Internet, Casinos and Money Laundering

Reprinted from Journal of Money Laundering Control - 1998

Money laundering, casinos and the Internet may become unavoidably intertwined in the next decade. Money laundering is the process by which criminals transform the money that they receive from criminal activities into funds that appear to have been generated by lawful means and cannot be traced by law enforcement to their illicit sources. While the magnitude of money laundering is unknown, law enforcement authorities estimate that it consists of an annual $100bn-$300bn in US currency,¹ and a rough estimate of an `annual worldwide . . . range of $300 to $500 billion'.²

Money laundering involves three steps.³ The. first is placement, which involves changing the form of the funds into a less suspicious, more easily manipulated form. Placement is the most well-known phase of money laundering. Criminals, particularly drug dealers, tend to accumulate their money in smaller denominations as the proceeds of their criminal activities such as the sale of drugs to customers. These funds tend to be bulky and difficult to transport. Therefore, methods need to be devised to convert the smaller bills into larger bills, bank cheques, money orders, traveller's cheques, or some other form of cash equivalent.

The next step is to layer the funds. Layering is the method by which criminals distance themselves from the converted funds. The idea is to provide a series of financial transactions that inhibit the ability of law enforcement to track the money back to their owner or source. This frequently involves wire transfers between bank accounts, often in foreign countries. The final step is integration, which involves transferring the layered funds from the foreign country into the mainstream financial world in the USA through a transaction that has legitimate commercial purpose.

Undoubtedly, casinos have often been perceived as connected with organised crime. The general public is well aware of stories reporting a connection between organised crime and casinos in pre-Castro Cuba and their subsequent operation in Great Britain before the Gaming Act of 1968. Casino gambling is carefully regulated in many countries since it is `an expanding industry which is central to the development of tourism' and has been `increasingly international in scale'.⁴

Concern over money laundering, and casinos, however, go beyond historical connections with organised crime. Casinos have drawn the attention of money launderers because they are involved in a cash business that could assist in both the placement and layering of illicit funds. A money launderer may attempt to place funds by depositing them with a casino and requesting the casino transfer the funds to his or her bank account. Another method would be to deposit the funds and receive a negotiable instrument that is easier to deposit elsewhere or to take outside the country. As opposed to simply depositing the funds, and expecting the casino to return them in a different form, the money launderer may attempt to disguise the funds as winnings through a series of wash transactions. For example, placing a bet on both teams in a football game or on both red and black on a roulette table would be a wash transaction. Nevertheless, the person could argue that one-half of the money returned on the winning bet was `winnings'. This changes the origin of the funds from the proceeds of an illegal activity to the proceeds from winning bets.

The issue of money laundering has been cited as a reason both for and against legalising casinos. In Brazil, Roman Catholic spokesmen have warned against legalisation of casinos partly because of fear of money laundering.⁵ Likewise, the powerful Moslem Judicial Council has urged the rejection of casinos in Capetown, South Africa, partly because `casinos are known to be placed for money laundering . . . .⁶

In some circumstances, casinos are closed down because of money laundering. For example, the Turkish Government recently closed down casinos partly because of the problem of money laundering.⁷ The closing of Turkey's 78 casinos was facilitated by the killing of Omer Topal, known as Turkey's casino king, which was ordered, in the opinion of his widow, `by rivals who were not with money laundering arrangements he made or refused to make'.⁸

Some countries that have illegal casinos have taken measures or are in the process of legislation to legalise casinos. In Venezuela, legislation will permit casinos in only five-star hotels and `customers with more than $5,000 (£3,000) in cash must now report the origin of their funds'.<sup>9</sup> Venezuela's illegal casinos have been considered one of the major money laundering channels. In fact, in May 1998 a key Mafia drug king was arrested while travelling to Venezuela where he allegedly owned hotels and casinos.<sup>10</sup> If Venezuela legalised casinos, hundreds of illegal casinos would be closed which would eliminate 'one of the principal channels of widespread money laundering'.<sup>11</sup> One must be wary of unsubstantiated comments about the connection between casinos and money laundering. For example, the following statement was made and repeated throughout the media. `Italian organized crime groups, for example, have used banks and casinos in Nicaragua to launder their money...'¹² Nobody asked why anyone would want to bring money into one of the poorest countries in the Western hemisphere and this assertion has no citation or other substantiation.

While it is difficult to generalise about the relationship of casinos to money laundering, certainly nobody would disagree that casinos would be one place where it is common to carry large amounts of cash. If casinos are illegal but tolerated, it may be impossible to control money laundering. If casinos are legal but unregulated or under-regulated, there may be a strong likelihood of money laundering.

