The Magazine for Career-Minded Professionals in the Anti-Money Laundering Field

Reprinted with permission from the March–May 2015 Vol. 14 No. 2 issue of ACAMS Today magazine, a publication of the

Association of Certified Anti-Money Laundering Specialists © 2015 www.ACAMS.org | www.ACAMSToday.org

DO NOT BET AGAINST IT:

Heightened scrutiny of

casinos is here to stay

As large-scale casinos come closer to reality

in New York and Massachusetts, licensees and state gaming

commissions need to understand and address the federal government’s

expectations regarding financial crime compliance

programs

Governance. Risk. Compliance.

PRACTICAL SOLUTIONS

“W hat happens in Vegas, stays in Vegas” may still apply to bach-

elor parties, but it is no longer true for gaming. Just as the days of the discreet private banker have gone the way of the fax machine, so, too, has the halcyon era of anonymous gaming in land-based casinos. Recent events have made it clear that the Bank Secrecy Act (BSA) means what it says: The federal government will hold casinos to their obligation to develop effective systems to prevent money laundering.1

The last days of 2014 brought two major developments impacting the future of large-scale casinos. On December 17, New York approved the development of three major casinos upstate—in the Finger Lakes region, the former “Borsch Belt” area of the Catskills and in the Capital District outside of Albany.2 Only weeks earlier, the American Gaming Association (AGA) published its first-ever Best Practices for Anti-Money Laundering Compliance (the Guidance), to protect land-based casinos from money laundering and financial crime risks.3 Both events followed on the heels of Massachusetts’s licensing of three large-scale casinos earlier in the year.4

These developments occurred in the midst of a major push by U.S. regulators and law enforcement agencies to hold the gaming industry accountable under the BSA. Strong public statements by the Financial Crimes Enforcement Network (FinCEN)

and recent enforcement action have made it clear that casino gaming is in the govern-ment’s crosshairs because of the industry’s ability to absorb large sums of money.5 Like never before, casinos are facing pressure to root out money laundering in their midst.

Basics of BSA/AML requirements

The BSA, of course, requires that U.S. financial institutions help government agencies detect and prevent money laun-dering (among other things). A licensed casino or card club that has gross annual gaming revenue in excess of $1 million is a “financial institution” under the BSA and is subject to various reporting requirements.6

These requirements were expanded by the USA Patriot Act of 2001, which mandated the establishment of anti-money laun-dering (AML) compliance programs. At a minimum, each program must include the following four requirements:

1. Internal policies, procedures and controls tailored to the risks facing the particular institution

2. A designated compliance officer and team dedicated to compliance

3. Ongoing training of all financial institu-tion personnel

4. Independent auditing and testing to make sure the internal policies and controls are working7

These “pillars” of an effective BSA/AML program are just the foundation. The key to a vital AML program is a sophisticated know your customer (KYC) program set up to understand who is conducting financial transactions and what risks they pose. Under such programs, institutions gather information and rate their clients according to risk, with riskier customers requiring enhanced due diligence (EDD).8

Casinos have access to a significant amount of information on some of their larger domestic and international patrons, which should be organized and combined with strong due diligence procedures to create thorough client information files. These files, combined with harnessing internal data through robust manage-ment information systems, can be used to understand deeply a casino’s different types of patrons and the legitimate trans-actions they can be expected to under-take. Is the client placing bets that cancel each other out? Do winnings seem to always fall just under the CTR threshold? This is where a strong compliance officer can be most effective.

Yet a compliance program is only as good as the institutional culture around it. FinCEN recently issued an advisory seeking to highlight the importance of a strong culture of BSA/AML compli-ance for senior management, leadership and owners of all financial institutions.9 Leadership at financial institutions must actively support compliance efforts

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1 Jennifer Shasky Calvery, Director, Financial Crimes Enforcement Network, Remarks at the 2014 Bank Secrecy Act Conference, Las Vegas, Nev. (June 12, 2014). (available at http://www.fincen.gov/news_room/speech/html/20140612.html (accessed Jan. 5, 2015)).

