Money Laundering: Rapid Growth of Casinos Makes Them Vulnerable
Released: 1996-02-14T00:00:00

Letter

Background

Money laundering is the use or conversion of money gained from illegal activity, such as drug smuggling, as or to money that appears legitimate and whose source cannot be traced to the illegal activity. Law enforcement officials have estimated that between $100 billion and $300 billion in U.S. currency is laundered each year.

BSA and its implementing regulations require financial institutions to maintain records and to file with IRS currency transactions reports for certain transactions exceeding $10,000. These reports create a “paper trail” of records that is useful in regulatory, tax, and criminal investigations, such as money laundering cases. In 1985, BSA regulations were amended to include certain casinos, with gross annual gaming revenues (GAGR) over $1 million, under the definition of a financial institution.

Prior to BSA’s application to casinos, money laundering activities could occur in casinos in a variety of ways without a mechanism in place to deter and detect it. For example, an individual could purchase gaming chips with large amounts of cash, do little or no gaming, and then redeem the chips for a casino check without any record of the transactions. Under BSA regulations, casinos are required to maintain records and file reports for currency transactions by, through, or to them that exceed $10,000. However, according to Treasury and IRS officials, there is no such requirement for transactions under $10,000. In congressional hearings, Treasury officials have recognized and testified that casinos are primarily cash-based businesses that perform many of the same services as banks for their customers, such as cashing checks and placing money on deposit, and these officials expressed concern about the potential use of casinos as an avenue for moving funds generated by illegal activity.

IRS’ Examination Division is responsible for monitoring and enforcing compliance with BSA reporting and recordkeeping requirements for all financial institutions under its jurisdiction, commonly referred to as “non-bank financial institutions.” This monitoring includes conducting periodic compliance reviews at over 100,000 nonbank financial institutions, including casinos. Treasury’s Office of Regulatory Policy and Enforcement, formerly the Office of Financial Enforcement, is responsible for promulgating and providing interpretive guidance on BSA regulations, reviewing violations found by IRS, and recommending assessment of civil penalties, if warranted, against noncomplying institutions.

BSA provides the Secretary of the Treasury with authority to prescribe an appropriate exemption from its requirements. Treasury’s exemption regulation allows an exemption to casinos in any state whose regulatory system substantially meets BSA’s reporting and recordkeeping requirements. In 1985, Treasury granted such an exemption from certain BSA requirements to casinos in Nevada. The Memorandum of Agreement between Treasury and Nevada permitted the state to assume regulatory responsibility for currency transaction reporting by its casinos, as well as required the state to enact certain laws and establish certain procedures to implement its regulatory system. As a result of the agreement, Nevada revised the Nevada Gaming Control Act and adopted Nevada Gaming Commission Regulation 6A (hereafter referred to as Regulation 6A), which contains the requirements for currency transaction reporting by Nevada casinos. The agreement also stipulated that, for the exemption to stay in effect, changes to such state regulations require Treasury’s approval and, similarly, that changes in BSA or its regulations must be reflected in the state’s regulations if required by Treasury.

IGRA was enacted to provide a statutory basis for the operation of gaming by Indian tribes, as well as to provide a means for the regulation of such activity. IGRA classifies the different forms of Indian gaming—ranging from bingo to more common casino games such as roulette, craps, slot machines, and blackjack—into three classes of Indian gaming. (App. I describes the three classes.)

Generally, under IGRA, Indian tribes may establish Class III gaming, such as roulette, craps, slot machines, and blackjack, on Indian lands as long as the proposed gaming is not prohibited in the state. IGRA requires that tribes sign written agreements, or compacts, with the states if the proposed gaming meets the definition of Class III gaming operations (hereafter referred to as tribal casinos). The compacts describe the scope of Indian gaming permitted and define state and tribal authority related to gaming operations. Under IGRA, tribal casinos are subject to the currency reporting requirements of IRC section 6050I. The IRS Examination Division is responsible for ensuring that tribal casinos comply with these requirements.

BSA and tribal casinos are to file currency transaction reports with the IRS’ Detroit Computing Center (DCC) for inclusion in a national database, the Currency and Banking Retrieval System (CBRS). Nevada casinos file currency transaction reports with the Nevada Gaming Control Board (NGCB), which subsequently sends the reports on to DCC. IRS and other law enforcement agencies are to use the BSA portion of the database for civil and criminal enforcement and tax purposes. Currency transaction reports filed by BSA and Nevada casinos, as well as the reports filed by tribal casinos under section 6050I, are included in the database. Certain information from the reports filed by BSA and Nevada casinos is accessible to all 50 states for law enforcement purposes and to all federal law enforcement agencies through the Financial Crimes Enforcement Network (FinCEN). Transaction information filed by tribal casinos is generally not accessible to law enforcement because it is reported on transaction forms that record income tax information and thus are currently subject to disclosure restrictions.

Objectives, Scope, and Methodology

Our initial objectives were to determine (1) the extent of legalized gaming in the United States, (2) the currency transaction reporting requirements for casinos, (3) the currency transaction reporting requirements for tribal casinos, and (4) the level of enforcement efforts to ensure that casinos are complying with currency transaction reporting requirements. Because changes in reporting requirements were being planned during the time of our review, we added an objective to provide information on the changes in federal regulations and legislation.

