The online gambling industry is hugely lucrative, which makes it a prime target of fraudsters. To prevent fraud and criminal activity, certain security steps need to be taken, including the implementation of an anti-money laundering (AML) program. One of the primary features of this type of program is the identification verification measure Know Your Customer (KYC). KYC in gaming is extremely important for both customers of iGaming destinations and operators. In this article, we’ll explore both KYC and AML to help you understand why these security measures are not only vital for online gambling businesses but are also a legislation requirement in many jurisdictions.
Understanding KYC and AML
As previously mentioned, online gambling operations are prime targets for fraud. In particular, identity fraud, money laundering, and international financial crime are among the common types. To help ensure that online casinos, online sportsbooks, and other internet gambling institutions are protected from fraud, regulatory compliance has become increasingly stricter to help ensure real money gambling (RMG) operations are taking the necessary measures to prevent criminal activity.
What is KYC in Gaming?
KYC, which stands for “Know Your Customer”, is a fundamental process included as part of any financial institution’s anti-money laundering program. Information is gathered on customers and is used to verify their identities. For instance, every bank customer must be verified before they are permitted to use financial services like credit cards and checking accounts. Prior to initiating any business activity with a client, fintech companies must gather significant and viable information about the client’s identity to verify their legitimacy.
When used in iGaming, KYC is an identity verification measure for players and is sometimes referred to as “Enhanced Due Diligence”. It helps iGaming operators to identify and verify the customers who sign up to their websites online and via mobile. To comply with KYC requirements, players must provide gambling sites certain legitimate and up-to-date documents to prove their identity, place of residence, and proof of payment.
The purpose of the KYC measure in online gambling is to:
- Prevent underage gambling
- Prevent gambling addicts who have self-excluded from playing
- Prevent financial fraud – credit card and cashback fraud
- Prevent the same user from creating multiple accounts
- Monitor for suspicious activity
- Flag users who may be potentially risky
What is AML in gaming?
AML, which stands for “Anti-money Laundering”, is the overall broader measures and processes that government and financial institutions use to prevent and combat money laundering, fraud, terrorist financing, and other financial crimes. AML regulations are created by international bodies and differ from one jurisdiction to the next.
In terms of gaming, AML regulations that an online gambling business must follow depends on the jurisdiction where they operate and the jurisdictions of the players they accept.
- USA – In the United States online gambling businesses with a gross revenue of $1 million or higher are classified as NBFI (Non-bank Financial Institutions). As such, they are required to adhere to regulations similar to banks for the prevention of fraud, money laundering, and financial crimes. FinCEN (Financial Crimes Enforcement Network) is in charge of monitoring AML compliance regulations under the BSA (Bank Secrecy Act).
- UK – In the United Kingdom, AML regulations are based on the Proceeds of Crime Act. The UK Gambling Commission also has strict rules in regard to KYC processes to prevent underage gambling and to prevent those who’ve self-excluded from gambling. It is also used to identify potentially high-risk individuals who may be subject to financial sanctions or who hold a political position of power, to help protect against money laundering, terrorist funding, and other financial-related criminal activity. It should also be noted that operators who hold a gambling license from the Gambling Commission must follow stringent KYC verification procedures that requires the customer to complete KYC upon opening an account, and not only when they make a deposit or withdrawal as is the case with many other jurisdictions.
- EU – For online gambling markets that fall under the European Union, the primary regulation in place for AML and KYC compliance are the EU’s Fourth Money Laundering Directive and Malta’s Prevention of Money Laundering Act. These directives are not unlike the USA and UK laws. However, KYC procedures are slightly less stringent and are not prompted until a player makes a deposit that exceeds €2,000.
As there is no standard AML regulatory compliance across the iGaming industry, it is important for businesses to investigate which laws and rules apply to their operation.
Is KYC and AML the same thing?
KYC and AML do share similarities in that their purpose is to prevent fraud and other criminal activity. Furthermore, KYC is a part of the AML process. That said, although in the regulatory compliance sector the terms are often used interchangeably, there is a difference between them.
Essentially, the primary difference is that AML is an umbrella term for the various measures and processes a company must have in place. KYC, on the other hand, is a component of AML, but a separate process that is specific to a company verifying their customers’ identities. KYC must follow certain rules as outlined by financial institutions and/or other regulatory bodies.
A closer look at the differences
To help you gain a better understanding of the primary differences between the two terms in relation to iGaming, have a look at the following table.
What is KYC Identity Verification?
The KYC identity verification process or Enhanced Due Diligence is a procedure designed to verify a customer’s identity. This is done by having them submit personal information (e.g. full name, email, address, mobile number, etc.) as well as official documentation that can support the information they have provided.
Although there is no KYC standardization across the global industry, most gaming control boards provide a list of documents to licensees that are considered valid for verifying a customer’s ID.
How do online casinos verify identity?
