Source: https://www.omm.com/resources/alerts-and-publications/alerts/legalized-sports-gambling-anti-money-laundering-compliance/
Timestamp: 2019-04-26 10:37:02+00:00

Document:
This alert is the fourth in a series of alerts discussing updates and potential developments in light of the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association. The first installment outlined the Murphy decision itself, and the second installment focused on potential state and federal legislation following Murphy. The third installment identified potential revenue opportunities that may emerge following Murphy. This alert outlines risks related to money laundering and key aspects of an anti-money laundering compliance program as they apply to established businesses that may now expand into sports betting, as well as those that may be new entrants into the market post-Murphy.
In the months following the Supreme Court’s decision in Murphy v. National Collegiate Athletic Association (Murphy), which removed the barrier to legalized sports betting, a number of states have authorized and are now regulating sports betting. While Murphy offers market participants a new and significant opportunity to generate revenue, both new entrants to the market and those looking to expand the scope of their existing activities will need to be vigilant in avoiding unwitting participation in, and liability for, money laundering or any other illicit betting activity. Further, as we describe below, those individuals and entities that meet a certain threshold of sports betting activity are subject to anti-money laundering rules applicable to casinos and card clubs. While the Supreme Court’s decision in Murphy has brought new opportunities to both those interested in betting and sportsbook businesses, these opportunities come with their own unique risks.
Sportsbooks and casinos accepting sports bets must also be aware of limitations on out-of-state bettors and certain categories of in-state bettors. For example, in order to protect the integrity of sporting events, New Jersey prohibits any person who is a direct or indirect legal or beneficial owner of 10% or more of a sport’s governing body, or any of its team members, from placing or accepting a wager on a sporting event in which they participate.4 Of the states that have legalized sports betting to date5, all prohibit out-of-state bettors from placing bets with in‑state sportsbooks.6 It may be expected that some bettors will seek to use geolocation spoofing technologies aimed at getting around these rules.
At the federal level, interstate sports betting may still run afoul of the Wire Act, which prohibits those “in the business of betting or wagering” from using a “wire communication facility,” such as a mobile sports betting app, in the placing of bets on sporting events across state lines or in the transmission of money won or lost on those bets, regardless of whether such betting is legal in a particular state.7 DraftKings, a popular Boston-based online daily fantasy sports platform, has already entered the mobile sports betting market in New Jersey, although it currently limits access to New Jersey-based bettors.8 As mobile and online sports betting platforms enter the market, these companies will need to pay close attention to both the Wire Act and the geographic locations of their users. Further, with limitations such as those described above, sportsbooks will need to be aware of the risks of third-party betting, where prohibited and unidentified bettors use an intermediary to place bets in order to obscure the identity of the third-party and the source of funds used to conduct the transaction.
While, as mentioned, all business should avoid laundering criminal funds, not all sportsbooks will be subject to the formal requirement of having a written AML program, although many may find that having some level of AML program is prudent. However, all sportsbooks that are operating pursuant to state casino licenses and that have gross annual gaming revenues greater than $1 million are “financial institutions” subject to the requirements of the Bank Secrecy Act (BSA), 31 U.S.C. § 5311, et seq,10 and therefore subject to its AML requirements. The BSA, as amended by the USA PATRIOT Act, Pub. L. No. 107-56, 115 Stat. 272 (2001), seeks to prevent money laundering and the financing of terrorism by helping law enforcement identify the source, volume, and movement of funds within the United States and/or transmitted across its borders. To do this, the BSA requires “financial institutions”11 to maintain records and submit reports of certain types of transactions, including those that are suspicious.
Additionally, casinos are expected to take steps to determine whether a patron is betting on her own behalf or on behalf of a third party. In highlighting the risks of third-party betting,20 FinCEN advised in 2014 that, as with all aspects of an organization’s AML program, casinos must use a risk-based approach to developing their AML program to properly identify the person behind the transaction to ensure accurate filings of CTRs and SARs.
Thus, regulators will expect sportsbooks to develop risk-based AML programs commensurate with the size, scope, and nature of their operations to establish a culture of compliance from the top of the organization, to provide AML compliance staff with adequate resources and authority to run an effective program, and to use all available data and information in monitoring transactions and reporting suspicious transactions to law enforcement.
Although there is much speculation regarding whether and when Congress may establish a national regulatory structure applicable to sports betting in the United States, federal anti-money laundering laws are already broadly applicable to any licensed sportsbook operating here. Law enforcement has engaged with the gaming industry, offered guidance, and taken enforcement action where it has felt it necessary.
Going forward, we expect to see increased focus in the use of emerging technologies and data collection. Blockchain has already emerged as a platform in online casino gambling. In the esports arena, the use of virtual currency within gaming platforms is well-established and widely accepted for in-game payments and upgrades, among other things. With the legalization of sports betting, entities beyond traditional casinos will enter the sports betting market, including blockchain businesses and cryptocurrency platforms, either through primary licenses or partnerships with existing casinos. Blockchain companies promise increased transparency regarding the results of a game, winning bets, and payout amounts, which would all be publicly available and immutable. Many new blockchain companies also offer the promise of betting through the use of smart contracts, which would remove the middleman and ensure immediate payouts, as well as added security through the use of decentralized ledgers—allowing no single centralized actor the opportunity to disrupt the system—and reduced transaction fees.
These new business models will bring the challenge of operating as a regulated “financial institution” under the BSA for the first time. As is the case already with currency exchanges and blockchain investment platforms, we can expect a focus by law enforcement on bringing enforcement actions first against those companies or individuals that may be engaged in promoting fraudulent offerings or services.
