Casinos: Title 31 compliance is just the beginning of better due diligence

Among non-bank financial institutions, casinos top the list of businesses that federal regulators are scrutinizing for evidence of money laundering — and it’s not hard to see why.

Gaming is still largely a cash business, after all, and it’s not unusual for a customer to exchange thousands of dollars in a single visit. Furthermore, a casino’s customers are often one-time visitors and people who move from state to state. And unlike a bank, casinos are not legally required to collect a great deal of personal information from their customers before exchanging large sums of money.

For these and many other reasons, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) is ramping up its enforcement of Title 31, the portion of the Bank Secrecy act (BSA) that applies to casinos and card clubs. 

Whereas FinCEN issued only three civil penalties against casinos from 2003 to 2014, totaling $1.6 million, it levied $110 million in civil penalties against casinos from 2015 to 2016 alone. In 2017, Artichoke Joe’s Casino in California was hit with an $8 million fine for allegedly, according to FinCEN, “turning a blind eye to loan sharking, suspicious transfers of high-value gaming chips, and flagrant criminal activity that occurred in plain sight.”

The Anti-Money Laundering Act of 2020

Since then, FinCEN has not issued any large penalties to casinos, but it has strengthened its enforcement capabilities and given potential future penalties much sharper teeth.

On January 1, 2021, Congress enacted the Anti-Money Laundering Act of 2020 (AMLA), which significantly expands FinCEN’s regulatory powers and raises the maximum penalty for Title 31 BSA violations for individuals to $1 million and 10 years in prison. The AMLA raises expectations about the thoroughness of Customer Due Diligence (CDD) information that financial institutions are obligated to collect. It also raises the penalties for failing to disclose beneficial ownership information and neglecting to file appropriate Suspicious Activity Reports (SARs) and Customer Transaction Reports (CTRs).

While the AMLA does not specifically mention casinos, the implications of the law are hard to miss, says Jeremy Kuester, a counsel at White & Case and a former Deputy Associate Director for the Policy Division of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

“The AMLA affects every financial institution in the United States,” Kuester says. “FinCen still needs to define its new regulations and procedures and that will take some time, but the trend toward greater transparency and accountability is clear.”

Due diligence is good business

While casinos are required to collect a certain amount of CDD information and file SARs and CTRs when they observe suspicious activity, they are not legally obligated to provide the so-called “fifth pillar” of customer due diligence — beneficial ownership information — largely because of the practical obstacles to obtaining such detailed personal information in a casino environment.

 “The CDD rule only applies to those financial institutions that typically have account relationships and therefore generally longer-term customer relationships,” Kuester explains. From a legal standpoint, “collecting beneficial ownership information from a customer the casino may never see again isn’t super productive,” he says, but collecting as much information as possible about certain customers may nevertheless be a smart business decision.

“Even though no specific requirements have changed, casinos should always be evolving and improving their risk management as a matter of best practices and responsible corporate governance,” says Kuester. “Casinos make their money on a sophisticated understanding of risk. The better they understand their risks, the more profit they can make. So, if casinos aren’t constantly tweaking their AML risk assessments, the weaker their controls are, the less effective their programs will be, and the casino itself will be less profitable.”

Compliance pressures are mounting

Since 1985, casinos have been defined as “financial institutions” under the BSA. This means they must file CTRs whenever a customer brings in or takes away more than $10,000 in currency within a 24-hour period. Casinos also need to make a SARs filing whenever they have suspicions about a transaction. Casinos and other non-bank institutions are legally exempt from the more stringent CDD requirements imposed on banking institutions since 2016, but stricter regulations and mounting risks are nevertheless pushing casinos to gather as much information about their customers as they can.

According to Robert Ashton, Tribal Gaming Agency Manager for Jackson Rancheria Casino Resort in California, “the days of robotic SARS filings are over.” A casino can no longer expect to cover its bases by sending a generic SAR and declining to do any follow-up, Ashton says, because “we are being audited on not just the number of reports, but the investigations and the steps that we used in the decision to file — or not to file — the SAR.” 

As a practical matter then, casinos are under pressure to develop customer due diligence protocols that complement their own compliance strategies.

According to White & Case’s Jeremy Kuester, the key challenges for casinos going forward include “how do you determine who your customers are? How do you collect the information required for reporting obligations like SARs and CTRs? Larger gaming places may use technology solutions, they may have specific loyalty cards, and their cashiers are well trained to ask for this information. But it’s a real challenge to apply the sort of AML compliance methodology that banks use to the gaming space — and in some cases, it’s just not applicable.”

How casinos can protect themselves

Still, there many ways that casinos can strengthen their AML efforts.

Forge stronger links between marketing and risk management. A casino’s marketers and customer relations officials are tasked with bringing in top-spending patrons, using such efforts as discounts, loyalty cards, and other promotions. However, it’s becoming increasingly clear that player development must work hand in hand with customer due diligence. No longer can high-rolling customers avoid serious background checks simply because they are willing to spend millions of dollars at a casino each year.

For example, Jackson Rancheria’s Robert Ashton says that his casino’s marketing team issues a “Top 25” report every few weeks — a list of which clients were spending the most, their win potential, and so forth — and uses it to push for deeper background checks. “I want to make sure all of those people are legitimate. Any time someone hits our top 25 for the first time in a year, they get put through a background investigation. We take what could be a potential problem — money coming in and out in large quantities — and investigate those people for legitimacy.”

Greater emphasis on physical observation. Having sharp eyes and ears on the casino floor is important. If a customer appears to be avoiding detection, such as playing for large stakes but declining to use a customer card, the casino could use close-circuit cameras to track the patron’s movements, including out to the parking lot.

“Even if we don’t have a name, we’ll have a license plate, make, and model for a suspicious activity report,” Ashton says. If the casino finds the car in question returning for multiple visits, particularly with different patrons, that would be another red flag.

Improved use of technology for background checks. It’s important to remember that casinos are in an arms race against money launderers and other criminals. The more sophisticated criminals get, the greater a casino’s need for enhanced information technology.

“We’re connecting all the pieces and constantly trying to obtain customer identification,” Ashton explains. “Whether that’s getting people to sign up for cards, getting vehicle information, or using third-party online investigation software and negative media searches to look for such indicators as a patron’s work affiliation not matching the money they’re spending. You’re looking for priors and relatives and associates with priors.”

Another red flag is an affiliation with the marijuana industry. While marijuana is legal in states like California, federal banking laws prohibit distributors and growers from funneling cash through mainstream financial institutions. Consequently, casinos must always be on high alert for people attempting to convert marijuana money into chips or credits.

Get in front of FinCEN

In any case, says White & Case’s Jeremy Kuester, casinos that are waiting for guidance from FinCEN on their AML procedures are not doing their business any favors.

“Casinos shouldn’t be waiting for FinCEN, they should be constantly improving their AML programs and they should be doing it for their own business purposes,” Kuester says. “But understanding appropriate risk depends on a good culture of compliance. That requires leadership, an acceptance of compliance as a high priority, and adequate funding to make it happen.”

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