Generally speaking, when it comes to KYC in gaming, to comply with regulations an online gambling operation will ask players to provide basic identification so that their identity can be verified. This may include (but is not necessarily limited to):
- Full legal Name
- Residential address
- Mobile number
- Social security number (US)
The above information is typically requested when a user signs up and can be found within the registration form. However, for a full KYC check, the player will need to submit copies (digital images) of official documentation that can prove they are who they say they are. There are two main categories for verification:
- Standard Proof of Identity – Documents must have a photo. They may include:
- Valid Driving License
- National Identity Card
- EEA Member State Identity Card
- Voter’s Identity Card
- Bank Pass Book (if there is a photograph)
- Employee Identity Card (only for public sector or listed companies)
- Standard Proof of Address – Documents must show the customer’s full name and address and should not be dated older than three months. They may include:
- Utility Bill
- Bank Statement
- Council Tax Bill
- House Deed
- House or Car Insurance Certificate
- Lease Agreement with 3 months of rent receipts
Depending on the jurisdiction, online gambling operators may also require a player to send proof of payment method (e.g. image of the front and back of the credit card they are using, a screencap of their eWallet account, etc.). This may be required when the player deposits for the first time, makes a withdrawal for the first time, changes their payment method, and/or are depositing or withdrawing a large amount of money.
How do casinos verify documents?
Online gambling platforms send the documentation to official independent third-party verifiers whose job it is to check the authenticity of the documentation that has been provided. This information is run against a global database so the third-party verifiers can confirm that the customer is who they claim to be.
Additionally, these professional verifiers run customer information against global watchlists. This is done to ensure that the customer is not a Politically Exposed Person (PEP), which is a person holding a position of political power who is at a higher risk of corruption. The check also discovers any red flags related to financial sanctions that may be against the individual, which could pose a threat to the casino. Third-party verifiers also check the customer’s source of income.
Finally, as responsible gambling is a major part of the online gambling industry, third-party verifiers will also compare customer data to self-exclusion lists (e.g. GAMSTOP) to prevent problem gamblers from having access to casinos or sportsbooks during their period of voluntary self-exclusion.
Are there any issues when implementing KYC checks?
There are some downsides to complying with KYC procedures. The most common include:
- Cost – Over the years as technology has improved and more casinos have entered the online market, compliance rules have become stricter. As rules become more stringent the cost of compliance increases as gambling companies are required to hire fraud management teams and compliance offers to ensure that all the proper AML and KYC procedures are in place and being followed.
- Slow procedure – Depending on the system a casino uses the KYC process can be slow to complete. Why? The greater the demand there is for iGaming services, the greater the number of KYC checks submitted. This can lead to a massive backlog of applications for ID verification, resulting in some KYC approvals taking a week or longer to complete.
- Potential for security breach – Passing the sensitive data of customers to third-party verifiers leaves this data open to malicious attacks. The more data changes hands, the greater the risk of identity theft.
- Lack of standardization – Since there is no standardization across the iGaming industry, this means that third-party verifiers may not have the tools to validate players from different jurisdictions or validate ID documents from players from smaller countries, which could potentially allow high-risk users to slip through. Moreover, a lack of standardization can make it difficult for operators to ensure they are remaining compliant.
What can you do as an operator to ensure the best KYC and AML compliance practices?
Obtain the gambling software for your platform from experienced, reputable, and compliant iGaming software providers who understand your target market, such as the platform providers TCS reviews. It may also be worth considering running a white label casino operation as licensing and regulatory compliance is taken care of for you.
How Does KYC Benefit a Gambling Business?
In spite of there being potential unwanted issues, KYC in gaming, just like AML in gaming, is a necessary part of every online gambling operation. In addition to being mandatory for most jurisdictions where gambling is legal, its benefits also outweigh the drawbacks. The two main benefits of being KYC compliant include fraud prevention and avoiding non-compliance fines.
Prevention od fraud
There are many types of online gambling fraud. Due to the fact that all interactions are digital, it can be difficult to catch fraudsters. Common forms of fraud include:
- Multiple account fraud – When a user creates multiple fake accounts, typically to engage in bonus abuse at casinos, gnoming at sportsbooks, or chip dumping at poker sites.
- Credit card fraud – When a fraudster steals another person’s credit card and uses it to make deposits.
- Chargeback fraud – When a legitimate player who loses, attempts to recover their losses by lying to their bank saying that they didn’t use their credit card at the casino.
What’s more, it’s not only adults who commit fraud. A 2018 study released by the Gambling Commission revealed that 14% of 11- 16 year-olds in the UK spent their money on gambling in a week and that 6% have gambled online using a parent or guardian’s account.
Fraud can eat into the profits of gambling companies and can also cost them their reputation and even lead to their closure. Implementing strict identity verification protocols allows a casino to have a better shot at identifying suspicious users and restricting them, as they are unlikely to be able to validate and verify their details.
Prevention non-compliance fines
If the necessary and most up to date AML and KYC measures are not in place and operators are not fully compliant, they can face huge fines.
For instance, in 2020, the well-known betting firm Betway was fined a record £11.6 million by the Gambling Commission for breaching compliance regulations. The company allowed £5.8 million to flow through its betting site which was “found to be, or could reasonably be, proceeds of crime.”
Another example was in the US where daily fantasy sports and sports betting operator DraftKings was fined $10,000 in 2021 by the New Jersey Division of Gaming Enforcement, for sending 11 “promotional mailings” to self-excluded gamblers.
With the proper checks in place, operators can avoid costly fines. They can also avoid steeper penalties and even an eventual loss of license if regulation breaches repeatedly occur.
When you understand the importance of KYC in gaming, you can protect your business from fraud and fines and can provide your players with a safe place to enjoy their favourite games. AML and identity and age verification procedures are an absolute must if you intend to run a successful, long-term, and legitimate online gambling establishment. Partnering with the right iGaming software platform can help you satisfy compliance regulations and run swift and smooth KYC processes. Check out our gambling platform reviews to discover the most ideal platform provider suited to your goals.