HYPE vs. REALTY... a practical approach to Casino Anti-Money Laundering program

This article was originally published in ACAMSTODAY Magazine for Money Laundering Professionals-September-November 2016 Vol. 15 No. 4 edition

Casinos are a rather arcane business given that not too long ago legal gambling was confined to the states of Nevada and New Jersey. Lest anyone think otherwise, operating a successful legal casino is a lot harder than it looks. The smiling faces of dealers and the festive atmosphere belie the intensity of the operation. Every nuance of the gaming floor is monitored to ensure cheaters do not have the upper hand and patrons are dealt a fair game.

The few that are deemed worthy to operate casinos are exposed to comprehensive background checks before the coveted casino license is granted. In addition, the intrusive suitability checks continue as long as the person holds the license. Any hint of impropriety could force a licensee to appear before a gaming regulatory board to explain his/her actions. 

Thanks to Hollywood, stereotypes abound on casinos and those who operate them. A Las Vegas Internal Revenue Service (IRS) special agent once quipped at a meeting of industry casino compliance directors, “There are those outside of Nevada that think all casinos are owned by Robert De Niro and their anti-money laundering (AML) program is run by Joe Pesci.” This IRS agent was empathetically acknowledging challenges casinos face in overcoming views incubated by pop culture. Even though casinos are highly regulated, frequently audited and publicly traded, the bygone era of organized crime figures surreptitiously running certain casinos still undeservedly haunts the industry.  

Establishing a culture of strict adherence to procedures and fostering employee integrity is critical to a gaming operation. In this sense, casinos and banks share a commonality. However, casinos in many areas are not like banks. Whereas banks are in the business of moving and storing your money, casinos are, in large part, in the business of winning and losing money. Although casinos do provide services to facilitate gambling, they have little interest in financial transactions that do not bring customers to the tables or slot machines. A common mantra among casino cashiers when patrons request a nongaming-related financial transaction is, “Sorry, we are not your bank.” 

Even comparing currency transaction reports (CTRs) of banks and casinos is like comparing apples to oranges. If a bank files a CTR for $10,000 it usually means that the patron walked in with $10,000 in currency. However, this is not true for casinos. This is because the Financial Crimes Enforcement Network (FinCEN) requires casinos to aggregate every time a patron drops cash on a blackjack table or feeds cash into a slot machine. Lady Luck often drives patrons to cash-out, take a break and move to another table or slot machine. Even though it is the same cash, the new wagers are still included in the total currency in for the day. It is like a banking customer depositing $5,000, immediately withdrawing all of it and then walking to another teller and repeating the transaction. There is logic to this FinCEN rule, but law enforcement often has to be educated on how to interpret a casino’s CTRs.  

A practical way to understand casino AML programs is to first grasp how money laundering occurs in a casino and then how such activity is detected.   

Enjoyment of dirty money

 

The most common form of money laundering in a casino is simply enjoying ill-gotten gains.[1] This is the end stage of the money laundering cycle (integration). Most of the time, patrons enjoy “bad money” by gambling without regard to concealing their identity. In these situations there are no discernible differences between criminals spending illicit money and a gambler using legitimate funds. The one exception could be a significant spike in play. A material increase in a customer’s average monthly betting might indicate someone may have enriched themselves through a criminal activity. However, it is not that uncommon for legitimate players to have a spike in play. This often happens when a casino entices a patron away from a competing operator.   

To vet out criminals enjoying their untaxed money, casinos rely on established due diligence procedures to identify possible instances of illicit funds entering the casino. In marked contrast from the past, FinCEN has strongly advised casinos of their obligation to use all available information to ascertain patrons’ source of funds. This includes what any casino employee (such as managers, hosts, or player development staff) knows about the patron’s source of funds.   

Deploying an adequate due diligence process includes training employees who regularly interact with larger players on how to spot red flags—in particular indications that a person may be engaged in fraud or embezzlement. Interestingly, sometimes embezzlers think that Lady Luck will solve all their problems. Just a few “big wins” will allow them to replenish the pilfered accounts and still have money left over or disguise the real source of the funds.  

