Legalized casino gambling and sports wagering are approaching the finish line in Virginia following the recent passage of two bills by the Virginia General Assembly. Senate Bill 36 and House Bill 896, both awaiting the signature of Virginia Governor Ralph Northam, would permit five land-based casinos, online sports betting and up to 2,000 additional historical horse racing machines.
On August 13, Financial Crimes Enforcement Network (“FinCEN”) Director Kenneth Blanco addressed the 12th Annual Las Vegas Anti-Money Laundering Conference and provided insights on his agency’s expectations for the ever-evolving gaming industry.
The following are some key takeaways:
Cost Cutting Poses National Security Threat. Director Blanco stressed that reports of compliance budget cuts by casinos looking to trim costs and retain gamblers is seen by FinCEN as a national security issue and not something the agency takes lightly. Further, despite FinCEN not publicizing any enforcement actions against a casino during the last year, it is continually looking at compliance across all financial institutions and will not hesitate to act if it identifies violations of the Bank Secrecy Act (“BSA”). It is also important to note that not all enforcement actions are public—FinCEN often closes cases with warning letters sent to financial institutions or refers cases to our delegated examiners for additional review.
Casino Industry Trends. In terms of suspicious activity being reported in 2019, Minimal Gaming with Large Transactions is the highest reported activity with more than 5,000 Suspicious Activity Reports (“SAR”) reflecting this activity. Reports of Chip Walking have dramatically increased since this was added to the SAR form in the summer of 2018. Chip Walking is now the second most selected suspicious activity on the SAR form, with more than 4,400 reports being cited this year to date.
The other frequently cited suspicious activities include:
- Transactions below CTR Threshold
- Unknown Source of Chips
- Two or More Individuals Working Together
- Alteration or Cancelation of Transactions to Avoid CTR Requirement
- Suspicion Concerns on the Source of Funds
Additional analysis of trends reported by casinos checking the “other” box on the SAR form includes reports of suspicious activity involving sports betting, abandoned jackpot, and bill stuffing.
Sports Betting and Mobile Gaming. Casinos and card clubs must integrate sports betting and mobile gaming products into their existing AML programs. FinCEN expects casinos and card clubs to collect cyber-related indicators through their mobile gaming or betting applications in order to monitor and report potentially suspicious activity. Examples of such cyber-indicators include: source and destination information, file information, subject user names, system modifications, and account information.
Relevance of Convertible Virtual Currency (CVC) Advisory to Casinos. There are generally two areas where CVC will intersect with casinos and card clubs: so-called CVC casinos on the internet, and physical casinos and card clubs that accept CVC for gaming.
As FinCEN’s CVC guidance points out, internet gaming sites that operate online without licensure from a state or tribal gaming regulator are not “casinos” for purposes of regulations implementing the BSA. However, they are likely operating as money transmitters. Money transmitters have their own obligations under the BSA and its implementing regulations, which includes a formal registration with FinCEN.
Casinos and card clubs that accept CVC from customers either on location or through mobile applications, need to ensure that CVCs are accounted for in policies, procedures, internal controls and risk assessments. This includes developing processes for reviewing and conducting due diligence on transactions in CVC, for conducting blockchain analytics to determine the source of the CVC, and incorporating CVC-related indicators into SAR filings.
Culture of Compliance. Critical to fostering a culture of compliance is utilizing enterprise-wide information and ensuring such information gets into the hands of compliance personnel. For example, information developed by casinos for business and marketing, as wells as information developed by casino security departments for combating and preventing fraud should be used by casino compliance personnel to monitor customers for suspicious activity. Similarly, a casino’s legal department should alert compliance personnel when a subpoena is received as it could trigger reviews of customer risk ratings and account activity. Moreover, larger casinos may have multiple affiliated casinos that could benefit from the sharing of information across the organization.
Innovation and BSA Value. In January 2019, FinCEN began an ambitious project to catalogue the value of BSA reporting across the entire value chain of its creation and use. The project will result in a comprehensive and quantitative understanding of the broad value of BSA reporting and other BSA information to all types of consumers of that information.
As an example, given the current state of the opioid epidemic, something a minor as the mobile phone number of a suspect from a casino SAR could be vitally important to a DEA agent since the suspect would provide a real phone number to ensure he is called when his winnings are wired out to a bank account. Using that mobile number, the agent can build out a communication tree and identify new individuals, entities, addresses or accounts. A DEA agent can also use this information to seek legal approval to wiretap or track the movement of the phone, identify potential informants, and build out a network of associates.
Last week, the United States District Court for the Eastern District of Pennsylvania, Judge Jeffrey Schmehl, granted the Motions to Dismiss of Sands Bethlehem Casino Resort and other Pennsylvania casinos, which were alleged to have engaged in a retaliatory boycott impacting a mixed martial arts (MMA) promoter’s events. Sands Bethlehem was alleged to have engaged in a boycott of plaintiff’s events as a retaliation for a prior lawsuit promoter Ryan Kerwin filed against Valley Forge Casino and Harrah’s in Chester, Pennsylvania.
Sands, Parx and Sugarhouse Casinos and their respective event directors faced allegations that certain emails cited in the Complaint established a conspiracy. The plaintiff alleged that the defendants’ “horizontal group boycott” would put the plaintiff promoter out-of-business. The Court found the emails, at best, demonstrated nothing more than unilateral action by the individual casinos. There was no “plus factor” in the complaint’s allegation that would have shown a motive, actions that were against the individual casinos’ economic interests or, evidence that implied a traditional conspiracy. In the Sands instance, it was alleged that Sands actually emailed with plaintiff offering to contract for MMA events but plaintiff would not agree to Sands’ “inflated terms”.
