Applying the Why and How of Money Laundering to Casinos

This article original appeared in ACAMSTODAY Magazine- December 2021

An article published in the?ACAMS Today?September 2021-November 2022 issue titled “Casinos and the Why of Money Laundering”?introduced the money laundering goal methodology (MLGM) as an intuitive means to understand casino money laundering. The MLGM postulates that criminals engage in money laundering with the intent to accomplish at least one of the transactional goals described in Table 1.

By using the MLGM to explain why money launderers engaged in specific transactions, the concept of money laundering becomes more understandable and relatable, especially to the layperson who is not steeped in anti-money laundering (AML) training and experience.??

The risk assessment?

The MLGM can also be applied to the casino risk assessment to isolate vulnerabilities, identify appropriate mitigating controls and communicate risk more intuitively to casino leadership, who also may not be steeped in AML literature. For example, most people may not understand the concepts of placement, layering and integration, but they do understand concealing, converting, cleaning, transferring, spending and storing.???

Traditionally, casino risk assessments broadly affix a risk level to each product or service category under evaluation. For instance, a casino risk assessment may show the inherent risk for slot machines is high in facilitating money laundering, but what types of money laundering????

If someone asks a firefighter how to put out a fire, their first question will undoubtedly be, “What is burning?” Is it a fire from ordinary combustibles, chemicals, electrical, metal or cooking oil? Each fire type takes a specific method to extinguish the flames; that is why there are several types of fire extinguishers. If the risk of a cooking oil fire is high in a particular location, then there should be ample supplies of K-rate fire extinguishers. Stocking that area with AB-rated extinguishers is a waste of resources and rather dangerous.??

The same is true for fires from money laundering. There are certain controls that work best in taming the specific money laundering transactional flames. This is where the MLGM comes into play, by breaking down money laundering by its subtypes (the money laundering goals). Then, inherent risk (the risk of money laundering occurring without regard to controls) can be determined for each money laundering flame.??

Not all casino products and services have an equal ability to facilitate each money laundering goal. For instance, a kiosk machine can convert a ticket from a ticket-in, ticket-out (TITO) machine into $100 bills, but that money cannot be used to place a wager (spend). Markers require patrons to provide identification (ID), so they have less utility to conceal transactions unless the patron uses a false ID. Slot machines have a greater capacity to clean illicit funds by generating a W-2G form, whereas it is rare that a patron can generate a W-2G playing table games.???

Specific controls for specific goals

Once the inherent risk for each money laundering goal is determined, the controls best designed to detect, report or prevent the particular money laundering goal can be evaluated in their ability to detect, report or prevent the specific money laundering action.???

Though not a complete list, Table 2 provides examples of mitigating controls.

In evaluating risk by the money laundering goal, the user of the risk assessment is better positioned to determine if all the appropriate money laundering fire detectors and extinguishers are in place. Although a casino may deploy numerous controls in their AML program, the MLGM-based risk assessment may find they lack certain detection and prevention controls for specific money laundering goals. Also, a casino may find some controls have little or no mitigating effect when sized up to the specific money laundering goals. The MLGM may help flesh out procedures that are instituted just because “that is the way we have always done it.”??

A consideration in evaluating controls is that, like with fires, not all types of money laundering will occur equally. According to the U.S. Treasury Department’s “2018 National Money Laundering Risk Assessment,” the most common type of money laundering that occurs at a casino is simply spending illicit proceeds. Accordingly, casinos should ensure that controls to detect and prevent illicit spending are robust. Adequate customer due diligence is the critical control here.??

Casinos can also gauge the demand for each money laundering type based on the following:

• History of suspicious activity reports filing by casinos
• Law enforcement inquires or subpoenas
• Regulatory or law enforcement bulletins?

Factoring in the how of money laundering

The evaluation of controls for each product or service should be well documented in the risk assessment work papers. One way to refine the evaluation of controls for a particular product or service is to assess them against the commonly known processes used by money launderers to accomplish a specific money laundering goal. These are the how of casino money laundering, which are described in Table 3.??

A standardized worksheet breaking down the money laundering goals by their known processes can be used for each product or service under evaluation. By including the known processes for each money laundering goal, applicable prevention and detection controls are more precisely identified.??

Not all products and services can deploy every known process. For instance, you cannot chip walk with a slot machine. The spreadsheet should indicate what processes are not applicable to the product or service. Using a standardized assessment spreadsheet allows the risk assessment process to “kick the tires evenly” for all aspects of the casino under evaluation.?

