FinCEN’s Casino Crackdown Hits Vegas’ Poker Tables

By Allen E. Molnar and Christopher W. Hinckley (@Chinckley_HB)

Money talks in Las Vegas, but cash always seems to speak a little louder. Whether it’s giving  a nice tip to your server even though your drink was free, one to your blackjack dealer for “giving” you a winning hand even if the cards were entirely random, or a maitre d’ for helping you find a better table, regular visitors to Vegas find that showing a little gratitude can go a long way.

Cash commonly has been used at poker tables to keep games “in play” when chips run out. Though permissible casino floor games are officially played with chips, veteran players have learned that it’s never hard to add additional currency to a pot, especially if you’re doing particularly well and don’t want to take a break to change your chips. Dealers, pit bosses and security officials all seem agreeable with this tradition – regularly declaring “cash plays” whenever a player pulled out a bill.

Starting this spring, however, most major Strip casinos have silenced this voice in poker rooms, and now require that all poker games be played entirely with chips.

In March, MGM Resorts announced that, starting April 1, cash will no longer be playable at its nine poker rooms. It joined Aria and Bellagio in making this switch, and within a month, all of the Station Casinos, Wynn, Venetian and Caesars Palace followed suit. None of them made official proclamations about the switch – guests simply encountered the change, and it was also reported on by local gaming media.

However, the move wasn’t entirely unexpected due to increasing scrutiny being given the gaming industry by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and extra attention to anti-money laundering (AML) initiatives. FinCEN has been increasingly aggressive in encouraging casinos to account for every transaction, and for sizeable winners to complete paperwork before being presented with their winnings.  (Most recently, FinCEN issued uncommon “Geographical Targeting Orders” affecting businesses in certain zip code zones of Los Angeles and Miami it deemed particularly vulnerable to money laundering activity through the regular use of cash by customers for “large-ticket” purchases.  Businesses operating in the designated geographical locations now must report cash transactions to the government in greater detail, and at lower threshold amounts, than AML regulations ordinarily require.)

While casino owners may quietly grumble about the increased regulation and gradual shift from the city’s traditional “anything goes” reputation, they also seem willing to be seen as complying with still-evolving gaming laws.

Poker in poker rooms especially has stood out as a table game with slightly more lax views on playing with cash vs. chips. Players adding $100 bills to their bets were not uncommon. It certainly sweetened the pot and was a simple work-around for tables with a maximum amount of chips per bet.

But it also created security concerns – besides the potential risk of players not reporting any cash winnings, it also increased the potential for theft or accidents – it’s easy to identify which player may have dropped the blue chip, but harder to reclaim a missing $100 bill.

Players will likely adjust to the new chips-only rule adequately. They may remember to change extra money before a big tournament, or casinos may hire extra runners to change money when needed. What’s less known is how this change will impact the World Series of Poker, traditionally held at Caesars Palace. The role of currency for supplemental bets seemed like part of that event’s format.

NTRA Issues Statement on Federal Legislation Filed to Repeal the Interstate Horseracing Act

By The Editorial Team

The National Thoroughbred Racing Association issued a statement today (May 1, 2015) saying  the proposed legislation by Senator Tom Udall and Representative Joe Pitts to repeal the Interstate Horseracing Act of 1978 “is a shameless publicity stunt that mischaracterizes one of the nation’s most highly regulated sports.”

The NTRA said it “strongly opposes this most recent attack on horseracing by Sen. Udall and Rep. Pitts, who have introduced federal legislation that threatens to destroy the economic viability of the $26 billion horseracing industry and the 380,000 jobs it supports nationwide.”

New Legislation Introduced to “Restore Integrity”

By The Editorial Team

Senator Tom Udall and Representative Joe Pitts introduced legislation yesterday (April 30, 2015) to eliminate most wagering on horseracing, encouraging the sport to end doping and crack down on cheaters.  In a press release, Udall and Pitts said “horseracing is the only sport specially permitted by federal law to offer online gambling and interstate betting, yet widespread corruption has stained the industry.”

