FSB Technology regulatory settlement operates as a stern warning to other white label providers

The Gambling Commission has today (6 May 2020) announced that a regulatory settlement has been concluded with FSB Technology (UK) Limited (“FSB”) that is to pay £600,000 for advertising, money laundering and social responsibility failings, as well as having additional conditions imposed on its operating licence that require it:

  • before entering a relationship with a third-party partner, to conduct risk-based due diligence with a view to mitigate risk to the Licensing Objectives,
  • to manage and evaluate its existing third-party partner relationships and
  • to carry out risked-based due diligence on all its third-party partners at least annually to ensure they do not pose a risk to the Licensing Objectives.

This follows an announcement by the Commission in August 2019 (as reported by us here) that it was commencing a review of FSB’s operating licence. The key failings on the part of FSB that have been identified by the Commission are:

  1. Breach of Licence Condition 12.1.1 (2) and (3) (Prevention of money laundering and terrorist financing).
  2. Failure to comply with social responsibility code provision 3.4.1 (Customer interaction).
  3. Due diligence and control failings related to third-party arrangements (often referred to as ‘white label’ where a service provided by one company is rebranded and resold by another), namely:
    • whilst FSB had contractual arrangements in place with its ‘white label’ partners, it did not take sufficient action to ensure they were following the Licence conditions and codes of practice and
    • FSB had not carried out sufficient due diligence prior to entering into and for the duration of these contractual arrangements with third-party partners to ascertain the suitability of them.

In response to those failings, FSB has:

  1. put in place an improved system of due diligence and oversight to provide governance of its third-party contractual arrangements,
  2. revised its regulatory policies and procedures designed to deliver compliance,
  3. recruited new senior staff in various posts within regulatory compliance including a Money Laundering Reporting Officer and a senior compliance manager with a specific responsibility for safer gambling,
  4. increased resourcing with responsibilities for compliance within FSB, and
  5. completed a review of its customer base and, where it felt appropriate, has suspended the business relationship.

Today’s Gambling Commission announcement carries the title “Regulator issues warning to operators over third party responsibilities as FSB receive sanctions for failings”. It is clear that the Commission wants its announcement to act as a warning that gambling businesses will face regulatory action if they do not carefully manage all the third party websites that they are responsible for.

The Commission states as follows in its announcement:

FSB’s business model includes contracting provisions of its licensed activities to third parties. This arrangement, often referred to as a ‘white label’, places responsibility on the licensee to ensure that its third-party partners keep gambling fair, safe and crime-free. However, a Gambling Commission investigation discovered FSB did not have sufficient oversight of three third-party websites (1) or effective anti-money money laundering and social responsibility policies and procedures in place between January 2017 and August 2019. For example:

  • Ineffective customer interactions with, and source of funds checks on, a customer who displayed indicators of problem gambling and spent £282,000 over an 18-month period
  • Sending a marketing email to 2,324 customers who had previously self-excluded
  • A VIP team manager acting without adequate oversight and not receiving sufficient AML training
  • Placement of an inappropriate banner advertisement containing cartoon nudity on a Great Britain facing website which was providing unauthorised access to copyrighted content.

Richard Watson, Commission Executive Director, said:

“All operators should pay close attention to this case as it shows that we hold all licensees fully responsible for third party relationships – and we will act against any of our licensees that do not manage third parties appropriately. These were blatant breaches of rules we have put in place to ensure gambling is fair, safe and crime-free.”

The Commission has added that it is “still reviewing the actions of personal management licence holders involved in this case”.

You can download below the entire announcement, incorporating the Public Statement setting out in full (a) the circumstances that gave rise to the Commission’s investigation and (b) the terms of its regulatory settlement with FSB.

The following extracts from the Public Statement should be particularly noted by white label providers:

FSB’s suitability to offer gambling facilities using third-party arrangements often referred to as ‘white label’ partners

We make it clear that licensees are responsible for the third parties that they contract with. We require licensees to ensure that any contracted third parties conduct themselves in so far as they carry out activities on behalf of the licensee as if they were bound by the same licence conditions and subject to the same codes of practice as the licensee. SRCP 1.1.2 states:

  • Licensees are responsible for the actions of third parties with whom they contract for the provision of any aspect of the licensee’s business related to the licensed activities.
  • Licensees must ensure that the terms on which they contract with such third parties:
    • require the third party to conduct themselves in so far as they carry out activities on behalf of the licensee as if they were bound by the same licence conditions and subject to the same codes of practice as the licensee
    • oblige the third party to provide such information to the licensee as they may reasonably require in order to enable the licensee to comply with their information reporting and other obligations to the Commission
    • enable the licensee, subject to compliance with any dispute resolution provisions of such contract, to terminate the third party’s contract promptly if, in the licensee’s reasonable opinion, the third party is in breach of contract (including in particular terms included pursuant to this code provision) or has otherwise acted in a manner which is inconsistent with the licensing objectives, including for affiliates where they have breached a relevant advertising code of practice’

As FSB’s business model includes contracting provisions of its licensed activities to third- parties, responsibility for compliance remains with FSB and cannot be transferred to any other party. We found that whilst FSB had contractual arrangements in place it did not provide sufficient oversight to ensure:

In addition to its contractual arrangements, we expect Licensee’s obtain the necessary assurance in respect of third-party partners by conducting adequate due diligence on the third-party to ensure (amongst other things) that they are competent and reliable.

In this case we found that FSB had not undertaken sufficient due diligence on its third-party partners for example:

Third-party contractual arrangements Website B

FSB entered into what it referred to as a BLA third-party arrangement with Company B. The BLA required that FSB operated a website offering gambling facilities using an international website brand name associated to Company B.

The brand name was also in use by an international gambling operator not licensed to offer gambling facilities to the British market. FSB agreed the BLA with Company B despite:

  • the ultimate ownership of Company B being unclear
  • the relationship between Company B and the ownership of the brand name being unclear.

FSB accepts that it that it did not carry out sufficient due diligence which would have identified regulatory concerns in respect of the international operator of the brand name.

The motivation behind the BLA seemed to be to raise the international gambling operator’s footprint worldwide; achieved via marketing of the brand name by advertising associated to the UK Premier League football.

FSB accepted that whilst it did operate the brand name via its UK website its driver was not to operate a conventional gambling website and derive income via customers; but a commercial decision which in the terms of the BLA it received £20,000 a month from Company B.

FSB accepted it had been unable to undertake satisfactory due diligence in relation to Company B and the related brand name. FSB found that the complexities of the international corporate structure between companies and websites made the cost of doing due diligence enquiries financially punitive. It subsequently accepted that this position was a reason not to enter into the relationship at all, not a reason to explore arrangements such as the described BLA. FSB have now terminated the BLA.

Third-party contractual arrangements Website C

FSB had not carried out sufficient due diligence prior to commencing and during the relationship with Company C who associated with branded Website C.

In particular, we noted FSB had not sufficiently assessed the risk in respect of ownership of Company C which had links to an individual regarded as a politically exposed person (PEP). PEP status should have raised concerns and increased monitoring in respect of the level of risk- but in this case it did not. For example, despite knowing the PEP was running for political office they had not established that he had been elected. In addition, FSB failed to discover that Company C had ‘deregistered’ its company status during the business relationship.

FSB has now terminated this business relationship.