A New Approach to Casino Inherent Risk

This article offers a practical quantitative approach to computing the inherent risk associated with casinos. It allows casinos to isolate money laundering and financial crime risks better and communicate the casino risk profile to senior leadership.

Determining inherent risk tends to be the most subjective phase in the casino risk assessment process. Subjectivity comes into play when there is a lack of relevant factors considered, when an assessment that does not apply an objective methodology, or when risk is determined without regard to current money laundering and financial trends.

Subjectivity can cause casino risk assessments to inadvertently miscalculate risk, which could lead to misappropriating compliance resources or not identifying concerning risks.

Inherent risk is the likelihood that money laundering will occur in the absence of controls. Likelihood means the probability something will happen. Just because, in theory, an aspect of the casino could be used to launder money does not always mean there is a likelihood that criminals will gravitate to it.

Most products in a grocery store are eatable, but not all of them will be in high customer demand. A prudent grocery store will stock its shelves based on the perceived demand. Overstocking a product with little demand removes purchasing resources that could be applied to top-selling products. Such should be true for an anti-money laundering (AML) program when stocking AML resources.

Even though a grocery store may sell a desirable product, it may not have the capacity to sell the product in large amounts or procure high-quality items. Customers who may want larger quantities or better quality will simply go to other stores that have the capability to satisfy their needs.

Demand and capability will drive the likelihood of casino money laundering occurring. These factors need to be based on current money laundering and financial crime trends.

Regulatory guidance

The guidance provided by the Financial Crimes Enforcement Network (FinCEN) to assist casinos in determining inherent risk resides in FIN-2010-G002, Casino, or Card Club Risk-Based Compliance Indicators. The guidance offers a lengthy list of 51 general business risk and customer risk indicators, which all speak to demand and capability. According to FinCEN, these factors will not apply equally to all casinos, and even when these factors are present, there may be different risk outcomes for different casinos. Furthermore, a casino may not be required to address each of the factors, and a casino should not construe the factors as exhaustive and only as the ones required to be addressed. In other words, FinCEN grants broad latitude to determine what risk factors should be considered and how to compute risk—all in the spirit of a risk-based approach catered to each casino’s characteristics.

The guidance was issued in 2010, and a search of the entire document does not mention fraud. However, the 2024 U.S. Treasury National Money Laundering Risk Assessment (NMLRA) highlights how fraud dominates the illicit fund landscape in the U.S. The guidance also does not mention, as the NMLRA indicates, that the most common way illicit funds enter casinos is merely from criminals enjoying the fruits of criminal activity.

In addition, the 2020 Anti-Money Laundering Act amendments to the Bank Secrecy Act reiterated that AML programs are intended to be effective, risk-based and reasonable, including ensuring that more attention and financial institution (FI) resources should be directed toward higher-risk customers and activities, consistent with the risk profile of a FI, rather than toward lower-risk customers and activities. One of the priorities delineated in the U.S Department of the Treasury’s 2024 National Strategy for Combating Terrorist and Other Illicit Financing is to make the U.S. AML/counter-terrorist financing regulatory and supervisory framework for FIs more risk-focused and effective.[1] The methodology prescribed here embraces the Treasury’s efforts to drive more effect risk-based programs.

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Nearly all the customer risk indicators in the guidance are focused on suspicious transactional behavior rather than a source of funds. The guidance is set toward the laundering activity of the illicit drug trade. Where currency dominates the illicit drug trade, the original receipt of fraudulently obtained funds is typically in the form of non-currency. The guidance is not tuned to current money laundering and financial crime trends, so using it as the sole source of risk indicators will skew the assessment.

Quantitative approach

How do we apply FinCEN’s 51 risk indicators, plus other factors that may indicate inherent risk, without the risk assessment becoming unduly complicated and uneasy to interpret? Keep in mind that today’s casinos offer a multitude of financial products that were not available when the guidance was issued in 2010.

The methodology prescribed in this article objectively computes an inherent risk score for each aspect under consideration. This affords the ability to pinpoint the highest risk priorities so resources can be allocated appropriately. Furthermore, it also identifies aspects of low or immaterial risk that should not inadvertently draw resources away from higher risk priorities. The methodology is particularly well-suited for new product and service assessments. It is not overly weighed toward currency-based illicit contraband activity.