To determine the extent of legalized gaming in the United States, we reviewed testimony, reports, and articles concerning the gaming industry, including its extent and growth.

To determine the currency transaction reporting requirements for casinos, including tribal casinos, we reviewed BSA, the BSA implementing regulations under 31 C.F.R. part 103, IGRA, Nevada’s Regulation 6A, and section 6050I of IRC. We also interviewed officials from NGCB and IRS’ Criminal Investigation and Examination Divisions in Washington, D.C.

To determine what efforts have been made to ensure that casinos are complying with currency transaction reporting requirements, we interviewed officials at Treasury’s FinCEN, Office of Regulatory Policy and Enforcement, and IRS’ Criminal Investigation and Examination Divisions. In addition, we interviewed officials from NGCB and IRS officials in Nevada, New Jersey, Louisiana, Mississippi, and Connecticut. We also interviewed casino officials in those states. We reviewed and analyzed IRS management reports and currency transaction reporting data from the CBRS at IRS’ DCC.

To determine recent changes in federal regulations and legislation, we reviewed the Money Laundering Suppression Act of 1994 and recent amendments to BSA regulations; in addition, we confirmed that Treasury and Nevada officials continue to have ongoing discussions regarding the differences between BSA and Nevada’s regulations.

To familiarize ourselves with how casinos comply with reporting requirements and how the requirements are enforced, we selected areas to visit with large concentrations of casinos. We selected Las Vegas, Nevada, and Atlantic City, New Jersey, and—for variety of types of casinos—riverboat casinos in Louisiana and Mississippi, as well as a tribal casino. For the latter, we chose Foxwoods Resort Casino in Ledyard, Connecticut, the largest tribal casino in the country. In appendix II, we list all of the casinos that we visited for this review.

As agreed with the Subcommittee, our focus was on casinos with GAGRs over $1 million. We did not verify the accuracy and completeness of the data we obtained from IRS.

We did our work in Washington, D.C., and the locations visited between March 1994 and August 1995 in accordance with generally accepted government auditing standards. We obtained oral comments on a draft of this report from Treasury and IRS. Their comments are discussed in the agency comments section of this report. We received written comments from FinCEN. They are reproduced, along with our responses, in appendix VI.

Rapid Growth of Casinos Could Make Them Vulnerable to Money Laundering

Casino gaming is expanding at a rapid pace, and new casinos continue to open across the country. Although Nevada and New Jersey casinos still generate the most revenue from casino gaming, riverboat casinos and tribal casinos have increased their share of total casino gross annual gaming revenue (GAGR). The expansion of casinos has also increased the amount of money changing hands, or wagered. According to International Gaming and Wagering Business (various issues 1988 through 1995), wagering at all types of casinos totaled about $407 billion in 1994, up from about $117 billion in 1984. In constant dollars, this represents an increase of 152 percent over this period. As the amount of money wagered annually has increased, casinos may have become more vulnerable to individuals who attempt to launder their illegal profits in the fast-paced environment of casino gaming.

Nevada and New Jersey Generate the Largest Casino Revenues

Although 13 states and Puerto Rico permit games of chance, such as roulette, craps, slot machines, and blackjack, that take place at nontribal casinos, Nevada and New Jersey generate the largest casino revenues. In 1994, Nevada and New Jersey reported combined casino GAGRs of about $10.2 billion; this represented approximately 56 percent of the total nationally reported casino GAGRs—$18.4 billion—for that year. Nevada has had legalized gaming since 1931 and, as of June 1994, had over 400 casinos, of which about 220 generated GAGRs of over $1 million each. Although casinos operate in other Nevada cities, including Reno, Lake Tahoe, and Laughlin, approximately 120 of these 220 casinos are located in Las Vegas. Reported GAGRs for all Nevada casinos (excluding tribal casinos) were approximately $6.8 billion in 1994. Appendix III indicates the prevalence of legalized gaming throughout the country and in Puerto Rico.

Since 1976, gaming has been legal in New Jersey. Twelve large casinos, the only casinos in New Jersey, operate along the boardwalk and in the marina area of Atlantic City. All 12 generated GAGR in excess of $1 million; their total reported GAGRs for 1994 were about $3.4 billion. Appendix IV illustrates total GAGRs by gaming activities and for casinos in 1994.

The Number of Riverboat Casinos Has Increased

The growth of riverboat casino gaming has been dramatic. Prior to 1991, there were no riverboat casinos operating in the United States. Since then, close to 60 riverboat casinos have opened, but several have relocated due to a high level of competition in some areas. Initially, riverboat casinos were located primarily along the Mississippi River in Iowa and Illinois, but they have also expanded to other locations, such as Tunica, Mississippi (near Memphis, Tennessee), and New Orleans. Figure 1 shows a riverboat casino.

As of September 1994, 57 riverboats operated in five states: Illinois, Iowa, Mississippi, Missouri, and Louisiana. Indiana has passed legislation allowing riverboat casinos, but none were operating at the time of our review. Several other state legislatures have considered legislative initiatives to legalize riverboat gaming as a means of bringing new revenue into their states. Between 1992 and 1994, reported riverboat casino GAGRs increased from $0.4 billion to about $3.3 billion, thereby capturing about 18 percent of the total casino revenue.