Udall and Pitts noted that almost every horse is given race-day medication — banned in other countries — and no uniform medication rules or doping penalties exist. They cited a New York Times story from 2012, that pointed out “doping undermines the safety and viability of the sport, and 24 horses die each week from racing injuries — an alarming fatality rate likely caused by the misuse of permitted medication and abuse of illegal drugs.”

The proposed legislation is certainly an industry “attention getter” with the Kentucky Derby set for tomorrow. And in light of that, Udall noted: “Out of sight of the spectators in the grandstand, 19 of the 20 horses competing in this year’s Kentucky Derby will be injected shortly before post time…We must stop the abuse and restore integrity to this once-dignified sport.”

“Horseracing is the Sport of Kings. Unfortunately, however, it’s plagued by too many unscrupulous trainers, owners, veterinarians and other race track officials who race sickened or injured horses, pumping them full of painkillers or other performance enhancing drugs in order to try to win at all costs,” Pitts said.

The bills are named after racehorses who were given drugs to race and were euthanized on the track. Udall named the Senate bill after Teller All Gone, a 2-year-old Quarter horse who fell after the wire at a race in New Mexico. Pitts named the House bill after Coronado Heights, a 4-year-old Thoroughbred who died racing after receiving a diagnosis of early degenerative joint disease.

On Vetting Junket Operators and Junket Patrons

By Allen Molnar, Karl Sleight (@KSleight_HB) and Christopher W. Hinckley (@Chinckley_HB)

If Past Is Prologue: What Casinos May Expect From FinCEN

“Drilling Down” to determine the real parties-in-interest, and their source of funds, has become a primary concern of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in its efforts to combat money laundering. Mandatory due diligence requirements for racing/gaming operations reportedly are being developed by the agency, but, based on final regulations recently issued for traditional financial institutions, the direction of FinCEN’s eventual casino rules even now can be reliably anticipated. 

The authors here shall briefly review how FinCEN developed “third party” due diligence requirements for traditional banks, will note how differences between the operations of banks and casinos will require rules specifically tailored for the gaming industry, and shall consider how FinCEN’s prospective rules for casinos may affect their interaction with junket operators and junket patrons.

The Banking Precedent

Conducting due diligence on undisclosed principals or “beneficial owners” of legal entities (such as corporations and partnerships) seeking financial services was the single most problematic area for the banking industry to deal with when FinCEN announced proposed rulemaking on March 5, 2012. Questions left open by the agency’s announcement included (1) what amount of ownership would trigger, or be the threshold for, having to vet an individual owner; (2) how intrusive would the required due diligence questions be; and (3) would the results of such inquiry need to be memorialized in a file subject to regulatory review? Concerns also were raised about possibly having to identify all those having an interest in subaccounts maintained by a bank’s immediate institutional customer, such as a trust, and how would conflicts be resolved between any regulatory “need to know” and the privacy laws applicable to an undisclosed principal in her or his home jurisdiction. 

Following two and half years of industry feedback and agency response, final anti-money laundering (AML) rules for banks were issued August 4, 2014 and became effective in October of that year. On the much – debated questions about performing due diligence on the undisclosed principals of legal entity customers, FinCEN concluded:

  1. Anyone and everyone seeking to open an account for a “legal entity” must complete a prescribed form of certification containing the following information:
    1. Does the legal entity have one or more participants owning at least a 25 percent share?
    2. If so, the full name, permanent address and Social Security number must be given for each US person; if the 25 percent owner is a foreign citizen then the name, permanent address, passport number and country of issuance or (other similar identification number) must be given.
  1. In addition, similar information must be given for one designated person having significant managerial responsibility for the legal entity customer (even if that person is not an owner, or owns less than 25 percent).

Banks provided with this information must take the additional step of independently verifying that all persons identified on these certifications actually exist under the names and addresses given (a task which may include reference to any popular database).

The completed certifications and all related verifying information independently collected by banks – including a description of what methods were used to perform the verification – must  be retained for at least five years following closure of the customer’s account.  All such data is subject to regulatory inspection.