Macao, which is scheduled to become part of the PRC by the end of the century and which has flourishing casinos is `better known as a mecca for organized crime, loan sharking, prostitution and money laundering. . . . Lack of effective regulatory control has resulted in 'recent slayings in broad daylight of three security officials -- a top gambling inspector, a marine policeman, and the driver for the territory's secretary for security'.¹³ It is generally agreed that Aruba is a 'good example' of everything that is wrong in the regulation of casinos. In Aruba, there are approximately 11 casinos that in 1995 paid licensing fees of about $8.5m. Coopers and Lybrand in a report recommended: (1) the requirement of the identity of casino owners, since in 'money laundering operations, the original beneficial owner is hidden via a structure of affiliated entities using bearer shares to conceal the identity of the shareholder'; (2) registration and documentation which are essential characteristics for transfer of monies; (3) the initiation of the Nevada Minimum Internal Control Standards which 'restricts itself to the essentials'; (4) a gaming board; and (5) $11,255 as the amount to require mandatory reporting.¹⁴

One method that has been used to minimise or escape regulatory control, and thus maximise money laundering potential, is the establishment of cruises to nowhere. In Mexico, for example, an investment group including Ladbroke Plc and RAK Enterprises (US) plans to operate an offshore casino cruise (Cancun) which would circumvent Mexico's anti-gambling laws. This will probably be the first of several ventures, since the government, which has not yet legalised casinos, has opined that nothing can be done because these cruises would be in' waters beyond Mexico's jurisdiction.¹⁵

Within Florida, Gus Boulis owns 11 of the 26 gambling boats operating off Florida's coast. Unlike New York City, which conducts background checks on operators and inspects financial records, Florida has no laws concerning 'floating' casinos. Boulis, who withdrew his New York City application after 'an extensive and comprehensive investigation', acknowledged the New York City 'bureaucracy was a little too much'. Boulis knows people suspect gaming boats are used for money laundering. 'What people did in the past with laundering money and all those things . . . is not our business . . . We just like to sleep at night, [knowing] that we do everything for the best of our employees and our customers.'¹⁶ While the federal government, through US customs, is supposed to be informed when a casino collects over $10,000, a governmental spokesperson had admitted the law was unenforced because of limited federal resources. Suddenly, on August 4, state and federal officials, pursuant to a warrant, seized between 50 to 60 boxes of Bulis's corporate documents. On August 3, a federal civil complaint sought $47.5 million from him for, inter alia, falsely receiving mortgages and certificates and false documentation concerning the vessels.

In contrast to Florida, New York City has established a gaming control commission for gambling cruises to nowhere. Applicants must pay $100,000 plus costs. `The commission will scrutinize the owners, operators and investors as well as the key vendors. Criminal background checks through the FBI and Interpol will also be conducted on the employees. The city will check to see if there are any judgments or liens against the owners. The city will also periodically test some of the gambling equipment.'¹⁷

In some circumstances, a country might decline to have casinos partly out of fear of money laundering problems. In the Report of the Commission on Casino Gambling in Barbados,¹⁸ 'the fear of money laundering was specifically considered in so far as financial institutions were concerned and in so far as casinos might be used for such an activity'. While one expert testified how difficult it would be to use illicit money in order to set up a gambling operation because of banker vigilance, if `on the other hand you were to have gamblers who were to come in with a brief case of $1 million and buy chips and then get a check back, then that might be a way to get the funds into the system depending on the bank that the casino operators use'. The Report recommended the right decision -- not to have casinos -- for the wrong reasons, namely, religious opposition and the alleged 'serious economic and social costs'. Barbados, which already had fruit machines, had no effective regulatory body to supervise them. Unless Barbados is willing to develop a strong regulatory body, along the British or Bahamian model, casino development might have opened the door to criminal involvement and its concomitant money laundering problem.

It is interesting that money laundering was not the major factor in the rejection of casinos.

'With respect to money laundering and drug operations we were told that, in the view of the Research and Planning Department, it would not be surprising to learn that casinos in the Caribbean territories mentioned earlier, were involved in these activities, and that because casinos handle large sums of money, it was easy to conceal the association. There was in the oral submission, evidence that "It expands and expands to the point where they begin to invest their money through the casinos and then through the other areas." This view seemed to conflict, certainly so far as money laundering was concerned, with other views expressed before us on the control and measures used to minimize the incidence and scope of the activity.'¹⁹

It is agreed among gaming experts that if casinos are to be kept free of criminal domination and its association with money laundering, they must be subject to strong administrative control.

