Refereeing Football: The EU’s Yellow Card for Money Laundering

Professional football clubs and players’ agents will be required to report suspicious transactions to the police or face criminal sanctions, just like banks, if radical measures proposed by the European Commission are adopted.

These measures are recommended in the Staff Working Document that accompanied the Commission’s recently published Supranational Risk Assessment of money laundering and terrorist financing risks facing the European Union and its 28 member-states. The Commission believes these measures are necessary to combat the “significant” risk of money laundering in professional football and the “moderately significant” risk of terrorist financing in the sector.

The Commission recognises that sport can be attractive to criminals in order to launder funds and, whilst the sector is not material compared to some others in macroeconomic terms, it merits closer analysis given its significant cultural and social impacts, the large amounts involved in a single transaction and the recent increase in the number of individuals involved in the administration of the sport.

Whilst economic motives may not be of prime importance to criminals, social prestige, appearing with celebrities and players and the prospect of dealing with authority figures may attract those with less than honourable intentions.

Growing popularity, growing risks

According to the sport’s governing body, the Federation International de Football Association (FIFA), there are 265 million players around the world, including 38 million professionals in 301,000 clubs. The large influx of revenue into the game since the early 1990s has been driven by television rights and sponsorship. Players from all over the world participate in Europe’s professional leagues as a result of transfers of funds across continents.

The Commission notes that image-rights contracts, whereby prominent players sell the rights to clubs and others to use their image, and advertising contracts can be exploited for criminal purposes, particularly tax evasion, since monies paid under these contracts are “commonly transferred” to bank accounts of companies established in third countries.

Consequently, the Commission opines that there is a serious risk of fraud as it is easy to avoid declaring that the funds have been received. The convictions in Spain of three of the world’s leading players—Lionel Messi, Neymar and Cristiano Ronaldo—for tax evasion of payments under image-rights and sponsorship contracts being routed through offshore jurisdictions are prime examples of this type of criminality.

The most common form of payments involve foreign jurisdictions that allow the final destination of the payments to be disguised or hidden. Image-rights contracts are also used to conceal the actual amounts paid to players.

Setting the rules

FIFA, a private body, is based in Zurich and hence is subject to Swiss law. It controls the game worldwide through its 211 members, the football federation in each jurisdiction and the six continental confederations of national federations. Each federation must follow FIFA’s rules, whilst FIFA is charged with safeguarding the reputation and integrity of the sport.

After allegations of corruption arose around the turn of the century, FIFA published its first Code of Ethics in 2004 and created an Ethics Committee. FIFA also actively monitors betting on football matches in order to detect the fixing of matches or events within matches—e.g., goal scorers, red/yellow cards, penalties, etc.

FIFA has established the Transfer Matching System (TMS) to monitor and control the international transfer of players. TMS records over 30 types of information, including the player’s history, the club’s involved, payments, values and contracts.

National federations are responsible for the development and control of football within their country, ranging from grassroots teams and school football through to professional leagues and national teams.

Accruing yellow cards

One of the first examples of official concern of criminal infiltration into the sport was the 2007 EU White Paper on Sport,which noted that corruption, illegal gambling and money laundering were detrimental to the game. This was followed in 2009 by the Financial Action Task Force (FATF) publishing Money Laundering in the Football Sector, which set out the vulnerabilities of the sector and some typologies to highlight their concerns.

The arrests of some football administrators on the fringes of the 2015 FIFA Congress in Zurich by Swiss police at the request of US prosecutors led to headlines around the world and the resignation of the FIFA president. Subsequent court proceedings revealed the corrupt awarding of television and sponsorship contracts and the  influencing of votes on the staging of the FIFA World Cup. Criminal investigations into these matters continue.

The acclamation and social status that are linked to a winning team combined with the investment in clubs with little apparent expectation of a financial return have made the industry attractive to some criminals.

The Commission notes the lack of transparency over the transfer of players and the true owners or controllers of football clubs can lead to a small number of people controlling the industry and “cause serious concern about the prevention and suppressing of money laundering”. Many of the issues raised by the Commission are explored by Transparency International in its 2016 Global Corruption Report on Sport.

FATF observed the use of family members, lawyers, accountants and consultants to create structures to facilitate the movement of illegal funds. It further noted that payments under image rights and other contracts are often transferred to bank accounts in third countries with serious risks of fraud.

Red flags

The Commission has provided some case studies to demonstrate the sector’s vulnerability to money laundering:

Firstly, a club in Portugal’s top division was relegated and soon found itself to be under considerable financial pressure. An offer of financial support from a Russian consortium was rapidly accepted by the club’s directors. The consortium soon purchased and thus controlled the club via a series of front men and offshore companies without the federation, at the time, understanding who controlled the club and how they generated the funds to take over the club. The club was then used to launder millions of dollars, via the under- or over-valuation of transferred players, television rights deals and betting.