Indian Gaming Has Grown Rapidly

The growth of Indian gaming, which includes casino and bingo operations, has also been rapid. Ten years ago, Indian gaming was practically nonexistent. However, as of March 1995, we estimated that there were 237 Indian gaming operations, including 119 tribal casinos, in 29 states. Between 1992 and 1994, reported tribal casino GAGRs grew from about $1.2 billion to about $3.0 billion, thereby capturing about 16 percent of the total casino revenue. As figure 2 illustrates, Indian gaming operations, including tribal casinos, are currently located throughout the United States.

Indian gaming may generate large amounts of revenue for some of the tribes that own these operations. For example, according to a report by the California attorney general’s office, in 1993 three tribal casinos near San Diego generated a total of over $200 million in revenues. Foxwoods Resort Casino in Ledyard, Connecticut—owned by the Mashantucket Pequot Tribe—reported revenue in excess of $40 million per month in 1994. Indian gaming operations may also generate additional income for the states in which they are located. For example, in 1994, the Pequot tribe paid the State of Connecticut about $136 million under a compact governing the operation of the casino in the state. Figure 3 shows the largest tribal casino in the United States.

Large Amounts Wagered Increase the Potential for Money Laundering

The amounts of money wagered in all forms of legalized gaming have increased substantially along with the expansion of legalized gaming. According to International Gaming and Wagering Business (various issues 1988 through 1995), between 1984 and 1994, the total annual amount wagered in all forms of legalized gaming jumped from approximately $147 billion to approximately $482 billion. In constant dollars, this represents an increase of 137 percent over this period of time. Casino gaming and Indian gaming operations together account for the largest amounts of money wagered in legalized gaming activities. About $368 billion, or 76 percent of the $482 billion wagered in 1994, was wagered in nontribal casinos; Indian gaming operations, including tribal casinos, accounted for about $41 billion, or 9 percent of the total. Figure 4 illustrates the total dollar amounts wagered, by gaming activity, in 1994. The shaded areas show casino activity.

According to International Gaming and Wagering Business (various issues 1988 through 1995), wagering in nontribal casinos increased from about $117 billion in 1984 to about $368 billion in 1994. Indian gaming increased from virtually none to about $41 billion during the same period. Figure 5 illustrates the increase in the total dollar amounts wagered in casino gaming and Indian gaming between 1984 and 1994.

According to IRS’ Criminal Investigation Division, casinos are particularly vulnerable to the initial stage of money laundering, called the “placement” stage, in which money from illegal activities is introduced into the financial system through banks or cash-intensive businesses. Casinos are also vulnerable to money launderers because of the fast-paced nature of the games and because casinos can provide their customers with many financial services nearly identical to those generally provided by banks. Figure 6 illustrates the dollar amounts wagered in casinos in 1994.

Casinos Subject to Different Currency Transaction Reporting Requirements

Currency transaction regulations and reporting requirements provide the primary deterrent to, and means of detection of, money laundering in casinos. However, not all casinos are subject to the same regulations and reporting requirements. Because the regulations and reporting requirements for tribal casinos and Nevada casinos differ from BSA requirements, information reported to IRS differs. These differences may cause problems for law enforcement officers looking for a consistent paper trail of records with which to trace all gaming activity of customers engaged in large cash transactions, as well as to help identify potential money laundering activities.

Comparison of Currency Transaction Reporting Requirements for Casinos

Generally, BSA currency transaction reporting requirements have applied to all casinos with GAGRs over $1 million, except those in Nevada and tribal casinos. Nevada casinos operate under State Regulation 6A, and tribal casinos under IGRA have been subject to section 6050I of the Internal Revenue Code (IRC) for cash-intensive businesses. Table 1 provides a comparison of the three sets of requirements and the corresponding reports that must be filed with IRS.

Information reported to IRS on the nature of the cash transaction and the identity of the customer varies according to the type of casino involved. For example, Nevada casinos are not required to report any information on customers who win over $10,000 if a casino employee verifies that the winnings are the result of gaming at the casino. On the other hand, under BSA regulations, casinos are required to report all cash transactions over $10,000, including gaming winnings. Tribal casinos currently are required to report only those cash transactions involving cash receipts by the casino exceeding $10,000. Table 2 summarizes certain reporting requirements under BSA, Nevada’s Regulation 6A, and IRC. Table 2 also includes certain cash transactions that are prohibited by Nevada’s Regulation 6A because they could facilitate money laundering.

BSA Casinos Must Report All Currency Transactions Over $10,000

BSA reporting requirements apply to all currency transactions over $10,000 that take place in casinos, except those taking place in Nevada and tribal casinos. These requirements include reporting all cash coming into the casino, such as chip purchases and money placed on deposit for safekeeping, and all cash going out of the casino, such as chip redemptions and cash payouts for slot machine winnings.

IRS officials in the New Orleans district told us that the BSA reporting and recordkeeping system is a deterrent to money laundering because concealment of transactions would require the involvement of more than one casino employee. Employees in different areas of the casino, including those in the cage areas and on the gaming floor, track customer gaming activity and maintain logs and records needed to prepare currency transaction reports. According to New Orleans IRS officials, the BSA system makes it more difficult for a customer to circumvent currency transaction reporting requirements without the cooperation of several casino employees. Treasury and IRS headquarters officials told us that BSA is also a deterrent because customers know that currency transactions will be reported to IRS.