In May 1998, the topic of casinos and money laundering received international publicity as a result of the US federal sting named 'Operation Casablanca'. This three-year sting, commencing in November 1995, 'was part of what law enforcement officials describe as the largest drug-money laundering case in US history, one that for the first time tied Mexico's banking system directly to the wholesale cleansing of illicit drug profits'.²⁰ Casablanca was the purported Nevada casino where federal agents told the bankers and drug traffickers that 'they held an interest in the casino and moved money through it'. After dinner at Casablanca, 'designed to look like a set from a classic Bogart movie', the convoy of limousines was stopped by federal officials. The bankers 'were lured to Los Angeles and Las Vegas by undercover agents offering them new money-laundering schemes'.

As a result, over 22 Mexican bankers along with many drug dealers were arrested or indicted including managers of 12 of Mexico's largest banks. Three of the most prestigious banks also face money laundering charges and federal officials expect to obtain between $100m and $150m in asset forfeitures.²¹

Since the USA believed Mexico's judiciary and law enforcement officials were plagued by corruption, the US authorities neither informed Mexico about the undercover probe nor sought joint cooperation. An attempt by Mexico to extradite US drug agents for violating Mexican law in the undercover probe predictably was rejected by the House of Representatives in a 404 to 3 non-binding vote.²²

What is remarkable is that any sophisticated individual could believe that it would be possible to engage in money laundering with the support of any Nevada casino. In order to obtain a gaming licence, it is necessary to prove suitability by advancing whatever fees the gaming board deems necessary. In case of doubt, the individual is denied a licence.

In Nevada there is a bifurcated system with a three-person full-time Gaming Control Board and a five-person part-time Gaming Commission. If the Board recommends denial of a licence, the Gaming Commission must unanimously support the applicant. There is no judicial review from a licence denial. An investigation into an applicant's background will delve into every aspect of one's finances.

'Virtually every criminal charge, including charges as a minor, will be subject to inquiry. Financial agents initially review five to ten years of financial records. Although the agents usually focus on the last ten years, an applicant has no assurances that the agents will not review a transgression that occurred twenty years ago.'²³

An example of the application of Nevada's strict standards occurred during the early 1980s when a group of business persons from Western New York sought a

'license to open a race and sports book in Las Vegas. [The chief of investigation] flew a team of agents to the East Coast to investigate the men. As the initial interview neared an end, the agents asked to audit a safe deposit box that one of the applicants had at a nearby bank. The businessmen were obviously taken by surprise. "When we did the audit on the box," [the chief of investigation] recalled, "we found $25,000 in cash, in $100 bills, with a note that said, Payoff money for Las Vegas." The men were allowed to withdraw their application.'^23a

Nevada investigators will demand that the proposed licensee pay investigative costs up front, and in the case of a potential licensee such as a Japanese applicant, the investigation will be quite costly. However, once the suitability of the licence holder has been established, considerable discretion is given to the business judgment of that licensee. Still, laws are so strict that one casino was fined $250,000 for trying to enforce a legal Nevada gambling debt in Korea, where it would violate Korean law on the export of currency.²⁴

'"By violating the laws of the Korean government in order to facilitate gaming business", the complaint reads, "the Tropicana failed to exercise discretion and sound judgment to prevent incidents which might reflect on the repute of the state of Nevada and act as a detriment to the development of the industry".'

New Jersey, with many of its grandmotherly laws, is even stricter than Nevada and the Gaming Board of Great Britain, which is subject only to the rules of natural justice, makes the licensing process for gaming applicants in Nevada and New Jersey seem almost easy. The system of ensuring suitability has worked so well in the USA that even a report critical of gaming has concluded that the `accusations about organized crime influencing casinos . . . are remarkable for their absence, with the exception of Louisiana'.²⁵

NEW JERSEY

New Jersey casino law, unlike Nevada but similar to Great Britain, had many grandmotherly laws which regulated 'everything from casino design to interior decorations'.²⁶ Yet, the state since the early 1990s because of budgetary problems reduced the state inspectors controlling casino money laundering by over one-half.²⁷ A possible reason for this reduction is that unlike Nevada, New Jersey has not assumed primary responsibility for money laundering. New Jersey casinos are subject to the Bank Secrecy Act, as administered by the federal government. New Jersey may feel the financial burden for police money laundering, therefore, should fall on the federal government.

The problem was exacerbated by the lack of casino auditors and regulators, especially after 5 pm.

