Source: http://www.jdsupra.com/legalnews/gambling-and-the-bank-secrecy-act-59952/
Timestamp: 2017-10-18 00:51:37
Document Index: 98627181

Matched Legal Cases: ['§ 542', '§ 5312', '§ 1021', '§ 1021', '§ 1021', '§ 2021', '§ 5322', '§ 5321', '§ 1081', '§ 5312', '§ 2']

Gambling and the Bank Secrecy Act | K&L Gates LLP - JDSupra
The Bank Secrecy Act (“BSA”) is a complex set of federal laws and regulations that require “financial institutions” to keep records, make reports, and conduct due diligence as a means of helping the federal government detect financial crimes. Failure to comply with BSA requirements can have costly consequences. This Alert explains what makes a casino a “financial institution” for purposes of the BSA and what requirements the BSA imposes on such casinos. It then notes potential penalties, explains why federal enforcement agencies are interested in casinos, and describes the results of some recent enforcement actions. Finally, it looks at forms of casino-style gambling, e.g., “cruises-to-nowhere,” and considers why enforcement officials may look for ways to bring them under the BSA and how that could be done.
Casinos and the BSA
1. What Makes a Casino Subject to the BSA?
The BSA applies to businesses that are financial institutions. Under the BSA, a casino or a card room, whether a land-based or riverboat operation within the jurisdiction of the United States, is a financial institution if it (1) has an annual gross gaming revenue [1] of more than $1 million and (2) is authorized or licensed by a state, a tribal jurisdiction, or under the Indian Gaming Regulatory Act. [2] If the BSA applies, a casino must do three things:
file a Currency Transaction Report for any transaction that exceeds $10,000 and file a Suspicious Activity Report (“SAR”) for any suspicious transaction that exceeds $5,000; [3]
keep records of certain transactions; [4] and
develop and implement a compliance program that addresses the specific money-laundering risks that they face. [5]
2. Casinos and BSA Penalties
Under the BSA, if a casino qualifying as a financial institution willfully fails to file a required report, it is subject to a $250,000 criminal penalty and a $100,000 civil penalty per failure per day. [6] And, even negligent failures or inadequate controls may lead to stiff penalties.
Enforcement agencies—including the Financial Crimes Enforcement Network (“FinCEN”) and the United States Department of Justice (“DOJ”)—seem focused on large casinos. To facilitate gaming, these casinos offer a wide variety of financial services to patrons, including such things as deposit accounts, credit extensions, wire transfers, check issuances, and safe-deposit boxes. Enforcement agencies believe these services, combined with the large amount of money that patrons wager, create a high risk for money laundering.
Recent examples of government enforcement actions against or investigations into casinos for alleged BSA violations include these:
In August 2013, Las Vegas Sands Corp. agreed to pay $47.4 million under a non-prosecution agreement for failing to investigate and report the suspicious activity of a single “high-roller” customer under the BSA. [7]
In October 2013, SEC disclosures and news reports indicated that a federal grand jury and FinCEN were investigating Caesars Entertainment Corp. (and its subsidiary, Desert Palace, Inc.) for money-laundering violations. [8] More recent regulatory disclosures and news reports suggest that a settlement could reach $20 million. [9]
In November 2014, The Wall Street Journal reported that federal government entities are investigating Wynn Resorts regarding its BSA and money-laundering controls. [10]
In March 2015, Trump Taj Mahal agreed to a $10 million civil penalty levied by FinCEN as a result, among other things, of failing to file 41 SARs. [11]
3. Other “Casinos” That May Fall Under the BSA
a. Smaller, Land-Based Gambling Establishments May Be Subject to the BSA.
Small, land-based gambling establishments, such as bars, truck stops, gas stations, restaurants, or cafés with single-digit numbers of slot or video gaming machines [12] are currently legal in seven states. [13]
Operators of these small “casinos” in Illinois may soon discover that the BSA applies to their gaming operations. Since 2012, Illinois has allowed “licensed establishments,” i.e., places where alcohol is served, to have up to five video gaming machines. Therefore, these establishments appear to meet the first part of the BSA test for a casino to be considered a financial institution in that they appear to be state-authorized. In 2014, three of these businesses, for the first time, had gross gaming revenues of over $1 million. For the portion of 2014 when the gross gaming revenue exceeded $1 million, the BSA likely applied and likely applies for the entirety of the 2015 business year.
b. “Cruises-to-Nowhere” May Become Subject to the BSA.
To date, it appears that government enforcement agencies have not required gambling ships in international waters or cruises-to-nowhere to comply with the BSA’s requirements.
While the federal Gambling Ship Act makes it illegal for any person subject to the jurisdiction of the United States to operate a gambling ship, it exempts vessels with respect to gambling that occurs outside the territorial waters of the United States. [14] Under the Gambling Ship Act, that boundary is three nautical miles from the coast. [15]
Cruises-to-nowhere are day cruises departing a port and, without stopping at any other port, returning to the same port. They cruise to an area outside a three-nautical-mile limit from the U.S. coast, i.e., outside the territorial waters of the United States, where the customers on the cruise are permitted to gamble. As a result, no United States jurisdiction regulates the gambling that occurs onboard these ships. Therefore, businesses that operate cruises-to-nowhere are not casinos that qualify as a financial institution under the traditional definition because they are not licensed or authorized by a state or tribal authority.