BSA reporting regulations require that certain casinos with GAGRs over $1 million report all currency transactions over $10,000 to IRS. BSA reporting regulations also require that multiple currency transactions be reported to IRS as a single transaction if the casino has knowledge that the transactions (1) were conducted by, or on behalf of, the same individual and (2) total over $10,000 in a gaming day. Such currency transactions are to be reported on Currency Transaction Report by Casinos (CTRC) Form 8362. CTRCs include specific information about the type of transaction as well as identifying information on individuals conducting the transactions, such as their Social Security numbers. (App. V includes an example of a CTRC.)

Changes to BSA Regulations

In December 1994, certain changes to BSA reporting and recordkeeping requirements for casinos became effective. Among other things, the regulations now require that every casino subject to BSA establish a BSA compliance program that includes developing internal controls to ensure BSA compliance, conducting independent testing (auditing) for BSA compliance, training casino personnel in BSA compliance, designating personnel responsible for day-to-day compliance with BSA currency transaction reporting requirements, and using existing automated data processing systems to aid in ensuring compliance.

Casinos must also obtain and verify additional identifying information about customers who wish to deposit funds, open an account, or establish a line of credit. This will provide casinos with information on regular customers in line with Treasury’s intention to require financial institutions to establish “know-your-customer” programs to encourage casinos to become familiar with the practices of their regular customers and to report out-of-the-ordinary, or suspicious, transactions to IRS. It will also encourage casinos to take a more active role in ensuring their own compliance with BSA requirements.

Nevada Reporting Requirements

Nevada casinos are required to report cash coming into the casino and cash going out, except verified winnings, on a state Currency Transaction Report (CTR). Winnings are reported on Currency Transaction Incidence Reports (CTIR), which do not include customer identification for cash payouts greater than $10,000 on wagers or redemption of chips that exceed $10,000, if the chips are from verified winnings.

For both of these transactions, a casino employee must verify that customer winnings are the result of gaming at the casino. Casino officials believe this employee verification is important because CTIRs distinguish casino payouts in the form of winnings—a legitimate gaming activity—from all other currency transactions conducted in the casino that could be avenues for money laundering.

Both CTRs and CTIRs from Nevada casinos are forwarded by the Nevada Gaming Control Board (NGCB) to IRS’ Detroit Computing Center (DCC). According to an official at DCC, information from Nevada’s CTRs is entered into the Currency and Banking Retrieval System (CBRS), but information from CTIRs is not included in the database; CTIRs are filed separately. IRS and Financial Crimes Enforcement Network (FinCEN) officials reported that the CTIR information is “useless” to IRS because the forms, which do not include customer names or any customer identification, provide an incomplete picture of a currency transaction. (App. V contains examples of Nevada’s CTR and CTIR forms.)

Nevada regulations generally do not require reporting aggregation related to gaming in different areas of the casino. Instead, Nevada casinos are required to aggregate transactions that take place in the same gaming area of the casino—for example, multiple cash purchases at blackjack tables—but are not required to aggregate transactions occurring in different gaming areas of the casino—for example, chip purchases on blackjack and roulette tables by the same player. IRS and FinCEN officials believe that, to the extent the casino has systems in place with which to track a customer’s multiple transactions, or is otherwise aware of a customer’s currency activity, it should report transactions over $10,000. This would provide a complete record of all reportable gaming activity by casino patrons.

Possible Changes to Nevada’s Regulations

Since 1993, Treasury officials have had ongoing discussions with Nevada casino officials and regulators about possible changes to Nevada’s Regulation 6A aimed at making it more closely parallel BSA recordkeeping and reporting requirements. Although Treasury officials have had a continuing dialogue with Nevada officials, no details were available to us as of September 1995.

Nevada Prohibits Certain Transactions That Could Facilitate Money Laundering

Nevada regulations prohibit certain cash transactions that may lend themselves to money laundering. BSA provisions have no such prohibitions. Specifically, Nevada prohibits casinos from exchanging cash for cash in an amount greater than $2,500; issuing a negotiable instrument, such as a casino check, in exchange for cash in an amount greater than $2,500; and effecting any transfer of funds, such as a wire transfer, in exchange for cash in an amount greater than $2,500.

Consequently, Nevada regulations prohibit casino patrons from simply exchanging their cash for cash of a different (e.g., larger) denomination, or for another monetary instrument. For example, small denomination bills from illicit drug sales cannot be converted to large bills in transactions exceeding $2,500. Officials at the NGCB and casino officials we interviewed told us that they strongly believe that the prohibited transactions specifically prevent and act as a deterrent to money laundering, even though they have no evidence to measure the effectiveness of the prohibitions.

According to testimony by an IRS official in 1993, money laundering has occurred in casinos in a variety of ways, including the exchanging of large amounts of cash for casino checks and small denomination bills for larger bills. These types of transactions involving amounts over $2,500 are prohibited in Nevada under Regulation 6A.