'"It was ridiculous down here", says one casino supervisor who asked not to be named for fear of job retaliation. "We'd have some people come walking in here, literally with suitcases full of cash, put it up on the counter and ask to open an account. It didn't take a genius to figure out where the money was coming from, but there wasn't any law against it, either".'²⁸

The problem was complicated further by the significant backlog of FinCEN, the federal agency, eg the average backlog for 127 pending penalty matters was 2.8 years. Between 1986 and 1990, the IRS completed reviews of ten of the 12 casinos and identified technical reporting and record-keeping violations. Consequently, the Department of the Treasury (FinCEN) assessed $2.48m in civil penalties. In 1998 FinCEN again assessed $447,00029 in penalties against Trump's Taj Mahal for failing to file federal reports 106 times during 1990-91. While the penalties could have been $25,000 per violation, the Taj Mahal was assessed only $4,500 per violation because of the casinos cooperation with the investigation and 'otherwise laudable BSA compliance programs'.³⁰

Regardless of the reason, along with the ease of cashing cheques at other institutions, New Jersey has been viewed as having a 'relaxed approach to money laundering enforcement'. In effect, there are three types of casino money laundering schemes that exist in New Jersey: (1) make a large deposit of small, dirty bills at a casino bank, place a few small bets and return the next day and withdraw deposit in either $100 bills or a voucher cheque; (2) employ couriers to play fruit machines by inserting dirty money into the 'machine and then cashing out credits which can be cashed in for large bills; and (3) 'for more sophisticated criminal financiers, it is not even necessary to make withdrawals. Armed with an account number, they can simply direct a casino to wire the money overseas in seconds'.³¹

Law enforcement officials have on occasion been successful against casino money laundering through either a sting operation or sheer luck. As a result of federal state effort, resulting in part from the 1996 Report on Casinos by the GAO³², four mid-level casino executives were approached by governmental individuals asking whether they would assist in the laundering of drug money. Federal officials, posing as drug dealers, were assisted in opening casino accounts under false names and then exchanging what appeared to be dirty money for 'voucher' cheques and then filing false reports. Consequently, the individuals were indicted under a mufti-count complaint and could face a 20-year prison term and $500,000 for each money laundering charge.

Until this sting, 'only five people had been arrested for money laundering' in Atlantic City since the casinos began operations in 1978. In fact, 'state oversight is so lax that Atlantic City casinos have become virtual Laundromats for soiled money', and 'the odds of getting caught laundering money in Atlantic City are about the same as winning the lottery'.³³

One can get caught, however, if one is careless. For example, a Brazilian engineer and his daughter checked into an Atlantic City casino/hotel with 35 pounds of over $350,000 cocaine-dusted small bills. For nine days they laundered the money through house banks in five casinos and returned with stacks of $100 bills. The daughter then became impatient and 'began shoveling cash into several different' fruit machines which attracted the attention of security officers when they saw her on closed circuit TV. When they followed her to her room, they found 'stacks of bills, boxes of toys and a heat-sealing machine for concealing the money'.

The problem is that reports are filed by casinos, but they remain unread. For example, the New Jersey Division of Gaming Enforcement's staff 'is so small that it takes a month to review deposits at a given casino and identify suspicious actors ... [Money launderers] are out of reach before we even know they've been here'.

New Jersey did not even prohibit money laundering until 1994. Proposed legislation would limit cheque cashing to $2,500, except for government or insurance cheques. Law enforcement officials stress that adopting Nevada regulations which ban casinos from exchanging over $3,000 in bills would have a positive impact against money laundering.³⁴ Yet, what is really needed are more state officials on the gaming floor in order to stop money laundering activity at once.

NATIVE AMERICANS

Native American casinos have grown drastically since the Indian Gaming Regulatory Act of 1988. Native American casinos, pursuant to IGRA, were required to comply with IRS currency reporting (IRC Sect. 60501). Between 1988 and 1994, Indian gaming operations increased from virtually nothing to about $41bn.³⁵ It was not until the Money Laundering Suppression Act of 1994 that tribal casinos became subject to BSA reporting. On 1st August, 1996, the Department of Treasury's proposed regulations for tribal casinos had become effective.

One unsubstantiated complaint against Native American gaming used by Donald Trump and others would be that Indian gaming was influenced by organised crime. That has not been the case. Native American gaming is subject to careful regulations by the National Indian Gaming Commission and by tribal gaming commissions. There has, however, been financial sloppiness and some disorganised crime resulting in occasional money laundering. Two Cabazon Indian executives were accused of illegally laundering political contribu-tions to sympathetic candidates from casino revenues.³⁶ A former tribal planner of the Chippewa tribe pleaded guilty to a money laundering/fraud charge where the laundering of up to $370,000 of casino monies went to a bogus corporation.³⁷ In June 1996, various members of the White Earth Chippewa (Minnesota) tribe were found guilty of various charges including money laundering pursuant to 18 USC s. 1957. They had created a tribal compact to oversee casino operations and then created commissions that did nothing when they received sums of money.³⁸