A “Tailored” Approach For Casino Operations

The way banks operate makes it effortless for them to determine when further AML due diligence is needed on otherwise undisclosed parties-in-interest. Any individual wishing to open an account or secure financial services on behalf of a “legal entity” necessarily self-discloses; just asking to start a corporate checking account or engage partnership payroll services automatically alerts bank personnel that FinCEN’s certification inquiry procedures need to be pursued.

Not so for casinos. In the normal course, gaming establishments interact only with their immediate patrons, individuals who literally may walk off the street onto a gambling floor and begin participating with the presentation of cash. The basic dynamic does not allow for completion of a certification or other realistic “onboarding” procedures such as are unremarkable second-nature experiences at traditional financial institutions. It is possible that FinCEN may propose capturing information on real-parties-in-interest or sources of a patron’s funds at various “attachment points” when an individual needs to consult with “the house,” such as in arranging wire transfers or collecting winnings over a reportable amount. That aspect of FinCEN’s current initiative in drafting AML rules for casinos is beyond the topics to be addressed here. However, there indeed is an ongoing facet of casino operations which already has been identified as a higher risk category warranting further regulatory oversight appropriate for discussion, and that is how gaming establishments interact with junket operators and junket patrons.

Junkets: Who are We Dealing With and Whose Money are They Playing With?

FinCEN already has considered the implications of junket operations, as well as direct forms of “third party betting,” and increasingly has voiced concern over their money laundering vulnerabilities. See, for example, FIN-2012-G004, “Frequently Asked Questions/Casino Recordkeeping, Reporting, and Compliance Program Requirements” (August 13, 2012);  FinCEN Letter to American Gaming Association Regarding Third-Party Betting (December 24, 2014).  Should FinCEN employ a methodology for developing mandatory casino rules similar to what it followed for conventional banks then it is likely the agency will collect and codify its prior guidance in a unified set of regulations while at the same time “tweaking” or supplementing such prior guidance with new requirements.

In particular, it can be expected that FinCEN will start by taking various pieces of guidance issued to casinos over prior years, each touching upon some different aspect of patron due diligence, and shall assemble them in a single regulatory set covering all scenarios in which enhanced due diligence of patrons or their representatives (junket operators) is warranted. See, FIN-2009-G004 FAQs/Casino Recordkeeping, Reporting and Compliance Program Requirements (September 30, 2009)(Questions 20, 22); FIN-2010-G001 Guidance on Obtaining and Retaining Beneficial Ownership Information (March 5, 2010); FIN-2012-G004 (noted above); FinCEN Letter (also noted above).

The upshot of such effort likely will find casinos required to follow practices already part of most self-designed risked-based compliance programs, with new twists, as noted below:

  1. Patron identification data will need to be collected as a matter of course on:
    1. Junket operators
    2. Junket patrons
  2. That data shall include at a minimum for individuals: full name, permanent address, Social Security number (for US persons) or passport information (number and country of issuance)(for non US persons)(“Personal Data”).
  3. For junket operators which are formally organized business associations: the same items as required of “legal entity” customers at banks (that is, Personal Data of owners holding at least a 25 percent interest, and of a designated person having significant managerial responsibility).
  4. Identifying data for junket patrons will be required in all instances, even where there is no financially-linked triggering event such as establishment of a front money account, wire transfer authorizations, implication of amounts equaling US$10,000 or more, etc. This is especially so that “Politically Exposed Persons” may be identified even when amounts associated with their gaming activity remain below reportable thresholds.  For a variety of reasons the identifying data for junket patrons may be collected in the first instance by junket operators, and then relayed to casinos with an appropriate certification. Placing the initial collection obligation on junket operators will help alleviate issues arising from the inability of casinos to employ popular search engines in attempting to independently verify the identity of persons from certain countries, such as China, where online facilities and their content may be heavily restricted or prohibited.
  5. The form of certification will mimic the prescribed document issued by FinCEN for banks in August 2014 (see the attached example), with internal references changed to make the item referable to junkets and their patrons rather than to “legal entity” customers.

 FinCEN proved itself open to industry comment during the development of mandatory AML protocols for traditional financial institutions, and there is no reason to believe it will not do so given the unique operating environment of casinos. Gaming interests are well advised to assess how likely changes to the due diligence procedures for junket operators and patrons may affect their businesses, and to promptly advise the agency of concerns, either through direct contact or through industry associations.

