Turbulent times for 888 amid VIP compliance issues

Surprise and speculation are the key words that spring to mind surrounding 888’s spate of announcements on 30 January 2023. First was the sudden exit of CEO Itai Pazner, who had been at the operator for over 22 years, followed by the suspension of VIP customer accounts in the Middle East pending the outcome of an internal compliance investigation. The news sent shockwaves across the sector as the London-listed operator’s share price crashed 28% that same day.

With the CEO’s exit, the group’s non-executive chairman, Lord Mendelsohn, has assumed the role of executive chairman on an interim basis while the board searches for a permanent replacement for Pazner. The same day, the FTSE 250 firm disclosed that certain best practices had not been followed in terms of KYC and AML processes for VIP customers in the Middle East. While further investigations are underway, the operator suspended VIP player accounts in the region immediately. Should the suspensions remain in place, the board estimates the impact will be less than 3% of group revenue.

But that’s not all. 888 has been in the spotlight since the start of 2023 as it began a series of redundancies across its Israeli office in January. Although not confirmed by the sports, casino and poker operator, it has been reported that the layoffs are a result of duplicated roles from the £1.95bn William Hill International acquisition.

888 completed the acquisition of William Hill International in July 2022

All of this is just the latest in what has been a tumultuous 12 months for 888. In March 2022, the group was fined £9.4m by the UK Gambling Commission (UKGC) for social responsibility and money laundering failings in one of the regulator’s largest punishments imposed to date. But the bad news doesn’t stop there. The debt 888 is saddled with (£1.8bn) from purchasing William Hill International, a deal completed in July 2022, is now more than five times its current market value of around £323m. The debt burden means there is reduced opportunity to reinvest in the business.

A fall from grace  

The loss of Pazner, who held the position of CEO for four years, with the Israeli’s deep-rooted history at 888 after starting as a marketing manager in 2001, means a great deal of institutional memory will be lost, says Ivor Jones, a research analyst covering the leisure sector at Peel Hunt. While the operator benefited from its base in Israel and a dynamic culture, the centre of gravity of the enlarged group has now decisively swung to the UK and a relatively new team, notes Jones. “The execution of the William Hill integration now depends on a CEO yet to be appointed who will have to energise the culture while driving significant change,” he adds.

A Regulus Partners analyst claimed “denial was not a credible option” for Pazner but Peel Hunt’s Jones emphasises the difference between responsibility and fault. “Did the CEO know what was happening and was it sufficiently serious for them to have to leave? The disorderly departure of the CEO has given the impression to investors that there may be other serious problems with the business which, in aggregate, explain the departure of the CEO,” he says.

In reaction to the disclosure of compliance issues, Andrew Tait, consultant solicitor at Ince, says it’s a lesson learned for 888 and other operators that have been benefiting from unregulated markets. “Probably, now, the most important driver of the industry is to understand the regulatory landscape, what the risks are and which markets you should or shouldn’t go after. 888, the size they are, being a public company and with presence in the US, are probably even more sensitive to this than anyone else.”

888 holds an operating licence and has its HQ in Gibraltar so is bound by local regulations there. According to the British Overseas Territory’s AML guidelines, executive teams under the supervision of their boards should ensure internal risk assessments and reviews in this area take full account of the Gibraltar gambling commissioner’s expectations. There is a specific requirement under Section 26 (1A) of Gibraltar’s Proceeds of Crime Act for regulated entities to undertake an independent audit function for the purposes of testing their AML policies, controls and procedures. Executives on the management board may therefore be culpable for any failings/shortcomings in assessing those AML controls.

Tait highlights that there’s generally increased AML compliance scrutiny in Gibraltar since the Financial Action Task Force (FATF) put the peninsula on its so-called grey list last June. He adds: “So, an audit team may have picked up on this gap if it wasn’t addressed in the past, or maybe things have changed in the last year in the Middle East, which should have triggered additional mitigation or action, where the CEO was ultimately seen as responsible for it.”

Enhanced checks

Despite the compliance disclosure, speculation remains around what the actual failings are. The VIP customers were being served under the Gibraltar licence and with the British Overseas Territory’s greylisting, some experts question whether this added demand to improve AML standards played a part in these problems surfacing.

Richard Williams, partner at Keystone Law, suspects there may have been pressure from the regulator in Gibraltar to oversee the Middle East accounts and apply strict AML procedures as opposed to serious irregularity being at play. “What I suspect it means is that there wasn’t necessarily money laundering taking place, but the 888 AML procedures weren’t being followed in practice. We’ve got to not lose sight of the fact that in a lot of these cases, it’s procedural failings rather than evidence of actual money laundering that’s the issue.”

Tait at Ince suggests the compliance failings may have been picked up by 888 during an internal audit, perhaps in preparation for a compliance assessment by the regulator. Due to the crackdown on insufficient money laundering supervision in Gibraltar, every operator licensed there has had to go through a compliance assessment in the past year carried out by the Gibraltar gambling commissioner’s officers. He explains: “These are quite detailed in Gibraltar. It’s a one-day exercise covering on-site visits. They may want to see the top 50 players and then go through a sampling of those. As a VIP player, you’d hit certain triggers in terms of source of wealth, so you’d have to show there’s evidence or information to substantiate that level of gambling and where it’s coming from.”