One major case involving organised criminal figures involved the Rincon Indian reservation in California. Indictments claim organised criminal figures had attempted since 1991 to control video poker on the reservation and the indictments charged money laundering as well as other counts. The indictments in California and Pennsylvania alleged organised crime laundered $2.1m to open the tribal casino.³⁹

What may be especially disturbing concerning money laundering is the opening of two Native American banks in Indian City, Oklahoma (the Apache First Americans Trust Company and the Delaware Tribes First Lenape Nation Bank). These banks utilising the Internet promise Swiss-like secrecy.⁴⁰ While there is no direct connection with Internet gambling, First Lenape advertises on the Internet that its accounts are 'wholly insulated from attempts by government agencies to obtain customer account information or to levy or seize customer funds. For example, federal administra-tive agency subpoenas, liens, levies and seizures are insufficient mechanisms with which to obtain customer account information or to levy or seize customer funds. Wholly insulated from the judicial judgments of state district courts.'

Native American gambling interests have also indicated interest in establishing Internet gambling. The Coeur d'Alene has begun Internet lotteries in about 36 states where it is legal and in other countries. Certain state attorneys general have tried to prevent the tribe from conducting a lottery in Wisconsin and Minnesota and AT&T is in a quandary as to whether it may legally provide facilities to the Coeur d'Alene.

OTHER U.S. JURISDICTIONS

There are some states eg Colorado and South Dakota that allow small stakes casino gambling, which is unsuitable for money laundering. Other states such as Iowa, Illinois, Indiana and Missouri have riverboat gambling. While it may be difficult to conceive of money laundering in those states where boats are required to sail, federal agents stress the criminal element try to launder money at riverboat casinos. In Mississippi, organised crime attempts to use casinos for money laundering have resulted in prosecution.

Admittedly, the problem of money laundering may still remain notwithstanding the suitability of gaming operators. For this reason, legislation has been enacted in many countries in order to minimise money laundering at casinos. Specifically, the US Government has enacted: (1) cash transaction reporting laws; and (2) money laundering laws with forfeiture of assets.

CASH TRANSACTIONS

While the Bank Secrecy Act 1970 (BSA), which is really a disclosure law, required banks to report single or aggregate daily cash transactions over $10,000 to the federal authorities, it was inapplic-able to casinos until 7th May, 1985. In 1985, the Secretary of the Treasury, pursuant to his rule-making power authorised by the BSA, made casinos (gaming establishments with an annual gaming revenue of over $1m) subject to the Bank Secrecy Act. In 1984 the Internal Revenue Code was amended to require businesses to report large cash transactions with customers (Title 26).

What might seem unusual or even incredible to a European reader is the agreement in May 1985 between the federal Department of the Treasury and the Nevada Gaming Commission that allowed Nevada to enforce Nevada Gaming Commission Regulation 6A in lieu of federal regulations or laws.

Regulation 6A focuses on preventing certain transactions, while the federal regulations focus on reporting of these transactions. Regulation 6A's prohibitions and reporting requirements are designed to discourage the laundering of money obtained through illegal activities, and to provide intelligence data to United States agencies, such as the Department of the Treasury, the Internal Internet, Casinos and Money Laundering Revenue Service, and the Customs Service. Failure of a casino to comply with Regulation 6A can result in severe penalties, including revocation of the casino license and the imposition of fines and prison terms on the people involved.⁴¹

The cash transaction rules under both federal and Nevada law are similar. Each has four major components: recordation, cash transaction reporting,suspicious activity reporting and prohibiting transactions. Cash transaction reporting is the most well known of the requirements. This requires financial institutions, including the casinos, to report cash transactions with third parties that exceed $10,000 and the transfer or transportation of cash or monetary instruments in such amounts into or out of the USA. Under these laws, cash is generally defined to include cash equivalents such as money orders, bank cheques, bank drafts and traveller's cheques.

A cash transaction generally occurs any time the financial institution receives (cash in) or pays (cash out) more than $10,000 in currency to any third party. Because of the unique nature of the casino industry, the law defines what constitutes both cash in and cash out. The following are examples of both:⁴² transactions in currency involving cash which include, but are not limited to, purchases of chips, tokens and plaques; front money deposits; safekeeping deposits; and cash wagers. Transactions in currency involving cash out include, but are not limited to, redemption of chips, tokens, and plaques; front money withdrawals; and safekeeping withdrawals.