Avoiding detection (structuring)

According to FinCEN, the most common suspicious activity reports (SARs) filed are for structuring transactions to avoid a CTR. Many SARs filed for structuring cash out relate to the redemption of chips. These are situations where the patrons have more than $10,000 in chips in their possession, but choose to cash out less.[2] FinCEN has used the term “chip walking” to describe this behavior and put the industry on notice to report instances where chip walking might indicate an attempt to avoid a CTR. FinCEN concedes that not all chip walks are suspicious, but states that there may be “less innocent reasons” why a patron leaves a casino with chips.[3] 

There are legitimate reasons why someone may not want to cash all their chips in, especially if the patron plans to return to the casino to continue gambling. To mitigate risk, casinos review situations where a patron appears to have held back an inordinate amount of chips from redemption. Each circumstance must be evaluated to determine if there are aspects of the transaction that would raise suspicion. For instance, the patron continually makes redemptions under the reporting amount during subsequent trips. Interestingly, chip walks are usually tied to patrons who have more gambling winnings than losses in a day, with much of the originating legal funds coming from the casino.  

Avoiding detection (concealing identity) 

Law enforcement has alerted casinos to watch for individuals attempting to use a false identification to sign up for customer loyalty programs or criminals using another person’s loyalty program card.[4] Casinos use customer loyalty programs to encourage gambling by rewarding patrons with comps (meals, hotel rooms, shows) based on their level of play. The more a patron gambles, the more comps are earned. Loyalty programs track play through a loyalty card which patrons insert into slot machines or hands to the dealer. 

To mitigate risk of someone using a loyalty card to conceal activity, casinos require a valid ID in order to enter the loyalty program. In addition, regardless if a patron uses the loyalty card, patrons should be required to provide a valid ID in order to conduct currency transactions over a certain dollar threshold. Whether or not a loyalty card is used, if a patron’s aggregated currency transactions exceeds $10,000 in a day and he/she refused to provide a valid ID and his/her social security number, the patron should be banned from further play.     

Converting dirty money

Drug trade organizations and currency intensive criminal enterprises frequently use $100 bills to purchase contraband and store their ill-gotten gains. Thus, law enforcement has stressed to look for patrons converting small denomination bills to $100 bills, with an emphasis when there is minimal gaming activity.[5] This money laundering method is referred to as “bill stuffing.” Bill stuffing could also apply to converting $100 bills to new $100 bills—new bills are desirable if criminals want to unload currency laden with drug residue or suspect the bills are marked.  

Bill stuffing works as follows: The patron feeds currency into a slot machine and then requests a cash-out voucher. The patron then uses a kiosk machine to redeem the voucher for $100 bills. Kiosks are generally located throughout the gaming floor for convenience to handle smaller transactions without the customer having to go to the cage (the casino cashier).  As an AML control, kiosks are limited on how much currency can be redeemed at one time. Vouchers over this limit must be redeemed at the cage where patrons may be required to provide valid ID. 

In addition, cash-out vouchers have an expiration date—usually no more than 180 days—which limits their longevity as a form of currency. Nevertheless, recent intelligence provided by the FBI suggests that criminals have used cash-out vouchers to transfer funds from one confederate to another.[6] 

As a prevention mechanism, casino kiosk systems will generate real-time alerts that identify instances of possible bill stuffing. These alerts allow casinos to take immediate action to stop the activity—if deemed suspicious—and report it. Greatly aiding in identifying culprits are the ubiquitous surveillance cameras recording activity from various angles. 