IRS officials in the districts we visited had different opinions about prohibited transactions. IRS officials from the Criminal Investigation and Examination Divisions in the New Orleans District said that prohibiting certain transactions, as Nevada does, would be a deterrent to money launderers. The IRS gaming industry specialist in Nevada told us that prohibiting certain transactions, as Regulation 6A does, is a strong deterrent to money laundering. Further, an IRS oversight review of Nevada casinos by the Las Vegas District in February 1992 noted that prohibiting certain transactions is one of the strengths of the Nevada system. Conversely, officials from the IRS Criminal Investigation and Examination Divisions in Newark said that prohibiting certain transactions does not provide any information on customers attempting these transactions, nor does it provide a paper trail of records for law enforcement to follow. Further, they said that prohibiting certain transactions from occurring in BSA casinos would require undercover efforts on the part of IRS to ensure that casinos complied with the regulations.

Tribal Casino Reporting Requirements

Under IGRA, tribal casinos have been subject to limited reporting requirements under section 6050I of IRC that apply only to cash receipts and include no recordkeeping requirements. Tribal casinos report such cash receipts over $10,000 on a Report of Cash Payments Over $10,000 Received in a Trade or Business, IRS Form 8300. In addition, IRC regulations for section 6050I provide that initial payments not exceeding $10,000 must be aggregated with subsequent payments made within 1 year of the initial payment until the aggregate amount exceeds $10,000.

Form 8300 information is included in the CBRS database. However, because it contains income tax information, this form is generally unavailable to law enforcement agencies conducting money laundering or other criminal investigations. (App. V contains an example of IRS Form 8300.) In comparison, BSA mandates comprehensive currency transaction reporting for all transactions over $10,000 and requires a detailed recordkeeping system.

Certain Tribal Casinos Are to Be Subject to BSA Currency Transaction Reporting Requirements

The Money Laundering Suppression Act of 1994 expanded the definition of a “financial institution” subject to BSA reporting requirements to include certain tribal casinos. More specifically, under section 409 of the act, entitled “Uniform Federal Regulation of Casinos,” the term “financial institution” was expanded to include both those casinos currently subject to BSA reporting requirements and Indian gaming operations, such as tribal casinos, with GAGRs over $1 million. IRS Examination Division officials told us that this change was meant to provide more consistent reporting by tribal casinos, as well as a more complete record of customer transactions.

According to FinCEN officials, Treasury’s Office of Regulatory Policy and Enforcement is responsible for drafting, implementing, and providing interpretative guidance on BSA regulations. This involves publishing the regulations in the Federal Register and considering comments before the new regulations become effective. On August 3, 1995, Treasury published proposed amendments to BSA implementing regulations that would subject certain tribal casinos to BSA reporting and recordkeeping requirements. This change is intended, in part, to clarify the currency reporting obligations of tribal casinos and to bring certain tribal casinos under Treasury’s anti-money-laundering controls. Until these proposed amendments become effective, tribal casinos will remain subject to the more limited reporting requirements under section 6050I of IRC. The proposed regulation permits written comments on or before November 1, 1995, with the effective date being 90 days after publication of the final rule.

Compliance Reviews Have Varied for Different Types of Casinos

IRS’ Examination Division is responsible for ensuring that casinos comply with BSA reporting and recordkeeping requirements. IRS is also responsible for ensuring that tribal casinos comply with the section 6050I reporting requirements. The NGCB Audit Division is responsible for ensuring that Nevada casinos comply with Regulation 6A.

Regulatory efforts to determine compliance with currency transaction reporting requirements have varied for different types of casino. IRS has performed some compliance reviews at BSA casinos, as has NGCB at Nevada casinos. Some transaction reporting violations were found by both IRS and NGCB, and fines have been assessed at Atlantic City and Nevada casinos. IRS has also made efforts to inform and educate the management of newer casinos, particularly riverboat and tribal casinos, about transaction reporting requirements. However, IRS compliance reviews at riverboat casinos had only recently begun at the locations we visited, and consequently results were not available at the time of our review. Moreover, as of August 1995, IRS had not completed any compliance reviews of tribal casinos.

Compliance Reviews at Casinos Subject to BSA Requirements

Casino compliance reviews are complex. According to the IRS’ 1994 BSA Compliance Check Handbook, compliance reviews of BSA casinos consist of interviews with casino management and employees, reviews of the casino’s reporting and recordkeeping systems—which may be computerized—and analyses and matches of casino transaction records with casino filings in the CBRS database in Detroit. IRS’ Examination Division personnel who conduct compliance reviews require specialized training and knowledge of casino operations and recordkeeping systems.

Due to the rapid growth of the casino industry, IRS has been training Examination Division personnel, including revenue agents, tax auditors and compliance officers, to perform casino compliance reviews at casinos subject to BSA requirements. IRS policy is to use computer auditing techniques whenever possible. IRS has also conducted several training seminars, including a seminar in November 1994 on conducting compliance reviews at riverboat casinos.

In addition to casino compliance reviews, Examination personnel are responsible, as previously mentioned, for BSA compliance reviews of more than 100,000 nonbank financial institutions, as well as for both individual and business tax compliance audits. They are also responsible for section 6050I compliance reviews on all trades and businesses.

The IRS Examination Division, like much of the federal government, is faced with declining resources. Over the past 6 years, Examination resources have declined from the 1989 level of 31,315, to 28,788 in 1995—a decrease of over 2,500 during that period. We recognize that, as resources decline, there are fewer and fewer Examination personnel to conduct IRS compliance reviews, including BSA casino reviews.

