The recent regulatory scrutiny given to Daily Fantasy Sports (“DFS”) in Nevada, New York and Illinois has created quite a stir in the $15 billion fantasy sports industry. Specifically, the three states have deemed DFS as “illegal gambling.” With regulators’ attention heightened more than ever, it is critical that online DFS operators take note that this is not the time to forget about the importance of compliance.
A fantasy sport is a game where participants act as owners to build a team that competes against other fantasy owners’ teams based on the statistics generated by the real individual players or teams of a professional sport. Probably the most common variant converts statistical performance into points that are compiled and totaled according to a roster selected by a manager that makes up a fantasy team. More complex variants use computer modeling of actual games based on statistical input generated by professional sports.
In fantasy sports there is the ability to trade, cut, and sign players, like a real sports team owner. Traditionally, such variants were played out during the course of a real sports’ regular season where players are drafted to a roster for that season. Conversely, DFS allows participants to draft a roster to play on just a given night thus basing success on an individual game. Participants can compete in a contest with random players or they can create a league of other participants to compete against. FanDuel and DraftKings, originating out of New York and Boston, respectively, dominate the DFS space with a combined 95% market share, but traditional sites likes Yahoo! are also joining in.
Technically, fantasy sports has enjoyed an express exemption from being defined as “illegal gambling” under the Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”), because federal legislators classified fantasy sports as a “game of skill.” DFS opponents argue that UIGEA was drafted with only traditional fantasy sports in mind and that legislators did not contemplate the daily “wagering” now seen in DFS, which originated and gained mainstream popularity after UIGEA was enacted.
New York Attorney General Eric Schneiderman has taken the argument a bit further by stating that DFS is “illegal gambling” and filed suit to ban DraftKings and FanDuel from operating within New York. A district court judge ruled in Scheiderman’s favor, and the case is now on appeal. Since the appeal, Scheiderman recently amended the complaint seeking the sites to return all monies lost by participants and to pay penalties.
During the budding days of DFS, most of the compliance attention was given to just ensuring that UIGEA’s requirements of exempting fantasy sports as a game of skill were met. Those days are long gone. Now, as DFS has grown in both revenue and regulatory scrutiny so too has the need for greater compliance focus in the areas of anti-money laundering (“AML”) and Geo-location.
AML compliance is important for DFS operators as there are legal requirements and reputational risk for not having a robust AML program in place.
Whether it is deemed as “illegal gambling” or not, DFS operators accept and transfer money like most other online operators; and, thus, partake in the financial system, according to FinCEN. As with other online operators, DFS operators must take necessary precautions to eliminate criminals from using DFS platforms to disguise the source of illegal funds.
Who are the participants on the DFS sites and where is the money going? Know Your Customer policies must be created, implemented, tested, followed and properly reviewed. Transaction monitoring must also be given strict attention to avoid illegally placing and integrating funds. For instance, DFS operators must make certain that participants that know one another are not using the DFS site to purposely lose to other participants in order to launder money.
Compliant AML programs speak to a company’s due diligence in any financially-related business and promote a good reputation within the industry. DFS sites took a reputational hit in October 2015 when insider trading allegations surfaced regarding a DraftKings employee that used insider information that was applicable across the DFS industry to gamble and win $350,000 (yes, you read that right) in a DFS contest on FanDuel. This news elevated concerns that the DFS industry might not be as straight as once believed. Thus, with reputations already being called into question, DFS operators can ill-afford the additional reputational hit that could come from having a non-compliant AML program called into question as well.
If DraftKings and FanDuel are held as illegal in New York, then another form of compliance will become more important than ever—geo-location compliance. Successful geo-location compliance requires that participants located within states where DFS is illegal are restricted from accessing and participating on DFS sites. Geo-location compliance is not a new concept in the DFS industry–DFS is already illegal in Arizona. What DFS operators will need to strongly consider is the type of geo-location method to use to effectively comply.
There are two popular ways to monitor geo-location: cell phone triangulation and Wi-Fi plug in. Cell phone triangulation is where a participant’s cell phone or terminal is tracked according to cellular towers. The method is accurate within one mile. Wi-Fi plug in involves downloading a plug-in to a participant’s terminal or device and tracking the location based upon the precise location of that terminal or device used to access the DFS platform. Regardless, of the method used, DFS operators can expect close monitoring when it comes to geo-location compliance, especially if DFS is held as illegal in New York.
While the New York appellate decision is not expected for several months, this time should serve as an opportunity for DFS operators to make certain that they are giving AML and geo-location compliance proper attention. Once again, gone are the days of just complying with UIGEA and thinking otherwise is just a fantasy.
Jason Noto, Esq., General Counsel, is Chartwell’s Chief Legal Officer and manages all legislative and regulatory matters, analysis and interpretation. He has 13 years’ experience overseeing high-risk legal, regulatory compliance and government affairs while working at First Data, AT&T, and with or for various governmental offices within the State of Colorado.
Jason is an accomplished writer and public speaker. He has been published in various law, payments and gambling journals. For more information please contact email@example.com.
 Subject to certain conditions; See 31 U.S. Code § 5362.
 31 U.S. Code § 5362