Using chips to facilitate illegal activity

Criminals have been known to use casino chips as an alternative form of currency. The chips can then be used to store funds or transfer to confederates. Criminals may believe that the possession of casino chips gives them a convenient alibi that their money came from gambling winnings.  As detailed in a recent enforcement action on a Southern California card club, criminals used gaming chips to facilitate clandestine, illegal “casinos” operated out of luxury homes. As the investigation revealed, the main defendant would wire illegal funds into the card club and the casino would then give him chips. [7]  Law enforcement sources suggest that high stakes poker players are known to hoard chips in safe deposit boxes to avoid detection from the IRS.

A control to reduce the risk of chips being used for nefarious purposes is to validate whether the patron at the time the chips are redeemed had gambling winnings or prior chip buy-ins. Similar procedures are applied to those requesting redemptions of cash-out vouchers at the casino cashier. Casinos do not cash in the chips of competing casinos unless they confirm from the competing casino that the patron legitimately acquired the chips. Keep in mind, there is also an operational purpose to ascertain the ownership of the chips in that these procedures aid in identifying chip theft from the casino or from another patron. 

Facilitating illegal sports betting operations

A few months prior to the 2015 Super Bowl, FinCEN issued a letter to the American Gaming Association (AGA) concerning legal sports books. The letter stated, “It has come to the attention of the Financial Crimes Enforcement Network and its law enforcement and regulatory colleagues that increase in sports betting conducted on behalf of third parties are facilitating criminal activity and posing a money laundering risk to the U.S. financial system.” As a means to balance their operational risk, illegal sports betting operations have been known to surreptitiously use third parties to place bets in legal Nevada sports books. The illegal bookmakers—operating mainly outside of Nevada—earn income from loan sharking and charging a fee based on a percent of the bet rather than taking a position on the outcome of the game. These criminal enterprises attempt to balance their bets by “laying off” their overexposed positions without being detected.[8]  

In the letter to the AGA, FinCEN advised Nevada sportsbooks to inquire with their sports book patrons—whose transactions approach currency reporting thresholds—whether they are conducting the transaction on behalf of another. According to FinCEN, such patron inquiries would enable sportsbooks to comply with the CTR requirement to report whether the transaction is being conducted by a third party.[9]   

In response to the FinCEN letter, Geoff Freeman, president of the AGA, publicly stated, “While casinos routinely look for suspicious bets at sportsbooks and have worked with law enforcement to identify illegal activity, in some cases leading to criminal convictions, no such oversight exists for the illegal sports betting market.”[10]  

Paying the expenses of others

Paying the expenses or debt of another is a century old money laundering technique used to transfer illicit funds without creating a money trail of the payment between confederates. The IRS has alerted casinos to the risk associated with third-party payments used to establish front money accounts or paying markers. Front money accounts are credit balance accounts that patrons use to fund gambling and markers are casino-issued loans to fund gambling. 

The risk exponentially increases when third-party payments originated from an entity or unrelated individuals—even more so if they emanate internationally. Foreign wires are of particular risk given the limited ability to conduct due diligence of the payer. Many casinos will not allow these wires unless they can establish the legitimate connection between payer and benefactor.   

In a recent FBI/IRS case, criminals used third-party payments to transfer illicit funds from an illegal sports betting operation to fund a front money account on behalf of a confederate.[11] In addition, law enforcement recently caught an embezzler attempting to fund a confederate’s front money account with a bank wire exceeding a million dollars. The casino, unaware of the embezzlement, refused the wire because the casino could not validate the legitimacy of the transaction.[12]        

Cleaning

 

Quite a bit of intrigue has been attached to the idea of gambling in a manner to make “dirty money” look clean. On the internet, it is not hard to find someone pontificating on the possible betting machinations a person could deploy to give the illusion funds came from winnings. But these methods should contain a flashing neon warning sign. Attempting to clean funds by gambling is fraught with hazards. For example, a money launderer could actually lose all ill-gotten gains to the casino. That is just the nature of the unwavering law of probability and the house advantage. 