As it relates to both traditional sportsbooks and new blockchain platforms, FinCEN has emphasized in recent years its expectation that casinos use “all available information”—and by that it means the increasing amount of data casinos collect through automated means on their customers, their customers’ preferences, patterns, and practices—to enhance the effectiveness of their AML programs. Integrating that data collection and use from the business side of an operation with the compliance side will be important. Through increased enforcement action and public comments by regulators and law enforcement, we expect to see continued robust enforcement action aimed at sportsbooks and other licensed casinos and an expectation that those engaged in regulated sports betting activity develop and integrate strong AML programs into their ongoing business.
1 See 18 U.S.C. § 1956(a)(1).
2 See 18 U.S.C. § 1956(a)(2).
3 See 18 U.S.C. § 1956(h).
4 See N.J. ST. 5:12A-11(f).
5 These states are Delaware, Mississippi, New Jersey, Nevada, Pennsylvania, Rhode Island, and West Virginia.
6 See, e.g., NJ ST 5:12A–11 (l).
7 See 18 U.S.C. § 1084. It is unsettled whether the Wire Act prohibits interstate betting from one state where such a bet is legal to another state where it is legal. In the majority opinion in Murphy, Justice Alito cited other anti-gambling legislation, including the Wire Act, to demonstrate that federal regulation should be tied to an underlying state offense, suggesting that the Supreme Court may not see the Wire Act as a complete bar on interstate sports betting where sports betting is legal in both states at issue. Murphy, at 28. However, Justice Alito may have been referring to the safe harbor provision, which permits the transmission of information “for use in news reporting” or for “assisting in the placing of bets of wagers” from one state where such a bet is legal to another state where it is legal. See 18 U.S.C. § 1084(b).
8 Hillary Russ, DraftKings Launches Mobile Sports Betting in New Jersey, Reuters (Aug. 1, 2018), link here.
10 31 U.S.C. § 5312(a)(2)(X).
11 The definition of “financial institutions” includes banks, brokers and dealers in securities, and various forms of money services businesses, including dealers in foreign exchange, money transmitters, prepaid access providers, and check cashers, among others. 31 CFR § 1010.100.
12 What We Do, FinCEN, link here.
13 31 CFR § 1021.311–313.
14 31 CFR § 1010.312.
15 31 CFR § 1021.320.
17 31 CFR §§ 103.20, 103.36(b)(4).
18 FIN-2010-G003, Casino or Card Club Compliance Program Assessment, p. 1 (June 30, 2010); Remarks of Jennifer Shasky Calvery, 2014 Bank Secrecy Act Conference (June 12, 2014).
19 FIN-2010-G003, Casino or Card Club Compliance Program Assessment, p. 2 (June 30, 2010).
20 Jamal El-Hindi, FinCEN Correspondence with the American Gaming Association Regarding Sports Betting Conducted on behalf of Third Parties, FinCen (Dec. 24, 2014), link here.
21 The company was initially assessed an $8 million civil penalty in 2017, but $3 million was suspended upon the company’s agreement to take certain remedial steps, including hiring an independent consultant to review its AML program and hiring a compliance officer responsible for day-to-day compliance.
22 In the Matter of Artichoke Joe’s, Assessment of Civil Money Penalty, No. 2018-02 (FinCEN May 3, 2018), link here.
23 Id. at 5–6. A propositional player is a natural person employed by a casino or card club to play a permissible game with his or her personal funds. A propositional player is paid a fixed sum by a casino or card club for playing in a poker/card game and retains any winnings and absorbs any losses. Also, a propositional player's function is to start and gamble at a poker/card game, to keep a sufficient number of players in a game, or to keep the action going in a game. FIN-2007-G005, Frequently Asked Questions: Casino Recordkeeping, Reporting, and Compliance Program Requirements at p. 7 n.37 (Nov. 14, 2007).
25 In the Matter of Artichoke Joe’s, supra note 30, at 8–9.
26 In the Matter of Cantor Gaming, Assessment of Civil Money Penalty, No. 2016-05 (FinCEN Oct. 3, 2016), link here.
27 In the Matter of Cantor Gaming, Attachment A: Statement of Facts to Assessment of Civil Money Penalty, No. 2016-05 (FinCEN Oct. 3, 2016), link here.
28 In the Matter of Hawaiian Gardens, Assessment of Civil Money Penalty, No. 2016-04 (FinCEN July 15, 2016), link here.
29 In the Matter of Sparks Nuggets, Assessment of Civil Money Penalty, No. 2016-03 (Apr. 5, 2016), link here.
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Nicole M. Argentieri, an O'Melveny partner licensed to practice law in New York, Steve Olson, an O'Melveny partner licensed to practice law in California, Irwin Raij, an O'Melveny partner licensed to practice law in the District of Columbia, New York, and Florida, Eric Sibbitt, an O'Melveny partner licensed to practice law in California and New York, Jeremy Maltby, an O'Melveny partner licensed to practice law in the District of Columbia, New York, and California, Laurel Loomis Rimon, an O'Melveny senior counsel licensed to practice law in California, and Marjorie B. Truwit, an O'Melveny associate licensed to practice law in the New York, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

References: v. 
 v. 
 § 5311
 § 1956
 § 1956
 § 1956
 § 1084
 § 1084
 § 5312
 § 1010
 § 1021
 § 1010
 § 1021