2 New York State Gaming Commission, Selection of the New York Gaming Facility Location Board, (Dec. 17, 2014). http://gaming.ny.gov/pdf/12.17.14.GFLBSelection.pdf.

3 American Gaming Association, Best Practices for Anti-Money Laundering Compliance, Dec. 2014, at 4, http://www.americangaming.org/sites/default/files/aga-best-practices-re-aml-compliance-122014.pdf (“Guidance”).

4 Timeline: what you need to know, massgaming.com, http://massgaming.com/licensing/timeline/ (accessed Jan. 12, 2015).5 Peter Rudegeair and Brett Wolf, Regulators pushing banks to rid casinos of money-laundering, Reuters.com (Aug. 15, 2014 4:29am), http://www.reuters.com/

article/2014/08/15/us-banks-casinos-analysis-idUSKBN0GF0BV20140815 (accessed Dec. 10, 2014).6 31 U.S.C. § 5312(a)(2)(X)(i); 31 C.F.R. § 103.11. 7 Bank Secrecy Act, 31 U.S.C. § 5318(h)(1)(A-D).8 Know Your Customer, worldcompliance.com, http://www.worldcompliance.com/en/resources/protect-your-company-reputation/know-your-customer-kyc.

aspx (accessed Jan. 13, 2015).9 U.S. Department of the Treasury, Financial Crimes Enforcement Network, FIN-2014-A007, Advisory to U.S. Financial Institutions on Promoting a Culture of

Compliance (Aug. 11 2014). http://www.fincen.gov/statutes_regs/guidance/html/FIN-2014-A007.html (accessed Jan. 5, 2015); See, Daniel R. Alonso, Loud and Clear: FinCEN Demands a Culture of Compliance, Business Crimes Bulletin, Oct. 2014, at 1.

PRACTICAL SOLUTIONS

through adequate resources—both finan-cial and staffing—and not sacrifice such efforts to revenue concerns. To do so, it is also critical for leadership and staff to understand the purpose of their AML compliance efforts and how the govern-ment uses suspicious activity reports (SARs) filed with FinCEN.10 If leadership demonstrates that compliance is a top priority, a culture of compliance will be much easier to embed within the casino.

FinCEN speaks out

FinCEN has grown increasingly out- spoken about BSA/AML requirements in general, and with respect to casinos specifically. In a September 2013 speech at the Global Gaming Expo in Las Vegas, FinCEN Director Jennifer Shasky Calvery delivered what is best understood as a wake-up call to the gaming world, flatly telling the industry that the govern-ment expects casinos both to protect

themselves from illicit activity and to promptly report it when they see it.11 Citing Mexican drug trafficking organizations, fraud against government programs, public corruption, terrorist organizations and the proliferators of weapons of mass destruction, Shasky Calvery called casinos the “eyes and the ears” in the fight to limit bad actors’ access to financial channels.12

Shasky Calvery—who earlier served as chief of the Justice Department’s Asset Forfeiture and Money Laundering Section—reiterated these points in a speech last June, making it clear that casinos need to start thinking like other financial institutions when it comes to preventing financial crime. “[C]asinos are not simple cash intensive businesses. They are not arcades. They are complex financial institutions with intricate opera-tions that extend credit, and that conduct millions of dollars of transactions every day.”13 To FinCEN, in other words, casinos are not unlike banks. In Shasky Calvery’s words, they “must continue their progress in thinking more like other financial insti-tutions to identify AML risks.” Less will no longer suffice.14

Recent enforcement activity

The government’s focus is not merely rhetorical. In 2013, a major gaming company based in Nevada paid more than $47 million as part of a non-prosecution agreement after the federal government found its compliance programs to be inad-equate. The government cited massive money transfers from Mexican currency-exchange companies with which the

casino’s customer had no obvious affili-ation. In addition to the fine, the gaming company was required to implement a stronger compliance program in order to avoid criminal charges.15 Just months after that Settlement, another gaming giant disclosed that it was under investigation by FinCEN into a lack of adherence to the AML controls required by the BSA.16

