A planned crackdown by the Philippine Central Bank on how payment service providers identify and handle certain merchant transactions – aiming to make it harder to hide who is actually receiving money – could benefit illegal operators at the expense of the legal if not handled correctly, according to specialist Philippines gaming law firm Arden Consult.
After the Bangko Sentral ng Pilipinas (BSP) recently issued a draft memo proposing amendments to the Manual of Regulations of Payment Systems that would require greater visibility over merchants, beneficiaries and their underlying owners, payments channels, transactions and settlement accounts, Arden’s COO and Head of Commercial, Samuel Tarng, warned that similar regulatory methods have failed elsewhere when applied carelessly.
While broadly supporting the move as a means of targeting illegal gambling operators, Tarng has outlined key concerns that the BSP must get right to avoid alienating legitimate operators or giving customers pause to revert to illegal platforms.
Among these is the potential for banks and payment providers to “de-risk” entire industries, imposing automatic prohibitions on all entities within an industry sector rather than conducting appropriate due diligence on a case-by-case basis.
Citing past commentary by the Financial Action Task Force that the “wholesale cutting loose of entire classes of customer” is a failure of the risk-based approach because it pushes money into channels nobody can see, Tarng observed that the BSP’s categories are risk labels.
“A compliance officer asked to certify a merchant book under oath will be tempted to read them as prohibitions, and payment firms already decline transfers when a counterparty’s name contains a word like ‘bet’,” he said. “The BSP should say, in the final text or in guidance, what the draft implies.”
A second warning from Tarng is that a new merchant database linking merchant identities, while powerful, could have far-reaching effects on innocent merchants should they be erroneously listed – as evidenced by a similar scenario involving Mastercard where some merchants were listed for years without any real recourse to challenge.
“Merchants have been listed because their names resembled someone else’s,” Tarng’s commentary recounts. “The [draft memo] says the BSP will approve a ‘correction and dispute process.’ It should be quick, and it should not run through the institution that filed the entry. A suspicion flag at one wallet should prompt a review elsewhere; the draft says as much, and the final text should hold that line against automatic termination.”
A third warning points to a proposal in the BSP’s draft memo allowing financial institutions to impose transaction and settlement limits on high-risk merchants. The concern is that creating additional friction points could drive customers to less troublesome providers.
“The Netherlands tightened deposit rules on licensed sites and watched the legal market’s share of gambling revenue slide toward half, with players drifting to operators the rules did not touch,” the Arden Consult COO said.
“Limits should be sized to each merchant’s verified profile, which is what enhanced due diligence is for.”
According to Tarng, there are plenty of case studies on how similar policies can be exploited, including the famous “Black Friday” shutdown of America’s booming online poker network in 2011. In the wake of the country’s Unlawful Internet Gambling Enforcement Act of 2006 instructing banks to stop processing bets, poker sites hired processors who recoded deposits as purchases of golf balls and jewelry until the Justice Department indicted them in 2011.
In Brazil, displaced merchants used mule accounts connected to individuals as pass-throughs.
Finally, Tarng warns against interpreting affiliates too broadly, arguing that affiliates should be interpreted solely as companies directly handing player money and not game studios or test labs that have no such connection.
“None of this argues for delay [of the memo becoming formality],” he said.
“The e-wallet is how Filipinos pay, and for years it has funded platforms that answer to no Philippine regulator. Every license the offshore operators would need is already on offer. The firms that remain outside have made a choice, and the rails should stop paying for it.”
As previously reported by Inside Asian Gaming, the BSP’s draft memo identifies casino and wagering operators – both land-based and online – as companies that should in future only be accepted under a direct merchant arrangement, as opposed to layered merchant agreements where there is an intermediary between the payment acquirer and the actual merchant. Casinos would also be subject to enhanced due diligence and enhanced monitoring under the updated plan, specifically targeting companies that are hiding the true nature of their transactions and customers.
This comes after the BSP detected merchants accepting thousands of tiny payments late into the night, which were found to be bets on online casinos. It also found that more than 8,000 merchants were using what appeared to be small, legitimate retailers to receive these payments.
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