Secondly, clubs that are acquired by criminal groups can be used to launder funds generated from betting on fixed matches.

Thirdly, sports corruption and match fixing are often carried out by criminal groups with links to drug trafficking, illegal tobacco smuggling and burglaries.

Finally, an organised crime gang created different websites for online betting purposes to bet on manipulated sports events across Europe. The gang then developed links to their gangs to invest funds from serious crimes, including the illicit trafficking of drugs.

Based on its own case studies, the Commission believes that the threat of money laundering to professional football is “significant,” which is its second highest category of risk.

In the UK, the tax authority, Her Majesty’s Revenue and Customs (HMRC) disclosed in March 2019 that it had written to 1,900 agents announcing potential tax investigations following “serious allegations of fraud”. HMRC had previously announced tax investigations into 173 players, 40 clubs and 38 agents.

The determination of HMRC to address perceived tax evasion in football was demonstrated by its “dawn raid” in April 2017 on the premises of a Premier League club, Newcastle United. The ensuing legal challenge to the lawfulness of the authority’s actions focussed on the “free” transfer of a player to the club. Two days before the transfer took place, Newcastle brought an agent into the transaction. He received £1.9 million for his services, of which £1.7 million was paid away to other parties, so much so that the player, according to HMRC, had undisclosed tax liabilities of £1.1 million. The court upheld HMRC’s actions and later Newcastle made a provision of £22 million in its financial statements to cover a tax dispute with HMRC.

Tax authorities across the world often view payments to players under image-rights contracts as “disguised remuneration” that should have been subject to deductions for income tax and social security duties on behalf of the player and payroll taxes for the club as the employer. The judgment in Hull City v HMRC clearly sets out how the tax authority successfully challenged such payments.

Understanding the risks

The Commission believes that the operation of the TMS is inadequate in that its contents are only available to the public authorities following lengthy intergovernmental negotiation on a case-by-case basis. They complain that FIFA appears to be more concerned with its own commercial and private interests, alongside those of the clubs and the federations, than with assisting law enforcement and tax authorities.

To resolve this situation, the Commission calls for clubs, federations and associated lawyers, accountants and consultants to be required to submit suspicious activities reports to authorities just as banks are required to do. The raising of the awareness of the risk of money laundering in the sector amongst all relevant parties—including clubs, players, lawyers, accountants, consultants, etc.—is recommended by the Commission. The English Football Association (FA) did produce a guide on money laundering for clubs in 2008, but it was held in low regard and is not readily available on the FA’s website.

After noting that “the sector’s ability to provide dedicated resources and training in this area is still quite low”, the Commission concludes that “the level of money laundering vulnerability in the professional football sector is considered moderately significant/significant.”

The Commission separately notes that the sector “is not frequently used by terrorist groups” and that it has no evidence of any links to terrorist financing. Accordingly, it believes that the threat of terrorist financing to the football sector is deemed to be “moderately significant”, which represents the second lowest threat level.

New penalties, new rules

The Commission proposes a number of statutory measures for EU member-states to consider adopting on a “comply or explain basis”:

• Players’ agents, clubs, federations, confederations, companies and individuals should be required to report suspicious activities to statutory authorities;
• Clubs should keep all contracts for five years;
• Full identification should be required of all investors, including those who operate via corporate vehicles;
• Registrations of the origin of bank accountholders and the beneficiaries of funds sent to tax havens should be strengthened and the ability to obtain information for all countries where such accounts are held should be improved;
• Training for players, their agents, clubs, federations, and confederations should be augmented;
• Clubs, federations and confederations should be sanctioned if they fail to provide full details about all transfer of players, including the financial structure of the transfer, the full identity of the player and any agent;
• Independent audits of federations and confederations should be obligatory.

As regards agents, the Commission recommends that EU member-states do the following:

• Create a registry of players’ agents, even where a player uses a family member or a lawyer as his/her agent;
• Require all agents to be licensed;
• Regulate and supervise the activities of agents;
• Establish legal limits on dealing as an agent and requiring agents to be registered with a statutory body as well as with FIFA;
• Prohibit anyone with a criminal conviction from acting as an agent or anyone who has lost a civil case regarding fraud, tax evasion or who has other unpaid civil liabilities;
• Require agents to notify the player and relevant clubs of all other agents to be used in the transfer.

Know your risks

The eight pages devoted to professional football out of a total of 245 pages in the Commission’s Supranational Risk Assessment attracted a disproportionate interest from the mainstream media, thereby demonstrating the cultural and societal importance of the “beautiful game”.

Financial crime staff would be well advised to review their client base to ascertain whether they have any individual or corporate customers who are associated with the sport. Given the Commission’s risk assessment of the sport, firms should consider whether any football-linked clients should be afforded enhanced due diligence.  More generally, prudent staff should also compare the Commission’s risk assessment of other sectors to their firms’ own assessments of those sectors and consider whether any adjustments are necessary.

Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.

He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.