Christopher Hinckley presents at the American Bar Association’s Spring Meeting of the Business Law Section

By The Editorial Team

Harris Beach attorney and member of the Racing and Gaming Industry Team Christopher Hinckley sat on a panel along with gaming and financial experts to discuss the growth, status and potential of social gaming and virtual currencies during the American Bar Association’s Business Law Section Spring Meeting on April 17, 2015. Panelists included Gregory Giordano, partner at McDonald, Carano & Wilson; Karl Rutledge, partner at Lewis, Roca & Rothgerber; and Elijah Alper, partner at WilmerHale.  

The discussion focused on defining both social gaming and virtual currencies along with the reasons behind their rise in popularity and roles in both the gaming industry as well as the overall economy. The panelists discussed the popularity of social gaming, how it’s able to generate such significant revenues, and distinguished social gaming from gambling and explained why regulation of the activity appears unnecessary. The discussion of virtual currencies opened with how this new eco-system is able to function and the roles and definitions of its integral parts. The speakers next discussed its integration and uses by a number of large companies and ended by addressing virtual currency’s volatility, security and potential for the future.

About the Harris Beach panelists: Christopher W. Hinckley, former general counsel to a state gaming commission, provides legal counsel to licensed gaming entities on matters related to compliance with regulatory, state and federal laws.

Christopher Hinckley and Allen Molnar Presenting at the International Masters of Gaming Law Spring Conference

By The Editorial Team

Harris Beach attorney and member of the Racing and Gaming Industry Team Christopher Hinckley will lead a discussion of industry thought leaders on FinCEN’s Protocols for Casinos during the International Masters of Gaming Law Spring Conference on March 31.  Panelists include Allen Molnar, Harris Beach partner; Thomas N. Auriemma, member, Compliance Committee, Penn National Gaming; and Fredric Gushin, managing director, Spectrum Gaming.   

The topic will focus on how FinCEN has admonished casino operators to implement broader, in-depth “know your customer” rules in the agency’s stated effort to bring gaming operations more in line with anti-money laundering (AML) compliance standards required of more traditional financial institutions, such as banks. Now that regulatory officials have turned their attention to formulating mandatory AML protocols for casino operations, what will the rules look like and how will these prospective requirements affect casino interaction with patrons and other stakeholders?

About the Harris Beach panelists: Christopher W. Hinckley, former general counsel to a state gaming commission, provides legal counsel to licensed gaming entities on matters related to compliance with regulatory, state and federal laws. Allen E. Molnar, of the firm’s New York City office represents clients with issues related to multijurisdictional or international implications, such as compliance with requirements of anti-money laundering laws. 

NYRA’s Privatization Not Addressed in New York State Budget

By The Editorial Team 

Call it a late scratch or simply holding off for better racing conditions, but it does not appear the New York Racing Association’s (NYRA) privatization will be addressed in this year’s budget, due under state law by April 1.  As reported by the Wall Street Journal, the quasi-state agency tasked with reorganizing and temporarily overseeing Aqueduct Racetrack, Belmont Park and Saratoga Race Course is not being discussed as part of this year’s budget negotiations.  According to CEO and President Christopher Kay, the reorganization plan prepared by NYRA (previously discussed here at “NYRA Reorganization Plan to be Presented in mid-April”) is ready but has not yet been voted on by the board or presented to the state due to other priorities in the state budget.  As noted by the article, this is consistent with the governor’s budget plan, which proposed extending the current three year term of the reorganization board to four years. The state legislature is scheduled to adjourn for the year in June and the issue could return as part of discussions between the governor and the legislature later this spring.   

NYRA Reorganization Plan to be Presented in mid-April

By The Editorial Team

As reported by the Albany Times Union, the New York Racing Association (NYRA) is “all but finished” with a reorganization plan, and will present the plan to the New York State Legislature by mid-April.  Christopher Kay, NYRA’s president and CEO, made the announcement at a news conference that also addressed a new economic impact study on the Saratoga Race Course and the surrounding area.  As noted in the article, this news follows reports from the fall of 2014 which showed NYRA expecting a $1.5 million surplus for 2014 after years of deficits (see our previous coverage at NYRA Back in Black; Discusses Aqueduct).