Often the end game of those who attempt to “clean” their money is to obtain a payout in the form of a casino check. Depositing a casino check into a bank is less suspicious because the bank will assume it is gambling winnings. Unfortunately for money launderers, you cannot just buy a bunch of chips, walk around the casino without gambling and go to the cage to get a check payout. Check payouts are not allowed unless it is validated that the funds were put at risk (gambled) and the patron has winnings. The policy also applies when a patron requests remaining front money account balances to be wired out. 

Although known instances are rare, offset betting techniques might allow money launderers to put all their funds at risk without exposing their dirty money to significant gambling losses. Offset betting is the process of placing equal bets on both outcomes of a casino game. For instance, on a roulette wheel, placing equal bets on black and red and hoping you do not get too many greens. If just one patron attempts offset betting it would draw suspicion.  To reduce suspicion, a money launderer might enlist confederates to place the other side of the bets. Surveillance personnel, however, are also keen in spotting team betting patterns.     

To identify instances of offset betting to obtain checks, casinos can review those patrons that receive a material dollar value of check payouts and determine how the patron funded their gaming activity. Situations where patrons fund their gaming with currency and consistently requested a check may warrant further due diligence. 

One method drug dealers have deployed to give the illusion that funds originated from gambling winnings is a W-2G scheme. A W-2G is a form required to be filed annually with the IRS when a patron hits a jackpot over $1,199. The rules require that when a patron hits a reportable jackpot, the slot machine locks up and a casino employee approaches the patron to obtain a valid ID and social security number. The patron is then issued a copy of the W-2G. At this point, the patron could request to be paid in currency. Jackpot currency payouts are not included in the computation of currency out for CTR purposes because FinCEN has ruled that these amounts are already reported to the federal government via the W-2Gs.     

 

The W-2G scheme is rather simple because it merely involves just sitting at a slot machine and gambling until you obtain enough W-2Gs to pacify anyone questioning your stash of currency. Since W-2Gs are merely snapshots of gaming activity throughout the year they are rather poor indicators of actual net gaming income. It is not uncommon for those in possession of numerous W-2Gs to be net losers at the end of the year.

But those not familiar with the nature of gambling may consider the W-2Gs as proof that the person’s currency came from successful trips to casinos.  This faulty logic is akin to assessing earnings from stock trades by just adding up gross sale proceeds without regard to the cost of those shares. The rather fossilized rules on W-2Gs were enacted by Congress in 1970. Any attempt to revise the rules should take into account the money laundering vulnerability imposed on casinos.    

What has peaked law enforcement’s interest of late is a patron using third-party payments to give the illusion of gambling winnings.[13] A third-party payment could allow a pool of funds to look like it originated from a casino winning. The scheme would work as follows: A patron obtains a casino marker to fund his gambling during his trip. If at the end of the trip the patron is lucky, then he/she uses his/her winnings to pay off the marker and requests the remaining balance in either check or bank wire. In subsequent casino trips if the patron is a net loser, then the patron attempts to pay off the marker through a third-party payment. This way the patron’s bank records only show gambling winning deposits but do not show the repayment of the markers.   

A word on card clubs

A review of DOJ and FinCEN press releases reveals that a notable portion of recent casino enforcement actions have been on card clubs. There is a regulatory distinction between Vegas-style casinos and card clubs. In California, card clubs are issued a “Class II” license, which only allows them to offer games where patrons play against each other and the card club earns revenue on the “rake” (a fee charged to each player per hand). In Class II operations, the players are self-banked and the card club has no action in the game. Casinos that offer Vegas-style games are granted a “Class III” license that authorizes them to bank players and earn revenue from winnings.[14] Generally, there is a more robust regulatory regime for Class III casinos.[15] Some card clubs have been known to surreptitiously bank players, which could be a violation of Title 18, Section 1955, illegal wagering.[16]  

Conclusion

There has been a flurry of casino enforcement actions, but a recent study conducted by Ernst & Young demonstrates that many major casinos have been taking to heart their responsibilities to deploy robust AML programs.[17] As former FinCEN Director Jennifer Shasky Calvery pointed out in a speech to the American Banking Association, casinos have made extensive strives to enhance their AML programs to meet current regulatory expectations.  

