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. 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. 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. 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.