With a Great Britain licence, operators have had to self-report AML compliance failings since October 2020 as set out in new Licence Condition 15.2.3.1 in the Licence Conditions and Codes of Practice. In Gibraltar, the gambling commissioner’s recently published (November 2022) Enforcement and Sanctions Policy specifically mentions that a financial sanction measure will be mitigated by an act of self-reporting.

The danger of operating in the Middle East region is that it is higher risk considering these are generally Muslim countries and therefore dark grey or black markets for gambling. Williams says there are also arguments that there’s a higher risk of money laundering through financial institutions in the Middle East due to less rigorous AML controls and high levels of wealth there.

Tait concurs that a combination of lower-tier payment methods and insufficient checks such as ID verification makes the Middle East riskier for gambling operators.

In Gibraltar, when it comes to AML processes, there’s enhanced due diligence at the point of deposit. This requires operators to not only know who their customer is (their name, address, etc) but to be able to verify that electronically and go through an extra verification check. Tait points out that in the Middle East it’s extremely difficult to verify people’s identities as there are very few or poor open-source databases to rely on.

The Financial Action Task Force (FATF) put the peninsula on its so-called grey list last June

While Williams suspects in this case that 888’s compliance procedures were robust enough, it may be that those procedures weren’t being applied correctly to customer accounts. “I can only speculate that they will have completed the ID checks, but by virtue of revenue these VIPs will be high-risk customers. It’s possible that source of funds or source of wealth checks haven’t been sufficiently rigorous,” he comments.

At KPMG’s eSummit in June 2022, Gibraltar’s gambling commissioner, Andrew Lyman, was very vocal about the territory’s FATF greylisting, arguing there was no “fundamental [or] systemic weakness” with its regulatory regime. Lyman set out that he wasn’t intending to start enforcing against operators just to satisfy FATF so Gibraltar could remove itself from the grey list.

Tait agrees that Lyman has been pragmatic and balanced in his approach since the greylisting and he suspects the regulator will look at whether the 888 failings are systemic. “Have blind eyes been turned or is there something more isolated in terms of that market and maybe those people who were reviewing those types of customers? I’m just guessing here, but that seems to be the case where it’s just a small group of VIP customers potentially subject to a different flow or thread in terms of who was dealing with them internally. Perhaps they didn’t really keep up to date with the changes or consider the additional risks,” he ponders.

Markets spooked

The crash in 888’s share price – from around 104p just before the scandal emerged to 72p at the time of writing – alongside the compliance failings, will no doubt damage 888’s reputation, but some industry experts believe it could indicate there is more bad news to come.

Showing the regulator in Gibraltar and its shareholders that there is a clean-up exercise in play by the CEO resigning is the first step to tackle a lack of confidence, says Tait. “Going forward, they will need to have much more oversight and control of how they deal with things. The US presence will maybe slow down, limit or raise questions for the US regulators themselves to ask what’s really going on. So, they have to act quickly to cut out the rot and clean up their act.”

Being a PLC carries a significant risk of operating in higher-risk markets such as the Middle East, Williams points out. Just last month, London-listed rival Entain revealed it is accelerating plans to exit several unregulated markets where it sees no route to domestic regulation. The aforementioned Regulus Partners analyst posed the question of whether this could see the demise of dotcom markets. “Pazner’s fall could have very serious repercussions for how many grey markets are treated, in our view, as well as signalling a much greater legacy risk from dotcom operations than is often appreciated,” the analyst said.

Jones at Peel Hunt believes operators will continue to have customers based in markets without domestic regulation while still complying with licence terms where the transactions are executed, however, that could change down the line. “Recent history in the UK has demonstrated that operating in domestically regulated markets does not equate to low commercial risk. The remaining listed operators may decide to eliminate the remaining dotcom to satisfy shareholder perceptions of risk and to make corporate M&A easier,” he states.

In response, Keystone Law’s Williams expects there will be far more scrutiny of markets and more nervousness about being in dark grey and black markets that will never or are not likely to be regulated soon. Similarly, Tim Miller, executive director at the UKGC, speaking at the ICE World Regulatory Briefing earlier this month, called for greater scrutiny of licensed operators operating illegally in black markets. In his view, an operator’s activity in other jurisdictions should be considered when deciding whether it is fit and proper to hold a UK licence.

Steadying the ship

Aside from the news of Pazner’s departure, 888 also announced that CFO and exec director Yariv Dafna, who was set to step down on 31 March, would remain in his post until the end of the year. Williams expects this decision was made to prevent the share price from tanking even further. “You see this with all companies that uncover regulatory problems, where the top man may have to fall on his sword to take the rap for the failings. But you need to have some sort of continuity behind the scenes,” he states.

Jones adds that “the disorderly management of the board has contributed to the sense of undisclosed problems which is weighing on the share price”. He believes: “The announcement that the CFO would stay longer was a belated realisation that there was a risk there would be no executive directors on the board by April.”

The next hurdle will be to find a replacement CEO willing to take on an operational turnaround, intense regulatory scrutiny and considerable debt. However, Williams believes there will be plenty of people up for the challenge. “Just because an operator has regulatory failings doesn’t mean to say the issues can’t be rectified.”

Tait believes finding a replacement CEO to turn things around is no easy feat. “Getting the person with the right experience will be very difficult. So, they are buying themselves time and giving themselves stability to move forward,” he remarks. Although Jones sees it as more likely a replacement candidate will be sought internally to expedite the process and reduce the time needed to bring the new CEO up to speed.

The word on the street is that there could be more announcements to come from the beleaguered operator. Whether the reputational damage can be reversed remains to be seen.