In 1994, the BSA was amended by the Money Laundering Suppression Act, and in May 1994 the Secretary of the Treasury empowered FinCEN⁴³ to be responsible for the anti-money laundering rules pursuant to the BSA. Native American casinos which flourished as a result of the Cabazon decision and the Indian Gaming Regulatory Act were subject to the Bank Secrecy law only on lst August, 1996.⁴⁴ In 1998, card clubs, 90 per cent of which are in California and where over $9.lbn was wagered in 1996, have also been made subject to proposed Bank Secrecy rules.⁴⁵ Predictably, FinCEN has been criticised by the General Accounting office of the USA for this long period of regulatory time.⁴⁶

Recording requirements differ from reporting requirements in that they require the financial institutions to note, but not report, certain information. This information, however, must be made available to government inspectors and allows them to trace the details of financial transactions. In the context of casino gambling this includes receipt or disbursements of cash at levels lower than the reporting thresholds, extensions of credit, wire transfers, play or transfer records and cheque cashing records.

Prohibited transactions refer to transactions that a casino may not consummate with a patron. Only Nevada prohibits certain transactions. The federal government, however, has proposed similar prohibitions for all casinos. The major prohibited transaction in Nevada is the exchange of cash between a casino and a patron where the exchange involves more than $3,000 in US currency or involves the casino issuing a cheque or completing a wire transfer in exchange for $3,000 in cash. These prohibitions are designed to prevent the casinos from being used to place or layer illicit funds.

Nevada casinos must report all suspicious transactions where the casino knows or, in its subjective judgment, suspects a transaction that: involves funds derived from illegal activities or is conducted or intended to hide or disguise funds or assets derived from illegal activities as part of a plan to launder the proceeds;⁴⁷ or is designed wilfully to evade any requirement of Regulation 6A including the structuring of transactions or attempting to structure transactions; or has no business or apparent lawful purpose or is not the sort of transaction in which the particular patron would normally be expected to engage, and the casino knows of no reasonable explanation for the transaction.⁴⁸ Casinos and card clubs, pursuant to a FinCEN proposed rule⁴⁹ will be required to file a Suspicious Activity Report on Casinos (SARC) if the gambling establishment suspects a transaction of $3,000 or more is linked to illegal activity or has no legitimate purpose. This already is mandatory in Nevada as of 1st October, 1997.

This action was encouraged by the GAO report on the growth of casinos as well as the FATF report that financial institutions that suspect funds stem from a criminal activity be required to report promptly their suspicions. The delay in the FinCEN report was largely the result of a two-year turf dispute with the Securities Exchange Commission.⁵⁰ Nevertheless, FinCEN plans to hold hearings in various cities to allow comments from the gaming industry and other interested parties.

In July 1998, FinCEN⁵¹ issued a 'Guideline for Detecting and Reporting' suspicious casino activity. It specifically listed 'ten broad categories of potentially unusual, suspicious or criminal activity'. Among the 41 examples are the following:

Unusual Activity for Casino Environment A customer purchases chips with currency (eg in excess of $3,000), wagers with little chance of loss (eg bets both red and black on roulette), then moves to other gaming tables and conducts similar transactions and later goes to the cage to redeem the chips for large denomination currency or a casino check at $10,000 or just under that figure.

* * *

Layering Transactions to Disguise Source A customer exchanges, at the cage (or slot booth), large amounts of currency (eg in excess of $3,000) from small to large denomination bills, which are easier to hide or transport.

* * *

Customers Engaging in Minimal Gaming Activity without Reasonable Explanation A customer purchases a large amount of chips (eg between $5,000 and $10,000) with currency at a table, engages in minimal gaming, and then goes to the cage and redeems the chips for a casino check.'

MONEY LAUNDERING LAWS

The Money Laundering Control Act of 1986 criminalises and provides civil penalties for the structure of transactions to avoid BSA reporting. In the opinion of one expert, these aggregation rules on federal and state levels 'can easily be avoided'.⁵² In 1994 Congress expanded the definition of financial institutions to include casinos.⁵³

The Money Laundering Act introduced the new offences of laundering of monetary instruments (18 USC s. 1956) and 'engaging in monetary transactions and property derived from specific unlawful activities' (18 USC s. 1957). Occasionally, money laundering application to casino gambling is not what it seems. For example, in March 1998 the US Attorney for the Southern District of New York issued criminal complaints against 21 Internet owner/operators and managers alleging a conspiracy to violate the Wire Act (18 USC s. 1084). All had operated facilities with an 800 number and operated out of jurisdictions such as Antigua, Grenada, Curacao, Costa Rica and the Dominican Republic. In every instance, federal agents placed bets and were promptly paid upon winning.