However, as noted above, casinos have been under scrutiny lately because FinCEN and federal prosecutors believe they pose a high risk of money laundering, particularly when international or cross-border customers are involved. FinCEN has said that it seeks to apply the BSA to “gaming establishments that provide both gaming and an array of financial services to their patrons.” [16] Businesses operating cruises-to-nowhere that offer gambling activities may offer an array of on board financial services to facilitate it. [17] This status would seem to make them attractive targets for federal regulators and prosecutors and to engender a regulatory change to bring them under the BSA. The Secretary of the Treasury has the power to supplement the definition of “financial institution” under the BSA and may do so by including businesses whose cash transactions—in the Secretary’s opinion—“have a high degree of usefulness in criminal, tax, or regulatory matters.” [18]
Of course, for the BSA to apply, even after a specific designation by the Secretary, the question of whether the gambling on a cruise-to-nowhere is taking place within the United States must be answered. As noted, the Gambling Ship Act says that gambling can occur outside the “United States Territorial Sea,” which is three nautical miles under that Act. In other contexts, however, the United States Territorial Sea extends to 12 nautical miles, including for criminal-jurisdiction purposes. [19] Accordingly, if FinCEN or other government bodies draft and adopt regulations that bring cruises-to-nowhere under the BSA, arguably the 12-nautical-mile limit might apply. Additionally, questions of whether the BSA and these regulations should apply extraterritorially may be implicated—particularly with the upcoming renewal or modification of the USA PATRIOT Act (which has amended the BSA in part) being hotly debated in Congress.
As states and tribes look to authorizing additional forms of gambling as sources of new revenue, many businesses will be tempted to enter the market. This expansion would likely cause government agencies tasked with enforcing the BSA to broaden their enforcement beyond the traditional large, land-based casinos. Businesses that offer such gaming services should consider how the BSA might apply to them to avoid running afoul of the BSA’s strict requirements.
[1] Gross gaming revenue is the amount of money wagered by patrons minus the winnings paid to patrons. See 25 C.F.R. § 542.2. Gross gaming revenue is calculated before taxes and expenses. See id.
[2] 31 U.S.C. § 5312(a)(2)(X).
[3] 31 C.F.R. § 1021.311; 31 C.F.R. § 1021.320.
[4] 31 C.F.R. §§ 1021.400–410.
[5] 31 C.F.R. § 2021.210.
[6] 31 U.S.C. § 5322(a); 31 U.S.C. § 5321(a)(1).
[7] U.S. Atty’s Office for the Cent. Dist. of Cal., U.S. Dep’t of Justice, Pub. No. 13-110, Operator of Venetian Resort in Las Vegas Agrees to Return Over $47 Million after Receiving Money under Suspicious Circumstances, (Aug. 27, 2013), http://www.justice.gov/usao/cac/Pressroom/2013/110.html.
[8] Caesars Entm’t Corp., Current Report (Form 8-K), at 8.01 (Oct. 21, 2013); Chris Palmeri, IRS Cited Caesars for Bank Secrecy Act Breach, Bloomberg Business, (Oct. 30, 2013), http://www.bloomberg.com/news/articles/2013-10-29/irs-cited-caesars-for-bank-secrecy-act-breach.
[9] Tom Zanki, Caesars Palace Could Face $20M Anti-Money Laundering Fine, Law360 (May 12, 2015), http://www.law360.com/articles/655050/caesars-palace-could-face-20m-anti-money-laundering-fine.
[10] Kate O’Keefe, Rachel Louise Ensign, & Christopher M. Matthews, Wynn Resorts Probed on Money-Laundering Controls, The Wall St. J. , Nov. 21, 2014.
[11] Trump Taj Mahal, Assocs., L.L.C., FinCEN No. 2015-02 (Mar. 6, 2015).
[12] Depending on the state, these machines may also be called Video Lottery Terminals (“VLTs”) or Video Gaming Terminals (“VGTs”). VLTs and VGTs often look like and operate similarly to slot machines. For BSA purposes, slot machines, VLTs, and VGTs are treated the same. See FIN-2007-G005.
[13] Illinois, Louisiana, Montana, Nevada, Oregon, South Dakota, and West Virginia. Proposed legislation to legalize similar games exists in several other states—including Pennsylvania—and is in various stages of the legislative process.
[14] 18 U.S.C. § 1081.
[15] Id.; Florida Dep’t of Rev. v. New Sea Escape Cruises, Ltd., 894 So. 2d 954 (Fla. 2004).
[16] FIN-2007-G005.
[17] Additionally, it may be that no trail exists on these cruises if they are not regulated, rendering money laundering and other offenses nearly untraceable. See Fin. Action Task Force, Vulnerabilities of Casinos and Gaming Sector, ¶¶ 153, 168–69, 183, 186, March 2009, http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/vulnerabilities_casinos-gaming-sector_032009.pdf. Cash advances, payouts, and other money transfers or exchanges of value (particularly incentive awards) related to gaming may be unrecorded or reflected only as a generic credit or fee on the total bill for the cruise itself, which has led international anti-money-laundering experts to raise concerns over gambling ships specifically. See id. at ¶¶ 172, 181–90.
[18] 31 U.S.C. § 5312(a)(2)(Z).
[19] 33 C.F.R. § 2.22.