During a pair of recent speeches, Kenneth Blanco, director of the Treasury Department’s Financial Crimes Enforcement Network, discussed money laundering issues for—and the need for cooperation from—casinos. Another topic: the regulatory perils of virtual currencies.
“I believe casinos are good and important partners that have made significant progress in recent years with respect to Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT). There are, of course, as in most industries, areas for improvement,” Blanco said at the 11th Annual Las Vegas Anti-Money Laundering Conference and Expo.
He stressed that FinCEN is able “to do important things with the data that casinos and other financial institutions provide every day.”
“As many of you know, Bank Secrecy Act data is one of the first lines of defense in our fight against all kinds of crime and bad acts, including terrorism,” Blanco said.
Nearly 500 federal, state, and local law enforcement and regulatory agencies have access to FinCEN’s database of BSA records, he explained. Within these agencies, there are an estimated 11,000 active users of BSA data. This includes 149 Suspicious Activity Report review teams located all around the country, covering all 94 federal judicial districts—including one in each state, Washington D.C., and Puerto Rico.
Law enforcement, regulatory users, and FinCEN analysts have made more than 10 million queries of the BSA database over the past five years. More than 20 percent of FBI investigations utilize BSA data, and for some types of crime, including organized crime, that number is nearly 60 percent.
FinCEN receives nearly 1,900 SARs related to terrorist financing each year. “Keep in mind that those SARs are only the ones that the financial institutions filing the reports have identified as potentially relating to terrorism,” Blanco said. “We then take those and connect them to other SARs and other BSA information, which can generate further leads.”
He added that of 97 recent domestic terrorism cases reviewed by FinCEN, 25 of them had BSA reporting prior to a person’s arrest.
Blanco gave specific instances of BSA-related reporting aiding enforcement actions.
Reporting by casinos helped the Internal Revenue Service and several other federal agencies working together to combat Mexican kleptocracy involving senior political figures and the illicit use of the U.S. financial system to launder bribe payments received from Mexican drug cartels.
Financial data, including multiple BSA records filed by two separate casinos, played a critical role in this investigation by initially bringing the criminal activity to the attention of investigators and identifying numerous co-conspirators and previously undiscovered accounts and transactions from Mexico to the United States.
As a result, assets totaling more than $80 million were seized, including residential and commercial real estate, financial accounts, currency, gold coins, jewelry, vehicles, and aircraft. The subjects of the investigation were charged with various financial crimes, including money laundering, bank fraud, wire fraud, operating unlicensed money services businesses, loan fraud, racketeering, and others.
"It is critical that casinos utilize the information they have on an enterprise-wide basis and ensure it gets into the hands of the right people in your compliance departments. We know the kind of significant information that casinos are able to develop on gaming customers. This information is extraordinary and relevant and already used by casinos for a variety of marketing and other business purposes. But this information can, and should, be used by your compliance personnel as they monitor customers for suspicious activity. Information developed by your security departments for combating and preventing fraud should also be shared with compliance personnel."
Kenneth Blanco, director of the Treasury Department’s Financial Crimes Enforcement Network
“BSA reports filed by casinos ultimately played a role in a case involving an international fraud network and a kleptocracy investigation. The reports your casinos file matter,” Blanco said. “They are valuable. They make a difference.
“While BSA data may not assist with specific investigations, that does not mean that it is any less valuable,” he added. “FinCEN and law enforcement officials regularly analyze and work with the data to connect networks, to understand trends and typologies, and to develop red flags which assist financial institutions and law enforcement. When we combine this data with open source data and information from law enforcement… we can map out connections that we would not otherwise see or even know about. These networks would otherwise remain in the shadows.”
Part of getting better and doing more includes providing financial institutions better and more consistent feedback on how investigators use BSA data, so they understand our priorities and how to use their resources more efficiently and in a more targeted and focused manner, Blanco explained.
Reporting by a casino in Argentina, for example, helped piece together an investigation into a transnational criminal organization linked to Hezbollah and its global terror network.
“It is critical that casinos utilize the information they have on an enterprise-wide basis and ensure it gets into the hands of the right people in your compliance departments,” Blanco said. “We know the kind of significant information that casinos are able to develop on gaming customers. This information is extraordinary and relevant and already used by casinos for a variety of marketing and other business purposes. But this information can, and should, be used by your compliance personnel as they monitor customers for suspicious activity. Information developed by your security departments for combating and preventing fraud should also be shared with compliance personnel.”
Larger casinos may have multiple affiliated casinos that could benefit from the sharing of information across the organization, Blanco said.
To facilitate the sharing of information across components of a gaming enterprise, FinCEN issued guidance in January 2017 clearly stating that under the BSA and its implementing regulations, a casino that has filed a SAR may share the SAR, or any information that would reveal the existence of the SAR, with each office or other place of business located within the United States of either the casino itself or a parent or affiliate of the casino, he explained.