IRS Examination Division officials told us that each of its current 63 districts has a coordinator responsible for (1) identifying nonbank financial institutions, (2) selecting/targeting for review institutions with a high potential for noncompliance, and (3) scheduling compliance reviews. According to the IRS BSA Compliance Check Handbook, when selecting institutions for a compliance review, the coordinator is to consider achieving a balanced coverage of the different types of nonbank financial institutions, including casinos. In addition, the focus should be on institutions with a high volume of cash transactions or with abnormal cash activity.

The IRS Examination Division prepares a comprehensive currency and banking quarterly report that includes the total number (or inventory) of casinos subject to BSA requirements and the number of compliance reviews completed. In 1990, a Senate Appropriations Committee report required that IRS submit this information to the Committee so that it could track IRS compliance efforts at nonbank financial institutions, including casinos. In December 1991, IRS reported an inventory of 146 BSA casinos with GAGRs in excess of $1 million each. In December 1994, the number of BSA casinos reported had increased to 337. Meanwhile, between October 1991 and December 1994, IRS had completed 24 BSA compliance reviews at casinos.

IRS Compliance Efforts at BSA Casinos

Between 1986 and 1990, IRS completed compliance reviews at 10 of the 12 Atlantic City casinos, identifying in the process numerous currency transaction reporting and recordkeeping violations. As a result, in 1993 Treasury assessed civil penalties of about $2.5 million against the 10 casinos. Among other violations, IRS found that every casino examined had failed to file some required reports on currency transactions and, in addition, had not expended sufficient resources and conducted enough training to comply fully with the BSA requirements.

According to IRS, compliance reviews in Atlantic City were accomplished through interviews, on-site inspections of casino records, and computer matching of casino records with CTRCs filed at DCC. In addition, according to IRS, casino records that did not match were traced to original casino documents to determine whether transactions over $10,000 were reported to DCC and whether they were correctly reported.

Officials from IRS’ Examination Division told us that the Newark District recently began compliance reviews at the two Atlantic City casinos that were not reviewed earlier. Newark District officials reported that they plan to follow a 3-year cycle for compliance reviews at the 12 Atlantic City casinos—that is, complete approximately 4 per year.

IRS examiners had just begun to perform compliance reviews at riverboat casinos at the time of our review. At the time of our visit, six compliance reviews were in progress in Mississippi. In December 1994, the Jackson District reported that it planned to conduct compliance reviews at casinos in the order that the casinos opened. Casinos under review in December 1994 opened for business in 1992; the 1995 plan calls for review of those casinos opened in 1993. As of December 1994, there were 34 casinos operating in Mississippi.

IRS officials in the New Orleans District said that they had not conducted any compliance reviews at Louisiana riverboat casinos. IRS was working with the Louisiana State Police to ensure that casino personnel were informed about BSA reporting requirements. Agents from the New Orleans District said that they had also performed some educational visits to ensure that casino personnel understood BSA reporting requirements. IRS Examination Division and Criminal Investigation Division officials in New Orleans stated that they work together to ensure that casinos comply with BSA requirements, and that any potential money laundering would be investigated.

In addition to compliance efforts at the locations we visited—in Atlantic City, Louisiana, and Mississippi—IRS has also taken steps both to educate casino officials in other states about BSA reporting requirements and to ensure that the officials understand their responsibilities under BSA. Officials from IRS’ Money Laundering Team said that the IRS strategy for compliance for all nonbank financial institutions is “three Es”—educate, enhance, and enforce. IRS has also held training conferences for computer audit specialists, agents, examiners, and compliance officers to teach them the complexities of conducting compliance reviews at casinos. Further, IRS has detailed agents to work with state casino gaming commissions in Illinois, Indiana, and Missouri to assist in conducting casino background investigations and to help ensure that casinos are complying with BSA.

IRS Had Not Completed Any Compliance Reviews at Tribal Casinos

As of March 1995, the IRS Examination Division had not completed any reviews of tribal casinos, although under IGRA they have been subject to the currency transaction reporting requirements of IRC section 6050I since 1988. Officials from the Money Laundering Team in the Examination Division said that, before undertaking reviews of tribal casinos, they believed it was necessary to establish procedures and appropriate protocol for conducting reviews on Indian lands.

In January 1993, IRS announced a delay in planned reviews of tribal casinos. This temporary delay ended in January 1994. The IRS national office directive specified that the reason for the delay was that IRS “did not have a consistent and systematic compliance strategy” for conducting reviews on Indian lands. According to an IRS official, a strategy could not be developed until a resolution was reached concerning an “inconsistency” in the act. FinCEN noted that this situation creates a reporting ambiguity that may have confused some Indian gaming operators about their obligations to report such large currency transactions. While no clear strategy for conducting compliance reviews on Indian lands has been developed, on August 3, 1995, Treasury published a proposed regulation to bring certain tribal casinos under Treasury’s anti-money-laundering controls. According to FinCEN, this change is intended, in part, to clarify the currency reporting obligations of tribal casinos.

Officials from IRS’ Money Laundering Team at the national office said they had been developing an Indian Assistance Handbook that should “help to create consistency in IRS district office procedures for conducting compliance reviews” and foster cooperative relationships with the tribes involved in gaming activities. According to the team manager, several agencies, including the Bureau of Indian Affairs and representatives from the National Indian Gaming Commission, had worked with IRS to develop the handbook. The handbook is to include protocol for contacting tribal officials, as well as clarify issues involving access to casino records for tax and compliance reviews. However, as of August 1995, the team manager did not know when the handbook would be published.