One commentator suggested that the operators, although apparently honest, could have been and might be prosecuted under 18 USC s. 1956, the federal anti-money laundering statute. This law does not require any effort to conceal unlawful activity proceeds, but instead imposes culpability,

'knowing that the property involved in a financial transaction represents the proceeds of some form of unlawful activity, [he] conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity [eg the Wire Act] with the intent to promote the carrying on of specified unlawful activity.⁵⁴

The offence could result in a harsher prison sentence and a larger financial penalty. In the author's opinion an offshore site would offer 'almost no protection against a charge of money laundering'. Often the statutes are used by prosecutors to force a plea bargain.

The Financial Action Task Force (FATF), a well-respected multi-state organisation, has stressed the importance of enhanced money laundering controls. It has issued an oft-cited report on money laundering control, namely, the Financial Action Task Force Annual Report 1997-1998. The FATF is 'an intergovernmental body whose purpose is development and promotion of policies to combat money laundering'.⁵⁵ Its membership includes 26 countries and the European Commission and Gulf-Cooperation Council. It suggested in its 1997-98 Report that 'in the United States there is also a pressing need to finalize and implement the proposed [suspicious person] regulations to significantly enhance anti-money laundering controls over many categories of non-bank financial institutions, particularly . . . casinos . . . .⁵⁶

The FATE had praised the Netherlands for expanding reporting obligations to casinos,⁵⁷ as well as Belgium (where casinos are tolerated but not legal), Finland and Italy.⁵⁸ In fact, in 1995 the Netherlands mandatory reporting system has resulted in disclosure indications that are objective (cash deposits over 25,000 guilders) and subjective (assumption of money laundering when there is structuring by a customer who apparently prefers transactions below the 25,000 guilder threshold).⁵⁹

The European Union has long taken measures against money laundering in financial institutions (the Money Laundering Directive 91/308/EEC). The European Commissioner for Financial Services and Internal Market has indicated in a speech at a money laundering conference that the European Directive may be broadened to include casinos and other areas such as real estate and the legal profession, and in July 1998 the Commission recommended such action.⁶⁰ Even without any such modification, the 1991 Directive allows member countries to apply money laundering provisions to casinos⁶¹ and other areas. Belgium, Luxembourg and Finland have drafted money laundering measures that would apply to casinos. Denmark, Greece, Spain, Austria and Portugal have already applied respective money laundering laws to casinos.⁶² In other countries that have casinos, such as Germany, there is no casino money laundering because Lander authorities are always present and obtain tax revenues on a daily basis. Furthermore, credit and cheque cashing are nonexistent.⁶³

Within the UK, the Gaming Act of 1968 created the Gaming Board of Great Britain, which has effectively regulated Britain's approximately 120 casinos.⁶⁴ In order to gamble at a casino, the customer must first join a club and wait 24 hours before being allowed to play. A bona fide guest of a member is not subject to the waiting period, but the status of the 'guest' is strictly construed. While Britain has Money Laundering Regulations, pursuant to the EC Directive on Money Laundering, it is primarily applicable to banks and similar institutions. Given the unique status of British casinos

'HM Treasury has confirmed that at this stage [1997] it does not plan to apply the EC Directive on Money Laundering directly to casinos. Instead it has agreed with the Gaming Board for Great Britain and the British Casino Association that a code of practice should be introduced for casino licence holders to address the various matters which are covered by the Directive and consequent regulations. It is stressed that compliance with this code is also important to ensure that a casino licensee is not in breach of the general provisions of legislation in respect of money laundering. The code covers the identification of customers (ie members and guests), the recording of cash transactions at set limits and of all other relevant transactions, the identification, recording and reporting of all suspicious transactions, the training of staff and the role of the National Criminal Intelligence Service (NCIS) and the Gaming Board for Great Britain through its Inspectorate.'⁶⁵

Specifically, new members must produce a document, preferably a passport, driver's licence or an 'official entity card (foreign jurisdictions)'. The documentary details must be 'recorded' and retained by the casino: existing members who have not produced identity verification would be refused admission if they had not produced the required documentation on the sixth casino visit. All transactions of £2,500 must be recorded 'against the players identities'.

The Code of Practice states:

'The most important factor in the effort to eradicate money laundering lies in the identification and reporting of suspicious transactions. In order to do so casinos should ensure that staff both at tables and the cash cage are aware of the requirements of the code and that they are diligent in bringing suspicious transactions to the notice of management.'⁶⁶

One example that would lead to a suspicious transaction report would be when two players 'in collusion' play both sides of a near even money game such as black and red in roulette. This 'emphasis' is upon 'the importance of client identification, the concept of gamblers' "profiles" and the need to involve all the authorities concerned'.⁶⁷

Other countries that have casinos have taken regional steps to control money laundering. The five Anglophone countries of the Economic Community of West African States, which includes Nigeria with its Lagos .casinos, have drafted a common law on money laundering which includes provisions on casinos. Specifically, casinos would have to: (1) keep gambling records for at least ten years; (2) verify gamblers' identities; (3) record transactions in chronological order; and (4) make records available to a proposed anti-money laundering agency or central bank.⁶⁸ New Zealand has a Financial Transaction Reporting Act (1996) which includes casinos.

