Second Part of a Two-Part Series

As we blogged yesterday, British Columbia’s (“B.C.”) Attorney General David Eby recently released an independent and very detailed report examining money laundering in B.C.’s gaming industry and providing 48 recommendations to combat the problem. See Peter M. German, QC, Dirty Money: An Independent Review of Money Laundering in Lower Mainland Casinos conducted for the Attorney General of British Columbia (Mar. 31, 2018) (“German Report”). As we noted yesterday, when discussing the U.S. regulatory system, the German Report favorably cites the Nevada Gaming Commission and Nevada Gaming Control Board, whose Enforcement Division “acts as a first line of defence against organized crime and bulk cash buy-ins[,]” and further observes that the federal Financial Crimes Enforcement Network, “[i]n partnership with Internal Revenue Service, acts as the enforcement arm for most money laundering issues.”

The inquiry was called by the provincial government after reports outlined how money laundering in the province helped to fuel the real estate, luxury vehicle and gambling sectors. Casinos are being warned to assess the threat of junkets, strengthen controls and report suspicious activity after a government agency report found the overall risk of money laundering and terrorism financing to be high.

The U.S.’s more robust, streamlined AML regulatory regime, although hardly perfect, stands in stark contrast to the dysfunction alleged in the German Report that plagues B.C.’s current framework. In this post, we describe the U.S. AML regulatory regime for the gaming industry, and the recent enforcement actions which it has produced. Although the pace of AML enforcement has been somewhat sporadic, it appears to be increasing over time in regards to the gaming industry. Certainly, attention by regulators — as well as by the industry itself — to AML/BSA compliance has increased over the last several years.

The U.S. AML Regulatory Framework for the Gaming Industry

As a threshold matter, the Financial Crimes Enforcement Network (“FinCEN”) has authority to investigate casinos for compliance with and violations of the Bank Secrecy Act (“BSA”). FinCEN, in turn, has delegated to the Internal Revenue Service (“IRS”) its authority to examine casinos for compliance with the BSA. Under this framework, if the IRS identifies significant BSA violations during a casino examination, FinCEN initiates an investigation into that casino and, depending on the investigation’s outcome, may assess a civil penalty against the casino. As a result, the IRS and FinCEN work in conjunction while enjoying broad mandates that are not at odds with one another.

And, in contrast to the B.C. system described in the German Report, the U.S. has implemented more streamlined regulatory requirements for casinos pursuant to the Bank Secrecy Act (“BSA”), including:

• Filing suspicious activity reports (“SARs’) for suspicious transactions of at least $5,000;
• Filing currency transaction reports (“CTRs”) for cash ins or cash outs exceeding $10,000;
• Complying with certain recordkeeping requirements for up to five years, including a casino’s receipt of funds for each customer, bookkeeping entries for debits or credits into a customer’s casino account, and credit extensions exceeding $10,000; and
• Implementing AML compliance programs.

FinCEN issued guidance in 2010 regarding AML/BSA compliance programs in the gaming industry, stating that, “at a minimum,” such a program must include:

• A system of internal controls to assure ongoing compliance with the BSA;
• Internal or external independent testing for compliance with a scope and frequency commensurate with the risks of money laundering and terrorist financing posed by the products and services provided;
• Training of casino personnel, including training in the identification of unusual or suspicious transactions;
• An individual or individuals to assure day-to-day compliance with the BSA;
• Procedures for using all available information to determine and verify, when required, the name, address, social security or taxpayer identification number, and other identifying information for a person;
• Procedures for using all available information to determine the occurrence of any transactions or patterns of transactions required to be reported as suspicious;
• Procedures for using all available information to determine whether a record required under the BSA must be made and retained; and
• For casinos and card clubs with automated data processing systems, use of the programs to aid in assuring compliance.

Arguably, the gaming industry remains one of the last bastions of a major business that still often deals significantly in cash — in a world increasingly driven by technology and credit. To that end, some gaming businesses may attract a disproportionate share of customers seeking to avoid ensconced BSA reporting and record-keeping requirements, including the CTR filing requirement. Similar to some of the allegations in the German Report, some casinos also may attract certain individuals from across the globe who potentially are attempting to undermine certain laws in their home country, including tax reporting obligations.

AML Enforcement and the Gaming Industry

In recent years, FinCEN has shown an increased focus on AML compliance in the gaming industry. It assessed only three civil penalties against casinos, for a total of $1.6 million, from 2003 to 2014. In contrast, it imposed approximately $110 million against casinos from 2015 through 2016 and has pursued four significant enforcement actions since 2016.