Nevada’s Compliance Efforts

The NGCB Audit Division conducts three different types of compliance reviews: interim audits, to be conducted annually, are to include the testing of all currency transaction reporting procedures and a limited document review; full audits, to be performed every 2-3 years, are to include extensive document review to test all procedures for compliance with reporting requirements; and covert checks, to be conducted periodically, are similar to undercover operations and are to be used to test casino compliance with Nevada’s currency transaction requirements.

According to a 1992 IRS oversight review, one of the strengths of the Nevada system is that NGCB is to conduct either an interim audit or a full audit at all casinos under Regulation 6A at least once a year.

The covert checks are conducted on an unscheduled basis without advance warning to the casinos. Typically, a NGCB agent enters a casino and attempts to test compliance with currency transaction reporting requirements, or tries to conduct a prohibited transaction. For example: an agent might try to purchase chips in an amount over $10,000 as a test to determine whether casino employees properly record the currency transaction on a CTR; or an agent might try to exchange $5,000 in cash for another $5,000 cash from the casino, or $5,000 in cash for a casino check. (Both are prohibited transactions in amounts over $2,500.)

As of November 1994, NGCB had found currency transaction reporting and recordkeeping violations at 24 casinos and had fined 22 casinos about $1.8 million.

Conclusions

Legalized gaming is expanding rapidly across the United States. Casino gaming is among the fastest growing forms of legalized gaming, and new casinos continue to open around the country. Two areas of notable growth are riverboat casino gaming and Indian gaming. Along with this growth has come a large increase in the amount of cash wagered at all casinos, which totaled about $407 billion in 1994. With this much cash changing hands, casinos may be particularly vulnerable to money laundering in the form of money from illegal activities being placed into legal gaming transactions.

Recent BSA regulations requiring casinos to establish anti-money-laundering compliance programs, together with the implementation of certain provisions in the Money Laundering Suppression Act of 1994 with respect to certain tribal casinos, should help to deter or detect potential money laundering. These actions, coupled with possible changes to Nevada’s regulations, should bring greater consistency and uniformity to transaction reporting for casinos and improve the information available to law enforcement. Measures that deter money laundering before it happens, such as Nevada’s prohibited transactions, may also help to combat money laundering in casinos. Although there is no data to measure effectiveness, Nevada gaming officials strongly believe in the preventative aspects of prohibiting transactions that may lend themselves to money laundering.

The current federal strategy for deterring and detecting money laundering in casinos involves Treasury, which promulgates BSA reporting and recordkeeping regulations, and IRS, which performs compliance reviews. IRS has detailed agents to several state gaming commissions and taken steps to assure that casinos are complying with BSA currency transaction reporting requirements. IRS’ Examination Division has done some monitoring of Nevada’s compliance program and has established a cycle for reviewing casino compliance in Atlantic City. Until recently, almost all of the casinos in the country were in these two locations. In addition, FinCEN is working to develop a partnership with the gaming industry and it is their intention to encourage casinos to know their customers and identify suspicious transactions.

With its very limited resources, IRS’ Examination Division is responsible for compliance reviews at BSA casinos and over 100,000 other nonbank financial institutions, in addition to the massive job of ensuring compliance with our federal tax laws through the audit of individual and business tax returns. It seems likely, given the competing demands on resources, that IRS compliance review coverage for casinos will be limited. The new BSA regulations that require casinos to take a more active role in ensuring their own compliance with BSA, as well as other money laundering prevention strategies such as Nevada’s prohibited transactions, could be positive steps toward compliance given the limited IRS resources for compliance reviews.

Recommendation

We recommend that the Secretary of the Treasury consider the costs and benefits of an amendment to BSA to allow for the prohibition, as Nevada does, of certain cash transactions in casinos that may lend themselves to money laundering.

Agency Comments and Our Evaluation

On September 22, 1995, we obtained oral comments separately from Treasury and IRS officials on a draft of this report. At Treasury, we met with FinCEN representatives, including the Associate Director of the Office of Regulatory Policy and Enforcement. We also met with IRS officials, including the National Director for Compliance Specialization. In addition, FinCEN sent us written comments, which are reproduced in appendix VI. Both FinCEN and IRS provided clarifications and technical corrections that we have incorporated where appropriate.

In its written comments, FinCEN said that, in general, the report is an informative and accurate account of the growth of casino gaming in America and of the potential threat this expansion poses for increased money laundering. However, FinCEN disagreed for several reasons with our recommendation that Treasury consider the costs and benefits of an amendment to BSA to allow for the prohibition, as Nevada does, of certain cash transactions in casinos that may lend themselves to money laundering. FinCEN’s reasons for disagreeing included concern that our work had not demonstrated that the prohibition of certain cash transactions would in fact deter money laundering and that additional prohibitions would increase the reporting burden on casinos. Both FinCEN and IRS noted that, even if certain cash transactions were prohibited in all BSA casinos, patrons who wished to launder money at a casino could circumvent the prohibitions by finding other ways to launder money there.