For continued updates on NYRA’s reorganization plan, subscribe to the New York Racing and Gaming Blog on the right-hand side of this page.

FinCEN’s Casino Crackdown: Part III

Christopher W. Hinckley (@CHinckley_HB) and Allen E. Molnar

Executive “Ownership” of Responsibility for AML Compliance

Potential implications loom for casino executives in the wake of New York state’s call that senior bank officers personally vouch for the efficacy of their institutions’ anti-money laundering (AML) protocols.

That initiative, announced in a February 25, 2015 speech by Financial Services Superintendent Benjamin Lawsky, reportedly will involve random on-site audits of AML monitoring and filtering software at regulated institutions, and having executives sign a certification as to the “adequacy and robustness” of their bank’s AML compliance regimen.  A full copy of Superintendent Lawsky’s remarks appear below.  History teaches that where the government goes down a road lined with financial institutions, it regularly diverts to the community of gaming and racing interests.

While federal regulators, including the US Treasury’s Financial Crimes Enforcement Network (“FinCEN”), require board members to familiarize themselves with their institutions’ AML procedures and to oversee their implementation, there is no present requirement for any individual to sign an attestation along that line (in the way that the Sarbanes-Oxley Act, for example, requires executive certification of financial statements).  Sanctions against individuals in the AML arena so far have appeared only as the result of detailed law enforcement investigation into suspected money laundering activity implicating the knowing involvement of bank officers or casino managers, with those individuals facing non-indemnifiable fines and legal costs, the clawback of bonus payments and other remuneration, and debarment from further employment in designated industries. 

This scenario changes dramatically should executives be required to certify the generic effectiveness of AML systems they cannot be expected to have personally tested in operational detail, but with regard to which their assessment must rely on the opinions of others, such as licensed investigators, auditors or legal counsel.  Even if impending new AML laws ultimately provide a “safe harbor” or “reasonable reliance standard” (such as the SEC has adopted for Sarbanes-Oxley financial attestations) the prospect of adverse governmental inquiry involving individual executives would be presented absent any knowing or volitional participation by them in conduct violating AML requirements; the inadvertent misperformance of an AML filtering software program may trigger months of regulatory or law enforcement involvement.

Trump Taj Mahal Discloses $10 Million Civil Penalty for AML Compliance Violations 

Papers recently filed in the Taj Mahal bankruptcy reorganization revealed that company’s consent to an admission it had violated the Bank Secrecy Act’s (BSA) reporting and records-keeping requirements over a period of years despite prior citations by regulators; the casino operator also consented to pay a related $10 million fine.  Most of the company’s admitted violations involved failure to identify customer conduct warranting the filing of Suspicious Activity Reports (SARs), to actually file required SARs, and to properly maintain relevant information (financial transaction confirmations, videotapes, etc.).

The belated disclosure of Taj Mahal’s AML enforcement action gives a new context to FinCEN’s December 24, 2014 letter to the American Gaming Association warning of the need for casinos to closely monitor activities indicating “third party betting,” that is, using a “front” individual to wager funds in which undisclosed principals are the real parties in interest.  (See our blog, FinCEN’s Casino Crackdown: Part II “FinCEN Statement on Third-Party Sports Betting May Indicate Direction of AML Regulation for Gaming” (January 21, 2015)).  In its December 24 admonition to the industry, FinCEN especially focused on how the failure of casino operators to identify and act upon suspicious third party betting would violate the BSA’s specific reporting and record-keeping mandates, subjecting unresponsive casinos to enforcement action.

Regulatory Reform – Part II

By Christopher W. Hinckley  (@CHinckley_HB)

The need for regulatory reform nationwide has been reinforced by the American Gaming Association’s (AGA) 2011 White Paper that outlines 10 suggested reforms that would greatly benefit states, casino owners, manufacturers of gaming machines and shippers/receivers of gaming equipment. Two of these 10 suggested reforms address the filing requirements for shipping of gaming machines and parts. The bottom line here is that unnecessary shipping paperwork clogs the systems, is not cost-effective, and requires excessive time and human resources to create, use and process.

