http://www.nytimes.com/2015/11/11/sports/football/draftkings-fanduel-new-york-attorney-general-tells-fantasy-sites-to-stop-taking-bets-in-new-york.html?_r=0
36. Suzanne Barlyn and Jessica Toonkel, “Yahoo a New Target in NY Daily Fantasy Sports Probe: Source,” Reuters, November 18, 2015, http://www.reuters.com/article/2015/11/18/us-fantasysports-new-york-yahoo-idUSKCN0T709V20151118?mod=djemRiskCompliance#rzKzfVJVRZtgmzx5.97