Our objectives for this review were to provide descriptive information on the extent of casino gaming, related reporting requirements, and enforcement efforts. As we did our work, we became aware of the issue of IRS’ declining resources versus the growth in casino gaming and the related potential for money laundering. While our work was not designed to develop specific solutions, we saw the need for Treasury to explore the feasibility of less resource intensive ways to deter money laundering. That concept embodies the intent of our recommendation. It seemed reasonable to us that due consideration should be given to trying to identify some less resource intensive options, including the possibility, by prohibiting certain transactions, of making the laundering process more difficult and enhancing casinos’ ability to self-regulate the issue, while simultaneously relieving some of the pressure on IRS resources. Given the federal downsizing environment, accompanied by the growth in casino gaming, we continue to believe that the identification of additional, less resource intensive ways to deter money laundering would be an appropriate step for Treasury.

As agreed with the Subcommittee, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Secretary of the Treasury, the Commissioner of Internal Revenue, and other interested parties and make copies available to others upon request.

Appendix VII lists the major contributors to this report. If you need additional information on the contents of this report, please contact me on (202) 512-8787.

Classes of Indian Gaming

1. Social games played solely for prizes of minimal value. 2.Traditional forms of Indian gaming played in connection with tribal ceremonies or celebrations. 1. Bingo or lotto (regardless of whether electronic, computer, or other technological aids are used) played for prizes. 2.Pull-tabs, punch boards, tip jars, instant bingo (if played in same location as bingo) and other games similar to bingo. 3.Nonhouse-banking card games that state law authorizes or does not prohibit and that are played legally anywhere in the state. 1. All forms of gaming that are not Class I or II gaming and any house banking games.2.Card games such as baccarat, blackjack (21), Pai Gow, etc. 3.Casino games such as roulette, craps, keno, etc. 4.Slot machines and electronic or electro-mechanical facsimiles of any game of chance, such as video poker, video blackjack, etc. 5.Sports betting and pari-mutuel wagering, including horse racing, dog racing, Jai Alai, etc. 6.Lotteries.

Casinos We Visited for This Review

Types of Legalized Gambling

State Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Total Indian gaming includes tribal casino and bingo operations (data as of March 1995).

Other includes legal bookmaking (sports and horse) and charitable games.

Total Gaming Revenues by Gaming Activity and for Casinos

Lotteries $14.1 (35.4%)

Pari-mutuels $3.7 (9.1%)

Other $1.6 (3.9%)

Indian gaming $3.4 (8.6%)

Charitable bingo $1.0 (2.6%)

Card room gaming $0.7 (1.8%)

Casino gaming $15.4 (38.5%)

N = $39.9 billion in gaming revenues.

Other includes legal bookmaking and charitable games.

Casino gaming includes riverboats.

Nevada $6.8 (37.0%)

Other $1.9 (10.5%)

Tribal $3.0 (16.2%)

Riverboat $3.3 (17.7%)

New Jersey $3.4 (18.6%)

N = $18.3 billion in gaming revenues for casinos.

Tribal casinos do not include bingo operations.

Currency Transaction Reports for Casinos

The following are GAO’s comments on the Financial Crimes Enforcement Network’s letter dated October 24, 1995.

GAO Comments

1. FinCEN stated that our recommendation is vague and ambiguous as to what specific transactions should be considered. Further, they said that the report does not provide any basis for determining that prohibiting certain transactions does in fact deter money laundering to any appreciable extent. Our descriptive work relating to the growth of casinos, currency transaction reporting requirements, and related enforcement efforts was not intended to delineate the costs and benefits of specific prohibitions against money laundering. However, in analyzing our descriptive information, especially in relation to the level of enforcement of anti-money-laundering provisions of BSA and the likelihood that IRS enforcement resources will remain limited, the need for less resource intensive means to deter money laundering seemed evident. We believe that a study to identify means to deter money laundering in casinos, such as by prohibiting certain transactions, would be an appropriate step for Treasury to take as part of an effort to control money laundering while expending fewer federal resources. 2. Treasury notes that, in addition to the prohibition of certain cash transactions in Nevada that we cited, other states also have prohibited transactions, and that we do not cite which of these Treasury should evaluate. Our work did not include an enumeration of all transactions that are prohibited by all states, nor are we suggesting that Treasury undertake such an effort. However, if Treasury is aware of other prohibited transactions that seem likely to inhibit money laundering, they too should be considered. 3. FinCEN said that it is Treasury’s position that the most effective means of combating money laundering is to determine which cash transactions should be recorded or reported, and then to work with the industry to ensure that suspicious activity is detected and reported. We agree that these are very useful strategies. However, this should not rule out adding an additional weapon to the arsenal against money laundering. To the extent that transactions that lend themselves to money laundering could be prohibited, the regulation process could be even more effective. Given the limited examination resources of IRS, follow-up on all recorded transactions seems unlikely. Accordingly, we believe that an action that could augment current enforcement efforts is worthy of consideration. 4. FinCEN stated that Treasury also believes that, given the diversity of gaming operations among states, it should be up to each state to determine the appropriateness of prohibiting certain transactions. We did not suggest that states could not or should not have their own regulations or prohibitions. However, if Nevada or any other state has a regulation or prohibition that could potentially aid the wider fight against money laundering, we believe that it should be considered for wider application.

Major Contributors to This Report

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