The risk assessment should also consider the adherence to the policies and procedures that govern the controls. Accordingly, the results of independent testing of the AML program need to be considered in assessing the adequacy of controls designed to address each of the money laundering goals.???

Residual risk?

Residual risk is the risk that money laundering will occur without being detected, reported or prevented after consideration of the applicable controls. For quantitative analysis, the risk assessment spreadsheet should numerically score the residual risk for each known process based on the evaluation of the relative specific control.??

One suggestion is to use the following numeric scoring:?

There may be several applicable processes for each money laundering goal, given the product or service. Therefore, the overall residual risk can be either determined by using the average or the highest individual numeric value determined for each process.?

The overall scores for each money laundering goal determined on the assessment spreadsheets are then rolled up to a casino risk assessment summary. This risk assessment summary represents the casino risk profile. To ensure materiality is factored into the profile, the summary expresses each product and service in terms of their percentile representation of the annual gross gaming revenue and currency transaction report (CTR) dollar volume.??

Table 4 is how the casino risk assessment summary would look like depending on the product or services offered by the casino.

Interpreting the summary

A traditional casino risk assessment that does not focus on the subtypes of money laundering may induce the casino to overlook material vulnerabilities and drive the AML program to emphasize controls that only guard against a few money laundering fires. For instance, a traditional assessment may be singularly focused on the risk of not timely identifying currency transactions over $10,000 and missing an (Multiple Transaction Log (MTL) or Negotiable Instrument Log (NIL)?transactions. Consequently, needed controls to mitigate the risk associated with converting, transferring, cleaning, spending and storing may be overlooked.??

When residual risk for product and services is summarized by money laundering type, senior leadership is better positioned to understand the entire scope of vulnerabilities and what is needed to reduce risk to organizational tolerances. Whereas a traditional risk assessment may broadly affix a higher risk to a certain product or service, the MLGM specifically indicates what accounts for the rating. This eases the process of identifying actionable items. The MLGM helps squeeze out a bit of subjectivity of traditional casino risk assessments.??

Vulnerability trends may also become more apparent when presented in the MLGM format. The summary may show that a certain money laundering goal is high across all product and services. This may indicate weaknesses in casino-wide internal controls.??

Factoring in materiality (the representation of gross gaming revenue and/or CTR total dollar volumes) guides the users to areas that pose the greatest vulnerability needing prompt attention. Conversely, a lack of materiality may point to product or services that lack the materiality to warrant significant controls and monitoring.??

Customer base and location

In addition to products and services, regulators expect a casino to also evaluate the risk associated with their customer base and location. The MLGM can be applied to these aspects of the casino to pinpoint vulnerability and actionable items more precisely to mitigate risk.???

In the case of customer base, traditional casino risk assessments affixed a risk associated with each customer class without consideration of their money laundering demands. For instance, a casino might automatically assess foreign patrons as high risk. But high risk for what type of money laundering? In the foreign patrons’ case, they may be more likely to use the casino to transfer funds out of their country rather than using the casino to clean their funds.???

Regarding location, casinos traditionally rate casinos higher risk the closer they are to the U.S. border or if they are located in the drug trade or financial crime corridor. But what type of money laundering demand is associated with a juxtaposition near the border? For instance, there may be a greater demand to convert illicit currency into $100 bills or transfer funds across the border. Thus, an MLGM-based risk assessment on location—particularly when there are multiple geographic operations—can yield a more calibrated approach to recognizing risk.?????

Conclusion

One objective of the Anti-Money Laundering Act of 2020 (AMLA) is to align financial institutions’ AML programs with law enforcement needs. By using a MLGM risk-based approach, law enforcement priorities can be distilled into the specific money laundering types that are needed to facilitate the applicable criminal activity. Then, controls can be calibrated to focus on investigative priorities.???

Breaking down money laundering by the intuitive terms of conceal, convert, transfer, clean, spend and store not only make the concept of money laundering more palpable, it also allows the risk assessment to harmonize with the U.S.’ criminal statute of money laundering. The most significant byproduct of the MLGM is that it forces the risk assessment to think like a money launderer.?

For the Bank Secrecy Act (BSA) officer, using the MLGM may engender more confidence that their AML program adheres with regulator expectations and appropriately guards against the various flames from money laundering.?

Paul Camacho,?CAMS, Vice President of Casino Compliance, Yaamava Resort and Casino at San Manuel.?????