Casino Money Laundering Risk

This document describes factors that a casino or card club may need to consider in applying a risk-based approach to the development and implementation of a Bank Secrecy Act ('BSA') compliance program. The BSA requires casinos and card clubs to develop and implement compliance programs tailored to business activities and customer risk profiles (e.g., type of products and services offered, the locations served, and the nature of their customers). Please note that the business/customer risk factors described below will not apply equally to all casinos and card clubs, and even when these factors are present, there may be different risk outcomes for different casinos and card clubs. A casino or card club may not be required to address each of the factors described below; also a casino or card club should not construe the risk indicators below as exhaustive and the only ones required to be addressed.

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. AUSTRAC has revealed its money laundering and terrorism financing risk assessment of the junket tour operations sector is high. A junket is an arrangement between a casino and a tour operator to. Matt Lappas is a Deloitte Risk and Financial Advisory manager in the anti-money laundering and economic sanctions practice, Deloitte Transactions and Business Analytics LLP. A Certified Anti-Money Laundering Specialist (CAMS), Lappas has 10 years of banking sector experience — six of which have been focused on anti-money laundering advisory work.

I. General Business Risk Indicators

There are many risk indicators or factors that a casino or card club may need to consider when developing and implementing an effective BSA compliance program to combat money laundering and terrorist financing. Risk factors may differ depending on the business activities of a specific gambling establishment, or its products and services, as well as state, tribal or local gambling regulations that affect the gaming operation. Also, a casino or card club may need to consider the risk management principles that it applies in its operational areas when assessing and managing its BSA risk profile.

A casino or card club may need to consider, as appropriate, the following factors when developing and implementing risk-based policies, procedures, internal controls and systems to comply with the BSA:

• Gross annual gaming revenue ('GAGR') of the business as well as GAGR by type of gambling offered (e.g., table games, card games, slot machines, video lottery terminals, sports book betting, pari-mutuel wagering on horse or dog races);
• Overall physical layout of gambling establishment (e.g., square footage and gambling floor layout);
• Governmental wagering limitations or other legal constraints on betting or the types of games offered;
• Types of gambling offered (e.g., table games, card games, slot machines, video lottery terminals, sports book betting, pari-mutuel wagering on horse or dog races);
• Types of specific games offered (e.g., roulette, baccarat/mini-baccarat, or craps, which allow a pair of bettors to cover between them both sides of an even bet);
• Number of table games, card games, slot machines/video lottery terminals offered;
• Number of table games, slot machines or video lottery terminals with high dollar maximum bet limits;
• Number and location of cages and slot redemption booths;
• Number of cage windows and race/sports book windows;
• Number of slot kiosks for ticket redemptions and maximum dollar thresholds;
• Types of financial services offered at the cage (e.g., deposit accounts, credit/marker accounts, account access cards, check cashing accounts, currency exchange services), any limitations on financial services, and other types of payment methods accepted (e.g., credit cards, debit instruments, wire transfers);
• Types of negotiable instruments accepted for cashing, credit, deposit, and purchase of gaming instruments (e.g., business checks, cashier's checks, foreign drafts, domestic or international money orders, official bank checks, personal checks, promissory notes, third-party checks, domestic or foreign traveler's checks);
• Business and personal check cashing dollar limits;
• Whether customers can wire funds domestically or internationally through a domestic depository institution for deposit or payment of markers into their personal casino accounts;
• Whether a third-party contractor provides check cashing or money transmitting for customers on the premises;
• Whether a third-party contractor provides race and sports book wagering within a casino, and the extent to which a casino conducts such customer transactions on behalf of a third-party contractor;
• Types of financial transactions that a casino 'host' can conduct on behalf of customers;
• Whether customers are allowed to conduct transactions through chip runners and the types of transactions that can be conducted;
• Whether the casino or card club is located in a High Intensity Financial Crime Area ('HIFCA');¹
• Whether the casino or card club is located in a High Intensity Drug Trafficking Area ('HIDTA');²
• Whether the casino or card club is located in a town or city center, or in a more remote location;
• Whether the casino or card club is located near a U.S. land border crossing;
• Proximity of the casino or card club to any interstate freeways which allow customers quick ingress and egress to the gambling operation;
• Whether the casino or card club is owned by a state or tribal government, privately owned, a combination of state and private entities, or is a publicly traded company;
• Whether a casino is owned by a corporation that operates other casinos in the same state or other states, as well as other countries;
• Number of employees, experience levels, and turnover rate of key personnel and frontline employees;
• Number of surveillance employees and ratio of employees to surveillance cameras;
• Number of fiduciary accounts that are opened annually (e.g., deposit accounts, credit/marker accounts, check cashing);
• Number of marketing accounts that are opened annually (e.g., player rating and slot club);
• Geographic marketing areas, such as international, regional, and local marketing areas, as well as relative concentration in these markets;
• Business clientele model and profile (e.g., a large number of customers who gamble relatively small amounts of money, a large number of customers who gamble relatively large amounts of money, a small number of customers who gamble relatively small amounts of money, a small number of customers who gamble relatively large amounts of money, or some combination of these); and
• Customer base (number of accountholders versus estimated number of non-accountholders, organized casino tours/junkets, estimated number of local customers versus estimated number of travelers or tourists).