Unquestionably, casinos do pose certain money laundering vulnerabilities given the intensity of currency transactions. That said, the U.S. Treasury’s 2015 National Money Laundering Risk Assessment indicates that criminals have not gravitated to casinos over traditional and nontraditional financial institutions. Casinos were not even mentioned in Treasury’s 2015 National Terrorist Financing Risk Assessment.  

Regardless where casinos fit in the money laundering spectrum, there is no excuse for casinos to avoid making compliance a top priority. FinCEN and the IRS have shown they will responsd swiftly and punitively to those casinos that willfully falter in the regulatory responsibility. To be on pace with banking regulatory examination cycles, the IRS is now deploying more resources to ensure a wider swath of casinos are examined.[18]

In the U.S., the regulatory regime for Class III casinos plays a significant role in reducing money laundering risk by ensuring bad actors are unable to control casinos. The movie Casino is a critically acclaimed and international fan classic, but when you watch such movies do not let it color your opinion on how modern-day casinos operate. There are few times when Hollywood intersects with reality. The characters played by De Niro and Pesci would never stand a chance obtaining a Class III casino license in today’s gaming regulatory environment. 

Paul Camacho, CAMS, vice president of AML compliance, Station Casinos LLC, Las Vegas, NV, USA, [email protected]

[1] “National Money Laundering Risk Assessment,” United States Treasury, 2015, https://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/National%20Money%20Laundering%20Risk%20Assessment%20%E2%80%93%2006-12-2015.pdf

[2] Information shared by law enforcement during Las Vegas casino compliance director and law enforcement working group meetings.

[3] “Prepared Remarks of Jennifer Shasky Calvery, FinCEN, June 12, 2014, https://www.fincen.gov/news_room/speech/html/20140612.html

[4] Information shared by law enforcement during Las Vegas casino compliance director and law enforcement working group meetings.

[5] Information shared by government officials at the 2016 Bank Secrecy Act Conference in Las Vegas.

[6] Information shared by law enforcement during Las Vegas casino compliance director and law enforcement working group meetings.

[7] “Twenty Five People Charged as Members of $10 Million Illegal Gambling and Money Laundering Operation,” U.S Attorneys Southern District of California, December 9, 2015, https://www.justice.gov/usao-sdca/pr/twenty-five-people-charged-members-10-million-illegal-gambling-and-money-laundering

[8] Letter to Geoff Freeman, president and CEO of AGA, FinCEN, December 24, 2014, https://www.fincen.gov/statutes_regs/guidance/pdf/01162015.pdf

[9] Ibid.

[10] Brett Wolf, “U.S. Treasury Warns Casinos on Illegal Sports Betting,” Reuters, January 16, 2015, https://www.reuters.com/article/gambling-sports-casinos-idUSL1N0UV2EK20150116

[11]

“Twenty Five People Charged as Members of $10 Million Illegal Gambling and Money Laundering Operation,” U.S Attorneys Southern District of California, December 9, 2015, https://www.justice.gov/usao-sdca/pr/twenty-five-people-charged-members-10-million-illegal-gambling-and-money-laundering

[12] Information shared by law enforcement during Las Vegas casino compliance director and law enforcement working group meetings.

[13] The author’s recent discussions with law enforcement officials.

[14] Legal Distinction Between Class II and Class III Gaming, October 4, 2011, IndianCountry.com

[15] California Tribes Score Victory in War with Card Rooms, February 26, 2016, Onlinepokerreport.com

[16] California Tribes Score Victory in War with Card Rooms, February 26, 2016, Onlinepokerreport.com

[17] “Investing in America’s Financial Security: Casinos’ Commitment to Anti-Money Laundering Compliance,” AGA, January 2016, https://www.americangaming.org/sites/default/files/AGA%20AML%20Research%20Report%20Final%20011916.pdf

[18] Comments made by Treasury officials at the 2016 Casino BSA conference in Las Vegas.

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