The floodgates seem to be opening. During 2014, another major gaming company faced an investigation into its high-end clients, both domestically and overseas.17 In addition, last August, FinCEN barred a former manager at the Tinian Dynasty Hotel & Casino in the Northern Mariana Islands from working at any financial institution, after he assisted high-end gamblers who made large cash transac-tions by consciously failing to file the required currency transaction reports (CTRs) and SARs.18 As described further below, casinos can minimize the risk of

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10 Id. 11 Jennifer Shasky Calvery, Director, Financial Crimes Enforcement Network, Remarks

at the 2014 Bank Secrecy Act Conference, Las Vegas, Nev. (June 12, 2014). (available at http://www.fincen.gov/news_room/speech/html/20140612.html (accessed Jan. 5, 2015) (“Calvery”)).

12 Id.13 Id.14 Id.15 Rudegeair and Wolf, supra note 5.16 Caesars Entm’t Corp., Incident Report (Form 8-K) (Oct. 11, 2013).17 Kate O’Keefe, Rachel Louise Ensign, and Christopher M. Matthews, Wynn Resorts Probed on Money-

Laundering Controls, WSJ.com, Nov. 21, 2014 4:56am. http://www.wsj.com/articles/wynn-resorts-probed-on-money-laundering-controls-1416512645 (accessed Jan. 5, 2014).

18 U.S. Department of the Treasury, Financial Crimes Enforcement Network, FinCEN Bars Casino Official from the Financial Industry (Aug. 20 2014). http://www.fincen.gov/news_room/nr/html/20140820.html (accessed Jan. 5, 2015).

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such scrutiny by understanding and taking seriously their legal obligations in the fight against financial crime.

AGA’s response to industry scrutiny

As cash-heavy businesses with an over-seas clientele and a sketchy pre-legaliza-tion history, casinos face serious financial crime and money laundering risks.19 In issuing its Guidance last month, the AGA sought to tackle this problem head on. By its own terms, the Guidance is “an attempt to distill the practices that a wide range of casinos and Internet gaming sites have adopted to meet [BSA/AML compli-ance] challenges.”20 Its laudable goal “is to provide a resource for industry and law enforcement to help guide their efforts to protect the gaming industry and the broader financial system from money launderers and others involved in illegal activity.”21 It applies both to land-based casinos and legal Internet gaming busi-nesses, referring to both for ease of use as “casinos.”22

To these ends, the Guidance outlines how casinos can best safeguard themselves against money laundering abuses. It high-lights and succinctly explains the key building blocks of a successful BSA/AML program in the industry:

• The importance of assessing AML risks

• The key role of the compliance officer

• The necessity of employee training

• Preventive steps that casinos can take

• Customer due diligence (CDD) programs

• Transaction monitoring

• Reporting of suspicious activity

• Procedures for auditing the compliance program

• Record keeping and retention23

Several of these bear special emphasis. The first is the indispensability of every casino’s individualized risk assessment, which becomes the foundation of an effec-tive financial crime compliance program. Crucial to this risk profile is a careful evaluation of the characteristics of the gaming offered, whether the casino’s patrons originate from high-risk countries, their behavior on the gambling floor and the characteristics of particular patrons, including the importance of identifying the presence of politically exposed persons (PEPs).24

The Guidance strongly stresses the need for casinos to better know their customers by strengthening CDD programs, a funda-mental step in any robust AML program.

To be sure, EDD can prove a challenge, especially with wealthy customers, whom casinos have traditionally been reluctant to probe too deeply. The AGA suggests that casinos must not take identity infor-mation provided by customers at face value, but rather be more aggressive in confirming its accuracy.25

For larger casinos, which frequently host patrons brought to them through overseas junket operators, management must not only be familiar with the operator, but also know the patrons brought to gamble and to spend their funds. Using a risk-based approach, casinos should attempt to deter-mine sources of wealth and consider the overseas jurisdiction where these patrons and their funds originated.26

Casinos also offer foreign exchange facili-ties to junket operators or VIPs. Foreign holding accounts—where funds are held in one jurisdiction but are available for use in a casino in another jurisdiction without the need for cross-border remit-tance—present further risks.27 Although these foreign holding accounts may not provide the U.S.-based casino with the adequate access to the source of funds, casinos must develop the tools, controls and programs to ensure that foreign holding accounts are used responsibly and lawfully.