II. Customer Risk Indicators

Although any type of customer activity is potentially vulnerable to money laundering or terrorist financing, certain customers may pose specific risks. In assessing customer risk, casinos and card clubs may need to consider other variables, such as services sought, products used, and geographical locations. For example, a casino or card club may need to consider the following:

• Particular aspects of operations (i.e., products, services, games, and accounts or account activities) that can be used by customers to facilitate money laundering and terrorist financing;
• Non-resident aliens and foreign nationals with deposit accounts who are citizens of countries or jurisdictions that are:
  • Identified as non-cooperative by the Financial Action Task Force (FATF)³ ,
  • Identified as Jurisdictions of Concern or Jurisdictions of Primary Concern in the U.S. Department of State's annual International Narcotics Control Strategy Report (INCSR)⁴,
  • Designated as jurisdictions of primary money laundering concern or subject to special measures through regulations issued by FinCEN, pursuant to Section 311 of the USA PATRIOT Act⁵, or
  • Sanctioned by the Office of Foreign Assets Control (OFAC), including those with state sponsored terrorism⁶.
• Customers with significant levels of gambling (e.g., in amounts of $3,000 - $10,000 inclusive) that are non-accountholders and for which identification is not known and is unavailable;
• Customers that pose higher risks based on type of account, account activity, types of products and services used, geographic locality, or player ratings, etc.;
• Customers that engage in a relatively high level of spending;
• Customers engaged in high value gambling that are inconsistent with a casino or card club's information about levels or sources of assets or incomes, or inconsistent with information about occupations in casino credit/marker account records (e.g., credit/marker applications) or other records;
• Customers using deposit accounts for non-gambling purposes;
• Customers observed borrowing money from non-conventional sources, including other customers;
• Customers conducting transfers of significant or unusual amounts of funds through depository institutions;
• Customers using domestic or international money orders in amounts just below the threshold for recordkeeping requirements, traveler's checks denominated in foreign currency, domestic wire transfers in amounts just below the threshold for recordkeeping requirements, debit cards, and prepaid access (stored value) cards either in significant numbers or with significant total monetary value;
• Customers conducting large transactions with minimal casino play;
• Regular customers with unusual spending pattern changes (e.g., dramatic or rapid increases in the size and frequency of transactions);
• Customers listed on a so-called 'barred patron list' and their known associates;
• Customer player rating and slot club accounts with P.O. Boxes only instead of permanent street addresses;
• Periodic review of FinCEN Form 102, Suspicious Activity Report by Casinos and Card Clubs ('SARCs') filed that are based on direct observation of customer activity and review of customer records;
• Dollar value of intercompany transfers of funds from customers' accounts for front money deposit or marker redemption conducted between casinos in the United States and their affiliated casinos located in other countries.

Once a casino or card club has identified the specific risk factors unique to its operation, it should conduct a more detailed analysis of its level of vulnerability. The level and sophistication of the analysis may depend on the comprehensiveness of a casino or card club's risk assessment process or the risk factors that apply. Also, the results may differ according to its business risk model and governmental gambling regulations. By understanding its risk profile, a casino or card club can apply appropriate risk management processes to its BSA compliance program to identify and mitigate its operational risk.

