21 May 2015
Gambling and the Bank Secrecy Act
Practice Group(s):
By Joseph A. Valenti, Samuel P. Reger
Betting and Gaming
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.
Government
Enforcement
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 revenue1 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 moneylaundering 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
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).
Gambling and the Bank Secrecy Act
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 nonprosecution 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 machines12 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.
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/irscited-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.
2
Gambling and the Bank Secrecy Act
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
14
18 U.S.C. § 1081.
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-illicitfinance/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.
15
3
Gambling and the Bank Secrecy Act
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.
Conclusion
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.
Authors:
Joseph A. Valenti
joseph.valenti@klgates.com
+1.412.355.8398
Samuel P. Reger
samuel.reger@klgates.com
+1.412.355.6258
Other Contact:
Linda J. Shorey
linda.shorey@klgates.com
+1.717.231.4510
Anchorage Austin Beijing Berlin Boston Brisbane Brussels Charleston Charlotte Chicago Dallas Doha Dubai Fort Worth Frankfurt
Harrisburg Hong Kong Houston London Los Angeles Melbourne Miami Milan Moscow Newark New York Orange County Palo Alto Paris
Perth Pittsburgh Portland Raleigh Research Triangle Park San Francisco São Paulo Seattle Seoul Shanghai Singapore Spokane
Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington
K&L Gates comprises more than 2,000 lawyers globally who practice in fully integrated offices located on five
continents. The firm represents leading multinational corporations, growth and middle-market companies, capital
markets participants and entrepreneurs in every major industry group as well as public sector entities, educational
institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations,
practices and registrations, visit www.klgates.com.
This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in
regard to any particular facts or circumstances without first consulting a lawyer.
© 2015 K&L Gates LLP. All Rights Reserved.
4