The methodology considers the following risk indicators that impact the demand and capability.

1.???????? Location

2.???????? Patrons

3.???????? Enforcement actions

4.???????? Law enforcement (LE) inquiries

5.???????? Suspicious activity report (SAR) filings

6.???????? Capacity

7.???????? Money laundering utility

Under this assessment, each product and service will undergo an evaluation where a rating is assigned to each of the above risk indicators as follows in Table 1:

Table 1: Rating assignments

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The calculation of the total inherent risk score for any given product or service is calculated as follows in Table 2: ?

Table 2: Inherent risk score calculations

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Risk indicators explained?

Location

Several of FinCEN’s risk indicators relate to the location, including proximity to a High-Intensity Drug Trafficking Area (HIDTA), a High-Intensity Financial Crime Area (HIFCA), or near the U.S. border. In addition to these characteristics, a casino may have other relevant risk characteristics, such as the proximity of material underground economy or high-risk industries that influence the demand for money laundering. The assessment should consider the totality of location risk indicators in determining the overall impact on any given product or service under review. The location should also consider where the product or service is located within the casino. For instance, our ATMs are located in secluded areas with little employee observation and camera coverage. ?

There is a tendency with traditional casino risk assessments to assign the same location risk to all products and services. Not all money laundering concerns are contingent on location. For instance, fraud can be committed anywhere and is the most likely type of illicit funds to enter a casino.

Patrons

Several of FinCEN’s risk indicators apply to a customer base, including country of origin, the number of patrons that gamble at large volumes, and the number of unrated players. Nearly all casinos will have these patron classes, as well as other classes that may impact inherent risk. In determining the impact level, consideration should be given to the ratio of these classes to the total customer base. Now that China-based money laundering organizations dominate cartel money laundering, the concentration of patrons bringing large amounts of currency to gamble should be a priority consideration, particularly if they have no U.S. financial footprint.

Casino enforcement and alerts

Enforcement and regulatory alerts involving casinos and their patrons are indicative of casino industry money laundering demand. The NMLRA is a key source for identifying relevant enforcement actions and alerts. To ensure relevancy, recent actions should be considered in greater weight. Criminals constantly evolve their schemes based on LE pressure. What may have been a prominent enforcement action years ago may not bear relevance to current money laundering schemes.

LE inquiries

Where enforcement actions and alerts indicate general industry money laundering demand, the volume of LE inquiries is a substantive indicator of money laundering demand specific to the casino. Like enforcement actions, older inquiries should be evaluated to determine whether money laundering schemes have evolved out of the associated schemes originally targeted by LE. LE inquiries also may be indicative of newer money laundering trends that have yet to be highlighted with enforcement actions or a local trend that are not materializing in other areas. Significant inquiries for trending money laundering schemes could indicate a lack of appropriate controls that make the product or service particularly attractive to criminals.

SAR filings

Where LE inquiries are an indicator of historical money laundering demand, SAR filings are an indicator of current money laundering demand specific to the casino. The level of SAR filings associated with a product or service is also an indicator of money laundering demand and capability specific to the casino. SARs give additional insight into the demand and capability. When considering SAR filings, there are SARs that may be the by-product of a patron's gaming style. These may not bear evidence of demand and capability for money laundering. For instance, a casino may have a policy to file chip walk SARs using a short evaluation period for redemption consideration, but the casino’s experience as a local casino is that many customers walk with chips for convenience.

There is another aspect to SAR filings that may indicate a deficiency in the AML program if there is a lack of SAR filings for certain typologies commonly reported by the casino industry to FinCEN. For instance, chip walk SARs are one of the most commonly filed. Unless the casino has no or relatively low table activity, a lack of chip walk SARs could indicate a deficiency in transactional monitoring.