In conclusion, an effective BSA compliance program must reflect potential money laundering and terrorist financing risks arising from a casino's or card club's products, services, customer base, and geographical location. Casinos or card clubs may need to update their risk indicators to reflect changes in operational risk profiles (e.g., revised products and services, new products and services, changes with regard to opening and closing accounts or closer monitoring of accounts, new categories of accounts, or changes resulting from acquisitions or mergers). It is a sound practice for a casino or card club to periodically review its risk indicators or factors to assure sufficiency and effectiveness.

For questions about this guidance, please contact FinCEN's Regulatory Helpline at (800) 949-2732.

For additional guidance, see Casino or Card Club Compliance Program Assessment, FIN-2010-G003 (June 30, 2010) and Frequently Asked Questions - Casino Recordkeeping, Reporting and Compliance Program Requirements, FIN-2007-G005 (November 14, 2007) and FIN-2009-G004 (September 30, 2009). Other reference material includes Suspicious Activity Report Filings Within the Casino and Card Club Industries, The SAR Activity Review, Trends, Tips and Issues, Issue 8 (April 2005) and FinCEN SAR Bulletin, Issue 2: Suspicious Activities Reported by Casinos (August 2000).

^{1 Locations designated as HIFCAs enable a concentration of law enforcement efforts at the federal, state, and local governmental levels. For a listing, seewww.fincen.gov/hifca}

^{2 Locations designated as HIDTAs are provided additional Federal government resources to help eliminate or reduce drug trafficking and its destructive consequences. For a listing, see the Office of National Drug Control Policy's website at www.whitehousedrugpolicy.gov.}

^{3 FATF is an inter-governmental body whose purpose is the development and promotion of policies, at both the national and international levels, to combat money laundering and terrorist financing. Seewww.fatf-gafi.org.}

^{4 See www.state.gov/p/inl/rls/nrcrpt}

^{5 See www.fincen.gov/resources/statutes-regulations/311-special-measures}

^{6 See www.treasury.gov/offices/enforcement/ofac/programs/}

International anti-money laundering (AML) regulations have been extended to non-financial businesses, including casinos.

Macau, a region situated on the south coast of China, has long stood in the economic shadow of its close neighbor Hong Kong. In 1844, in an attempt to compete, the former Portuguese territory legalized gambling, and in 2006, it superseded Las Vegas as the most successful gambling hub in the world. In Dec 2018, this autonomous region of just 33 square kilometers reached GDP per capita of US$82,613.301 – 80% of which was contributed by the casino industry.

Its success also has a dark side. According to a report by the Congressional Executive Commission on China, $202bn in ‘ill-gotten funds’ are channeled through Macau each year.

A Safe Bet for Money Launderers

Casinos are particularly vulnerable to money laundering and financial crime. The business is cash-intensive, highly competitive, and deals with large numbers of transient visitors. High-roller gamblers expect a degree of privacy, and foreign holding accounts are commonly used. As a result, the sector is an attractive target for financial criminals wanting to ‘wash’ illicit funds.

In March 2016, US$101m was stolen from an account held by Bangladesh’s Central Bank at the Federal Reserve Bank in New York. It is thought that $81m of that amount was laundered through casinos in the Philippines.

The Financial Action Task Force (FATF), the body leading the international fight against financial crime, has had the casino sector in its sights for some time. In 2003, the FATF’s guidelines on anti-money laundering (AML) and counter terrorism financing (CFT) were extended to designated non-financial businesses and professions (DNFBPs), including casinos; in 2008, the FATF released specific guidance for casinos on a risk-based approach to combat money laundering.

Casino Money Laundering Risk Assessment

Junkets Raise the Stakes

The prevalence of junkets in Macau – casino tourism operators providing transport, accommodation and meals to gamblers from across Asia, often targeting high net worth VIP gamblers, in exchange for a commission on bets laid by their clients – is a further complication.

As much as 70% of casino revenue in Macau can be generated by junket customers. It is relatively simple for a gambler to deposit money with a junket in Mainland China, access that money to gamble in Macau, and then deposit their winnings in US funds or Hong Kong dollars and move it offshore.

The Asia-Pacific Group on Money Laundering (APG) warned in its 2017 evaluation report on Macau that, while concessionaires and sub-concessionaires have a sound understanding of AML risks and obligations, there is ’incomplete awareness’ among junket operators. Junkets in Macau must apply for a license to operate from Macau’s Gaming Inspection and Coordination Bureau (DICJ), and are also subject to enforceable AML/CFT requirements.