As we have blogged, FinCEN announced on May 3, 2018 that it imposed a $5 million civil monetary penalty against Artichoke Joe’s for the casino’s alleged deficiencies in its BSA compliance. FinCEN asserted that Artichoke Joe’s AML program failed to implement sufficient procedures to identify loan-sharking operations. It found that: (1) the club’s senior management admitted loan-sharking operations were commonplace and observed by employees; (2) the club failed to file SARs and CTRs in compliance with the BSA; and (3) the club failed to undertake an independent audit after illegal loan sharking was initially detected.

FinCEN also pursued three large enforcement actions in 2016, about which we have also blogged:

• Cantor Gaming: FinCEN assessed a $12 million civil penalty against Cantor Gaming for purportedly “egregious and systemic” AML compliance failures on October 3, 2016. It found that Cantor Gaming failed to (1) provide adequate AML training for its officers and employees; (2) use all available information to identify and report suspicious transactions; and (3) maintain adequate internal controls to detect money laundering.
• Hawaiian Gardens Casino: On July 15, 2016, FinCEN imposed a $2.8 million civil penalty against the casino for allegedly repeatedly violating its BSA requirements. FinCEN attributed these failures to the club’s lack of a compliance culture, emphasizing that: (1) its leadership failed to meet as required by its charter; (2) its leadership failed to review and approve its risk assessment; and (3) its management failed to implement policies and procedures for customer identification.
• Sparks Nugget: On April 5, 2016, FinCEN imposed a $1 million civil penalty against the company for purportedly engaging in willful and repeated AML violations. FinCEN alleged that: (1) the company’s committee for deciding whether to file SARs never actually met and it included members that did not know that they were on the committee; (2) the company prohibited its compliance managers from interacting with BSA examiners; and (3) the casino used customer information only to further its business interests and not to comply with the BSA.

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An ongoing investigation

According to an investigative inquiry, River Rock Casino, the largest casino in British Columbia (B.C.), regularly did not fully report suspicious transactions, violating anti-money laundering (AML) rules.

The B.C. Lottery Corporation (BCLC), the province’s gambling regulator, is also alleged to have been aware of the transgressions, but did not take action. The Cullen Commission of Inquiry into Money Laundering in B.C. is looking into these potential AML breaches.

saw one casino patron bring CA$1.8m (US$1.35m) in cash over the course of a single week

The most notable of the suspicious transactions saw one casino patron bring CA$1.8m (US$1.35m) in cash over the course of a single week in December 2014. Despite these suspicious transactions, the BCLC did not tell the casino operator to refuse the money or to conduct a source of funds check.

Former AML director under the microscope

A government lawyer questioned former BCLC AML and investigations director John Karlovcec on Friday about the lack of action concerning the suspicious cash transactions. B.C.’s Gaming Policy and Enforcement Branch (GPEB) lawyer Kaitlyn Chewka focused her questions largely on the CA$1.8m worth of buy-ins from 2014.

Laundering Money Definition

Karlovcec admitted that these transactions were suspicious and they would have been reported to police and GPEB as well as FINTRAC, the reporting center for financial transactions in Canada. Chewka explained that the BCLC had the power to take further action but did not do so.

Money Laundering Stages

I recognize that we do not want to jeopardize revenue.”

One of Karlovcec’s e-mails at the time regarding the suspicious transactions said: “I recognize that we do not want to jeopardize revenue.”

Karlovcec testified that he was not under pressure to prioritize casino revenue, but he did agree that casinos may have resisted AML measures so as to not offend high rollers.

Other transgressions

The casino was only reporting cash transactions worth at least CA$50,000 (US$37,572), contrary to the CA$10,000 FINTRAC reporting requirement. Two cash buy-ins made entirely in CA$20 (US$15.03) bills totaling CA$49,960 (US$37,542) and CA$49,980 (US$37,557) in 2011 were not reported as suspicious. Authorities believe that casino staff might have informed high rollers of this reporting limit so they could avoid triggering an investigation.

The Cullen Commission questioned former BCLC manager of investigations Gord Friesen on October 28. Investigating lawyers highlighted numerous examples of Friesen disagreeing with his subordinates about large cash transaction investigations.

Investigators raised concerns about the River Rock reporting practices, but Friesen refused to investigate these concerns. River Rock Casino lawyers maintain that the casino met all reporting duties and that there were no AML breaches.

B.C. becoming notorious

The Cullen Commission was launched because of reports that illegal cash was fueling the gambling, luxury car, and real estate industries in British Columbia. New AML controls went into effect in January 2018 in B.C. as a result of ongoing concerns.

Casino Money Laundering Reddit Against

Money Laundering Through Casinos

B.C. Attorney General David Eby commissioned an independent report that found that regulators and operators were happy to turn a blind eye to large cash transactions, leading to the casinos in the province being dubbed a “laundromat for organized crime.” The extent of money laundering at B.C. casinos was so large that the international intelligence community described the use of VIP players to launder criminal proceeds as “the Vancouver Model.”