The Problem in Brief

Consider just a few pertinent facts about these areas of reform. These points demonstrate the extreme impact of the current problem nationwide, and how it might affect your company:

  • 365 sets of shipping jurisdictions
  • The high numbers of variations by jurisdictional expectations and rules
  • 61,000 regulatory filings for five gaming machine manufacturers over 12 months
  • A million or more different combinations of shipping requirements can apply to the shipment of a single gaming machine today

AGA Suggested Reforms

New York regulators can enhance the state’s pro-business stance by implementing the following AGA reform recommendations. Reducing the shipping restrictions in just these two areas of regulation would help to make New York more business-friendly to all companies involved in shipment of casino gaming machines and equipment.

Recommendation #9: Eliminate Prior-Notice or Pre-Approval of the Shipment of Electronic Gaming Machines

This eliminates useless paperwork all around. Regulators rarely deny a pre-approval request and shippers have to deal with variable time frames and with deadlines that mean multiple prior-notices for each machine shipped. Coordination of unnecessary paperwork, along with normal time and attention needed for pure logistics and penalties for missed deadlines only adds to company costs.

Recommendation #10: Reduce the Number of Pre-Approvals for Electronic Gaming Machines

Electronic gaming machines and machine modifications already are tightly scrutinized by state regulators and testing labs. The complex nature of electronic gaming machines and the constant industry quest for meeting consumer demands results in regular modifications of existing machines.

We believe a system of manufacturer certifications could easily replace at least one quarter of the high number of pre-approvals required today. This would reduce manufacturing time and shipping costs, and relieve overall paperwork and human resources burdens. In the highly competitive entertainment industry, it is essential to avoid deadening initiatives or loading unnecessary costs on the primary players within that industry to keep it vital and profitable.

Suggested Industry Reforms

In 2014, the AGA published a White Paper dedicated solely to bringing about reform in this area entitled Streamlining Shipping: Recommendations for Regulatory Reform (David O. Stewart, Ropes & Gray, LLP) in which there are seven recommendations for rule changes designed to successfully address shipping problems while simultaneously enhancing consumer protections. These suggested changes to shipping rules ensure that regulatory approval has been met for games and machines installed in a jurisdiction, and that those electronic machines and games are not tampered with during shipment.

Regional or national standardization of shipping regulations would speed delivery of new products to the gaming public and create important efficiencies for regulatory agencies, manufacturers and operators of electronic gaming machines. At the same time, reduction or elimination of unnecessary paperwork would also cut costs for regulators without reducing the effectiveness of industry regulation.

The AGA suggests these specific reforms:

  • Allow Shipment of Complete Machines – Factory assembly is superior to on-site component assembly. Reduction of delivery requirements, paperwork and errors.
  • Establish a Uniform Advance Notice Period for Shipments – Reduces costs of doing business, simplifies delivery process without reduction in regulatory effectiveness.
  • Allow Shipments Directly to Customers and to Multiple Customers – Reduces shipping costs and delivery times.
  • Allow Shipment Without Express Prior Authorization – Reduces variable authorization delays, eases coordination of shipments, and does not reduce regulatory effectiveness.
  • Exempt Non-Gaming Components from Prior Notice Requirements – There is little reason to fear tampering with non-gaming machine components.
  • Remove the Requirement of Prior Notice for Removing Slot Machines – Facilitates shipment scheduling, reduces administration burdens. Post-shipment notification to regulators is sufficient for monitoring active game inventories.
  • Allow Shipment Notices to be Delivered Either Electronically or Via E-Mail to a Single Regulatory Official – Electronic and e-mail notifications can easily be collected and stored for later use if needed or forwarded to other officials.

Changes suggested by New York regulators offer some relief and hopefully will influence other states and jurisdictions to make similar changes. The best outcome would be to see changes in shipping requirements instituted nationwide, for simplicity, cost-effectiveness and highest benefits to gaming/casino companies, gaming machine manufacturers and shippers. The suggested New York changes make doing casino business in New York more profitable for everyone, including the state.