Casinos need to develop transaction monitoring programs that reflect the high-risk scenarios particular to their offerings

19 Financial Action Task Force, Vulnerabilities of Casinos and Gaming Sector, 27 (Mar. 2009). http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/vulnerabilities_casinos-gaming-sector_032009.pdf

20 Guidance at 4. 21 Id. 22 Id. 23 Id. 24 Id. at 5.25 Id. at 10. 26 Calvery.27 Financial Action Task Force, supra note 19.

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Strong KYC is not enough. The Guidance additionally makes clear that casinos need to develop transaction monitoring programs that reflect the high-risk scenarios particular to their offerings.28 Compliance programs should analyze transactions that fall above a determined threshold and ensure that enough infor-mation can be gathered on the nature of the transaction and the identity of the customers. The AGA identifies certain types of transactions that need to be moni-tored, and, in the appropriate circum-stances, could require filing a SAR. Among these are:

• Sudden, unexpected increases in gaming activity

• Large cash-in transactions with little or no gaming activity

• Large credit advances with limited play

• Winnings repeatedly falling just below the CTR threshold

• Checks or wire transfers from unknown third parties

• Transactions with no apparent purpose or strategy, such as confeder-ates placing simultaneous offsetting bets on red and black in roulette

• Multiple patrons using the same account

• Physical transfer of large quantities of chips or slot machine tickets among patrons with no obvious close relation

• Patrons making payments or deposits using complex means29

The Guidance stresses that its examples are not exhaustive and that each casino needs to develop the scenarios best tailored to their particular business.30

Crucially, a casino’s resilience against financial crime depends on its people. Without job-specific financial crime compliance training, casino staff cannot be expected to understand and identify the suspicious activity they are required to report.31 Moreover, historically high

employee turnover represents a special risk to gaming institutions, where maintaining a work force that has been properly trained—and can be properly trusted—is challenging.32 Casinos need substantial resources to counter these risks.

Opportunity for New York and Massachusetts

As New York and Massachusetts enter legalized casino gaming, their Gaming Commissions and licensees will benefit from the timeliness of the Guidance and lessons learned from recent BSA enforcement efforts. They have an opportunity to “get it right,” which in turn will help fend off ever-vigilant opponents to the expansion of gaming into these states. AML failures in these states could not only bring enforcement actions and fines, but could also shift public opinion in a way that jeopardizes the industry.

Significant resources have already been spent to ensure that the expansion of gaming into these states is done in a thoughtful and transparent manner. In Massachusetts, for example, the Gaming Commission has formed the Investigations and Enforcements Bureau (IEB). The IEB has subpoena power and plans to work directly with the state police, the Attorney General’s Office and the Alcoholic Control Commission.33 While New York is still in the process of formulating its regulations, both states would benefit from forming a collaborative relationship with FinCEN, which has a long history of working with state and local law enforcement.

Casinos, too, would do well to take heed of FinCEN’s raised expectations regarding financial institutions. The numerous compliance lapses and subsequent penal-ties of the larger banks in recent years offer a cautionary tale. Prominent banks have been fined, charged, and even pled guilty to federal felonies for deficiencies in their AML and international sanctions controls. Not only do reputations suffer,

but the financial impact of AML failures—with fines in the hundreds of millions or billions of dollars no longer unusual—can be devastating.

As banks react to these government actions by strengthening their programs, bad actors are always looking for addi-tional avenues to launder ill-gotten gains. Casinos, unfortunately, offer one such route. Without strong AML controls, they risk entangling themselves in similar actions.

Roy Pollitt, associate managing director, Exiger, New York, NY, USA, rpollitt@exiger.com

Daniel R. Alonso, managing director, Exiger, New York, NY, USA, dalonso@exiger.com

28 Guidance at 11.29 Id.30 Id. at 5.31 Id. at 7.32 Financial Action Task Force, supra note 19.33 The Commission, massgaming.com, http://massgaming.com/the-commission/ (accessed Jan. 5, 2015).

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