Tighter Regulation Adds Commercial Pressure

Recently, the DICJ has strengthened requirements for all three casino tiers in Macau – concessionaire, sub-concessionaire and junket promoter – in line with FATF recommendations, including:

• a requirement to keep daily records and employ a compliance officer
• an obligation to carry out customer due diligence (CDD)
• an obligation to report and identify participants in large transactions, including the beneficiary owner
• identification, verification and ongoing monitoring of politically exposed persons (PEPs)
• a requirement to file suspicious transactions (STDs) reports to the DICJ
• joint liability between junkets and casinos for junkets’ compliance with applicable regulations.

One implication is that concessionaires and sub-concessionaires face tighter regulatory requirements in their business relationships with junket promoters. Concessionaires/sub-concessionaries and junkets must collaborate to implement preventative measures in AML. The concept of joint liability means that deficiencies in junkets will affect the risk management of the casinos themselves. Essentially, DICJ will be conducting reviews on both the concessionaires/sub-concessionaires and junkets. It has seen that in the recent years, Macau has taken a more stringent approach towards licensing and the supervision of junket promoters, which, in addition to acting as third-party introducers, are also subject to enforceable AML requirements. This area is the subject of enhanced and renews focus by DICJ. The number of license junket promoters has decreased from 235 in 2013 to about 100 in 2019. Macau’s casinos pointed out in 2016 when the new requirements were introduced that they placed extra costs and pressures on them at a time when the territory is facing competition from across Southeast Asia and casino revenue had hit a five-year low¹.

While revenue generated by VIPs in Macau dropped sharply in 2016, partly due to a crackdown on corruption in Mainland China, new casinos across Southeast Asia have seen their business increase. Junkets have expanded their reach accordingly; new junket operators in Cambodia and the Philippines earned at least US$1.4bn from VIP gamblers in 2017.

Casino Money Laundering Risk

In response, Macau’s junket operators have diversified their business activities and expanded their gaming-related operations to other geographies including the Philippines, South Korea and Vietnam. Suncity, Macau’s biggest junket operator, for example, recently announced that it’s new US$4bn integrated casino resort will open in Vietnam by the end of this year; the group is also considering the Philippines, Cambodia and Japan for its next investment.

The number of countries actively facilitating casino gambling is on the increase, but as a 2018 report by the Association of Certified Anti-Money Laundering Specialists (ACAMS) pointed out, some of these newer gambling hubs bring specific AML risks, including inadequate governance or unsecured borders with nations that have a high money laundering risk. ‘When junket operators work with casinos that have operations in several counties,’ added the report, ‘there is the potential for funds in one country being used for gambling in another, further complicating challenge of identifying the source of funds, as well as creating a significant money laundering risk.’

The AML risks posed by a successful gambling hub like Macau remains of concern to governments and regulators worldwide. A recent Strategy Report on money laundering from the US State Department, for example, advised that the Macau government ‘should continue to strengthen interagency coordination to prevent money laundering in the gaming industry’.

The challenge for casinos is to meet AML requirements effectively without impacting customer experience negatively.

Letting Technology Take the Strain: AML Beyond Banking

Across the region we are seeing stringent AML compliance requirements for Designated Non-Financial Businesses and Professionals (DNFBPs). It is important to have access to comprehensive, reliable and up-to-date screening list, such as ever-changing Sanctioned entities and Politically Exposed Persons registers and Negative news database, allowing DNFBPs to conduct accurate ongoing customer due diligence. The solution lies in technology.

In a customer centric industry, customer experience is crucial, as it will directly affect the Casinos’ patron visits, thus revenue. Casinos must ensure that the diligence process meetings regulatory requirements at the same time providing a positive customer experience. The key to this process is automation. With automation in place, real-time screening and checks can be conducted on new patron members and parties involved in high value transactions.

With a raise in casinos around the world, AML regulations in this industry will continue to tighten internationally. In order to remain compliant and not putting their Casino license at stake, Casinos has to review their due diligence process regularly.

Casinos around the world, and particularly in a successful gambling center such as Macau, can’t take any chances on financial crime risk. In fact, they have much to gain from taking steps to build trust in the sector and protect the industry from the growing reputational and financial risks posed by financial crime.

[1] Casino revenue in Macau fell from a high of US$45bn in 2013 to $28bn in 2016. Source – UNLV Center for Gaming Research https://gaming.unlv.edu/abstract/macau.html