The fine relates to offences in 2016, when the operator breached the Gambling Commission's social responsibility code provision 3.4.1(1), relating to customer interaction, and anti-money laundering guidance.
Paddy Power Betfair has accepted the findings and will pay a £498,508 divestment of monies received, a £1.7m financial penalty and £50,045 towards the Gambling Commission’s investigative costs.
The failings in question related to two customers using the Betfair Exchange with stolen money; one of which stole large sums from a charity.
A further three customers were allowed to gamble in shops and online without the operator providing adequate wealth and social responsibility checks.
Although Paddy Power Betfair is already working on improving its processes, it conceded those in force at the time were ineffective.
Richard Watson, Gambling Commission Executive Director, said: “As a result of Paddy Power Betfair’s failings, significant amounts of stolen money flowed through their exchange and this is simply not acceptable.
“These failings all stem from one simple principle – operators must know their customer.”
The Gambling Commission has also fined operator Mark Jarvis £94,000 for a similar offence, with a customer who displayed problem gambling traits allowed to spend £34,000 on B2 gaming machines over a 19-month period. Of this money, £11,250 was stolen.