Money laundering utility

A matchstick could be used to illuminate a dark room, but a flashlight is what customers purchase to go hiking at night. A casino may offer a product or service that could be a vehicle to launder money for financial crime, but trends indicate that criminals gravitate toward alternative options. This aspect grounds the assessment of the reality of current money laundering. For instance, casino chips could be used to store illicit funds, but prepaid debit cards and cryptocurrency may have much greater utility. A casino may have a bitcoin kiosk with low daily limits and no ability to purchase coins, but located near the casino is a convenience store with bitcoin machines with much higher limits, no casino-level surveillance monitoring, and allows for anonymous bitcoin purchases. A casino could have products or services that no other financial institution (FI) offers, elevating the utility. For instance, the ability to anonymously exchange small denominations for $100 bills without a fee. The bottom line is that the assessment should not automatically assume a matchstick is high-risk when flashlights are readably assessable.

Insight into money laundering utility can be gained by reviewing enforcement actions and regulator alerts on non-casino FIs. This could reveal available money laundering alternatives that make the casino less attractive for certain money laundering and financial crime schemes.

Capacity

Several of the risk indicator factors included in FinCEN’s guidance relate to capacity, including gross gaming revenue and number of units. Capacity considers the predictive volume and velocity of any given product or service. Capacity is the amount of dirty money that can be reasonably laundered. Just because something provided by the casino can be used to launder, it does not necessarily mean a casino has the capacity to launder material amounts. For instance, the casino has a small number of table games with low betting limits.

By money laundering scheme

To add inherent risk insight, a parallel assessment should also be conducted that focuses on the inherent risk of known money laundering schemes and other financial crimes involving casinos. In this assessment, the totality of all products and services available are considered in the overall ability of the casino to facilitate the scheme. The following is not an exhaustive list, but the methodology can be applied to these well-known industry schemes:?

·?????? Spending illicit funds

·?????? Structuring

·?????? Commingling of illicit funds to obfuscate

·?????? Generating W2Gs to clean illicit funds

·?????? Anonymous gambling of illicit funds

·?????? Bookmaking

·?????? Converting illicit wires or checks to currency

·?????? Converting illicit currency to wires or checks

·?????? Patrons using China-based money laundering organizations

·?????? Employee collusion to facilitate money laundering

·?????? False ID or Social Security number

·?????? Human trafficking

·?????? Loan-sharking

·?????? Converting small to large bills

·?????? Terrorist financing

·?????? Using gaming instruments as an alternative currency

A money laundering/financial crime base analysis may reveal weak points that the product and service analysis does not. It may also assist in isolating priorities and communicating the risk profile to senior executives.

Risk profile???????

The methodology will yield two summaries ranked by inherent risk score:

·?????? Product and services

·?????? Money laundering/financial crime schemes

These two summaries constitute the risk profile of the casino. With this, the casino will be able to better pinpoint priority risk concerns, which will aid in determining whether existing controls appropriately mitigate risk to the organization's risk tolerances. It also aids in communicating the risk profile to executives so they have a better understanding of the appropriateness of compliance resources needed to mitigate risk.

Conclusion

The methodology summarized here provides casino AML professionals with an alternative to traditional casino risk assessments, which may rely on more subjective judgment calls or weigh too much on currency-based money laundering.

Regulators do not expect FIs to apply limitless resources whenever there is the possibility of money laundering, regardless of how minute. The purpose of a risk-based approach is to allow FIs to allocate an appropriate level of resources commensurate with assessed risk to meet their regulatory obligation. But when too much subjectively is infused into the assessment process, a casino may err on the side of caution by overly compensating for inherent risk just to be safe. This methodology may give more confidence to AML professionals in justifying why higher levels of control may not be needed where inherent risk is relatively low. This methodology may also identify material risk concerns that may not have been evident using traditional methodologies.

Paul Camacho, CAMS,?vice president of compliance, Yaamava’ Resort and Casino? ?

[1] The Anti-Money Laundering Act of 2020 Section 6101 amends 31 U.S.C §5311. The amendment notes that the purpose of the Bank Secrecy Act is to “prevent the laundering of money and the financing of terrorism through the establishment by financial institutions of reasonably designed risk-based programs to combat money laundering and the financing of terrorism.” See more here: “Appendix B – Section-by-Section Summary The Anti-Money Laundering Act and Corporate Transparency Act of 2021,” U.S. House Committee on Financial Services, https://democrats-financialservices.house.gov/uploadedfiles/appendix_b__section-by-section_summary_of_amla_and_cta.pdf