Blanco gave another example of BSA disclosures in action. In May 2018, FinCEN settled a case against Artichoke Joe’s Casino, a card club in San Bruno, Calif. The settlement included a $5 million civil penalty with an additional $3 million suspended pending the completion of several remedial undertakings for willful violations of the BSA that occurred over an eight-year period.
FinCEN learned employees—including senior managers—observed loan sharking and other illicit activity taking place on the gaming floor that was not reported.
There was also a failure to address risks associated with some of the gaming practices offered. Artichoke Joe’s offered a practice called “backline betting,” which enabled players who were not at the gaming table to bet on activity at the table. According to FinCEN, the casino had no procedures in place to identify participants in backline betting, despite previous guidance on the topic.
Another lesson learned from the Artichoke Joe’s case is the importance of ensuring that gaming establishments address some of the “basic” requirements outlined in the regulations, Blanco said.
For years, he said, Artichoke Joe’s operated under a written compliance program riddled with blank passages or placeholder language. It was never completed. The casino conducted its first independent test in August 2011, following the execution of search warrants and arrests by state and federal officials.
“Neglecting fundamental issues such as the need for independent testing heightens the risk that your gaming establishment will be exploited by criminal actors,” Blanco said.
With these enforcement actions as a backdrop, FinCEN is encouraging increased information sharing through its voluntary 314(b) Program
“Just like other FinCEN-regulated financial institutions, casinos can share information with one another and with other regulated financial institutions, such as banks, under Section 314(b) of the USA PATRIOT Act,” he explained. “Information sharing under 314(b) can be useful in a variety of ways. It may be particularly useful in helping casinos gain a better understanding of their customers’ sources of funds.”
“As we have noted on multiple occasions, information on source of funds is critical to ensuring compliance with your SAR filing obligations,” he added. “For example, if you have a large foreign clientele, sharing information with other institutions can help you address and report concerns related to foreign corruption.”
“Given the clear and significant value of this information sharing,” Blanco said he is concerned that the number of 314(b) registrations for casinos has decreased since last year.”
At one point, there were more than 200 casinos registered to share information, but today that number stands at 183. And with more than 6,400 financial institutions participating in the 314(b) program, this means casinos make up only 2 percent of registrants.
“This trend is surprising to me,” Blanco said. “This is an area that we want to work with you on, to make sure that we communicate clearly the benefits and importance of the 314(b) program so that all of you can better understand its importance. … The program is voluntary, but FinCEN strongly encourages all financial institutions, including casinos, to participate. Remember that participation means you are able to share with other financial institutions—not just other casinos and card clubs.
Speaking at a legal technology conference in Chicago a few days earlier, Blanco discussed FinCEN’s approach to virtual currency and emerging technology.
“Innovation in financial services can be a great thing—providing customers greater access to an array of financial services and at faster speeds than ever before,” he said. “However, as industry evolves and adopts these new technologies, we also must be cognizant that financial crime evolves right along with it, or indeed sometimes because of it, creating opportunities for criminals and bad actors, including terrorists and rogue states.”
Virtual currency, he said, presents numerous concerns.
“Major money services businesses are looking at how to incorporate blockchain payments to expedite remittances to locations around the world,” he said. “But like any payment system or medium of exchange, virtual currency has the potential to be exploited for money laundering and other illicit finance.”
In 2011, FinCEN issued a final rule amending definitions and other regulations relating to money services businesses to provide that money transmission covers the acceptance and transmission of value that substitutes for currency. Virtual currency is such a substitute and is covered by that regulation. Since then, FinCEN has issued several administrative rulings clarifying how this affects different business models in the virtual currency space.
FinCEN’s March 2013 guidance indicates that rules apply to all transactions involving money transmission—including the acceptance and transmission of value that substitutes for currency, which includes virtual currency.
Businesses providing anonymizing services (commonly called “mixers” or “tumblers”), which seek to conceal the source of the transmission of virtual currency, are money transmitters when they accept and transmit convertible virtual currency, and, therefore, have regulatory obligations under the BSA.
“In short, individuals and entities engaged in the business of accepting and transmitting physical currency or convertible virtual currency from one person to another or to another location are money transmitters subject to the AML/CFT requirements of the BSA and its implementing regulations,” Blanco said.
To comply with these obligations, virtual currency money transmitters are required to: register with FinCEN as a money services business; develop, implement, and maintain an AML program designed to prevent the MSB from being used to facilitate money laundering and terrorist finance; and establish recordkeeping, and reporting measures, including filing SARs and Currency Transaction Reports (CTRs).
“We would also expect financial institutions adopting new FinTech to assess and understand whether the new financial products and services may be vulnerable to exploitation for financial crime; and whether this financial service activity has AML/CFT obligations under FinCEN’s regulations,” Blanco said.
He added: “Compliance does not begin because you may get caught, or because you are about to be discovered. That is not a culture that protects our national security, our country, and our families. It is not a culture we will tolerate. A strong culture of compliance should be part of building your operations from the ground up, and you can expect that we will identify where this is not taking place and take appropriate action.”