Judge Schmehl found that nowhere in the Amended Complaint did there appear evidence of “a conspiracy that supports an inference of collusion.” The Court’s holding that plaintiff failed to plead an unlawful agreement precluded an analysis of the other elements of the Section I Sherman Act claim.
The Court also dismissed claims that the defendant casinos (and Harrah’s and Valley Forge) were collective monopolists by keeping essential facilities from the MMA promoter. The plaintiff’s own pleadings that MMA events were staged elsewhere in Pennsylvania, other than the casinos’ event centers, convinced the Court that defendants’ properties were not “essential facilities”.
Sands was represented by Duane Morris lawyers – Manly Parks and Sarah O’Laughlin Kulik.
On January 14, 2019, the U.S. Department of Justice published a legal opinion that may restrict online gambling. The opinion, dated November 2, 2018, (although only now published) reconsidered the DOJ’s 2011 opinion that declared the Wire Act (18 U.S.C. § 1084) only applied to sports gambling. After the release of the 2011 opinion, several states, including New Jersey, Delaware and Pennsylvania, launched or moved forward with intrastate online lottery, casino gaming and poker. The new opinion, however, somewhat clouds the landscape regarding these operations. Online gaming businesses would be well advised to quickly determine whether their operations comply with the DOJ’s new reading.
The reconsideration stems from one phrase in the Wire Act: “on any sporting event or contest.” In 2011, the DOJ opined that the Wire Act was ambiguous and “that the more logical result” was that the phrase “on any sporting event or contest” applied to the entirety of the Wire Act, thereby prohibiting only the transmission of “bets or wagers” or “information assisting in the placing of bets or wagers” across state lines, if the bet or wager were on a sporting event. This logic follows in part from the Act’s legislative history, which reveals that Congress’ overriding goal in passing the Wire Act was to stop the use of wire communications by organized crime for illegal sports gambling. In 2018, the Supreme Court of the United States, in Murphy v. Nat’l Collegiate Athletic Ass’n—a decision that paved the way for states to authorize sports betting, in dicta—noted Congress’ original intent in characterizing a general federal approach to gambling: Operating a gambling business violates federal law only if that conduct is illegal under state or local law.
As a result of the previously reported reimposition of United States nuclear-related sanctions against Iran, on October 11, 2018, the Financial Crimes Enforcement Network (FinCEN) released an Advisory that provides casinos, and other financial institutions, updated guidance for identifying possible Iranian related criminal transactions.
Just as the growth of fantasy sports, sweepstakes and online poker were curtailed by the reach of gambling laws, the latest trends in the $138 billion video gaming industry are attracting an increasing level of unsolicited attention from gambling regulators across the globe. Much of this attention is focused on “loot boxes”.
On Monday, three-fifths of each house of the New Jersey legislature passed resolutions that will put a question on the ballot in November asking voters if they want to expand casino gaming outside of Atlantic City. As we previously posted here and here, the North Jersey casino proposal will allow for two casinos to be located at least 72 miles from Atlantic City, in separate counties. The minimum investment required for a North Jersey casino will be $1 billion. Current Atlantic City casino owners will be given an exclusive period of 60 days to submit bids for the two North Jersey casino licenses before bidding is opened up broadly. Current owners of Atlantic City casinos may partner with other investors/developers to submit a bid for a North Jersey casino license.
If New Jersey voters pass the referendum in November, the legislature will then need to adopt enabling legislation. This legislation will provide the details for the bidding process and the tax rate for North Jersey casinos. Atlantic City casinos currently pay an effective tax rate of 9.25% on gross gaming revenue. North Jersey casinos likely will be required to pay a significantly higher rate, perhaps in excess of 50%.
We will provide updates as developments occur.
On February 25, 2015, John Payne, Chairman of the Pennsylvania House Gaming Oversight Committee, introduced a bill that would allow existing Pennsylvania casinos to offer Internet gaming to patrons in Pennsylvania. The Pennsylvania Gaming Control Board (PGCB), which currently regulates casino gaming in the Commonwealth, would be responsible for licensing and regulating Internet gaming, as well. Under the bill, only existing casino licenses, or their affiliates, will be eligible to offer poker and other casino style games over the Internet. The proposed legislation also calls for the licensing of “significant vendors,” which would include operators of interactive gaming systems on behalf of the existing licensees. Importantly, the proposed legislation does not include a “bad actor” provision that would bar individuals or entities previously associated with illegal Internet gaming activities from being licensed by the PGCB. However, applicants would still be required to satisfy Pennsylvania’s suitability requirements, and it remains to be seen what view the PGCB will take of applicants who may have previously engaged in unlawful Internet gaming activities.
Subject to the limits under federal law, the bill limits participation in Internet gaming to those physically present in Pennsylvania, or from states with which Pennsylvania negotiates an Internet gaming agreement. The bill contemplates a rapid implementation cycle by requiring the PGCB to decide a licensing application within 120 days of a proper application being submitted. The PGCB may also grant temporary authorization to any vendor upon the filing of a complete application.
To read the full text of this Alert, please visit the Duane Morris website.