CANADA

In Canada, the Proceeds of Crime (Money Laundering) Act prohibited money laundering, but the law was inapplicable to casinos since 'casino gambling did not exist in Canada then apart from some very small charity events'.⁶⁹ It is puzzling why Canada decided to amend its money laundering legislation since there were no scandals or arrests in casinos. Perhaps the amendment was partly the result of pressure of the Financial Action Task Force on Money Laundering Annual Report which stated `money laundering has occurred through . . . [Canadian] gambling facilities [lotteries and casinos] . . .'.⁷⁰

In 1997 because of the growth of casinos in Canada, such as Casino Windsor in Ontario, the Department of Finance recommended that casinos be required to keep records of customer cash transactions of $10,000 and be required to report suspicious transactions. These regulations effective October 1998 would be applicable to casinos licensed by provinces, such as Casino Windsor, but not a government-operated casino such as the Casino de Montreal. When asked whether the admission would 'be an invitation for crime to target government operated casinos', the Canadian governmental official responded: 'Yes. And this is an area we will be examining later', because it is more difficult to amend legislation than issue regulations.^70a

THE INTERNET

The key to the use of the Internet to aid money laundering is the exploitation of new methods of funds transfer, ie the transfer of bets or the payment of winnings. Two methods of Internet funds transfer or a hybrid of the two, may become commonplace in the next decade. The method is stored value cards, known as smart cards, which have the ability to store information on embedded computer chips. These cards could serve as credit cards, bank debit cards or store digital cash. A person could use these cards to conduct commercial transactions over the Internet or in traditional settings. Internet transactions, however, would require the home user to have a card reader attached to his or her computers.

The second method is electronic cash, also known as e-cash. This involves the consumer exchanging real currency for e-cash, which is the electronic representation of currency that is stored on the person's computer. When the person wishes to complete a commercial transaction, he or she simply transfers the e-cash from his or her home computer to the merchant.

The Internet gambling industry will look to incorporate those methods of fund transfer that meet four primary goals: (1) immediacy - the ability to make immediate transfers of bets and winnings; (2) security - the protection from theft or counterfeiting; (3) cost efficiency - the transfer cost must be small relevant to the value of the transaction; and (4) anonymity - not having to provide any personal information.

Methods of future funds transfer may meet this criteria. A promising technology involves the use of peer-to-peer e-cash. In this instance, a patron can send electronic cash directly to the gaming operator and receive winnings in e-cash sent directly to his computer.

The significant advantages of these technologies, however, also provide vehicles to assist in money laundering. A future scenario may include drug users paying for illegal drugs through the use of smart card technologies. Instead of having thousands of pounds of drug-laced currency to place in the first step of the money laundering process, the drug dealer may have an 'electronic purse' that contains large amounts of electronic cash that could easily be transferred electronically to an offshore Internet bank of a casino, or more likely through a complex series of exchanges between these and other businesses, such as security brokers.

A value of involving Internet casinos in the process is that the funds can be disguised as winnings when, in fact, no gambling transaction has ever taken place. Take, for example, an unscrupulous casino operator in an unregulated environment. A drug dealer could set up multiple accounts with the casino. Some accounts result in the drug dealer 'losing' all of the deposited funds, while other accounts result in the drug dealer 'winning'. The funds from the winning accounts are then transferred to an Internet bank in the 'layering' process. To anyone investigating the trail, the funds appear to be legitimate Internet casino winnings.

In reality, the casino operator prearranged that one would win and the other lose because the operator controls the outcome of the games. In the normal casino setting, the outcome of the games is determined by random events. In this scenario, however, the casino operator simply programs the computer gambling game so that one account wins and the other loses. In an unregulated environment, no government oversight exists to ensure that the games have a legitimate random number generator.

It would be an understatement that Internet gambling is growing rapidly. Between March and May 1998, for example, one Belgian operator 'has launched 29 online casinos. Another 30 will go live this month, mostly named after places they bear absolutely no relation to but have all the "glamour" of - like Monte Carlo.com or Nevada.com'.⁷¹ The connection between money laundering and Internet gambling is one of the most complex issues facing regulators. 'Some web sites, such as Internet casinos . . . may be nothing more than money laundering activities.'⁷² The Internet Gambling Protection Act⁷³ (the Kyle Bill) would originally have given the US Government jurisdiction over world-wide Internet gambling if the punter was from the USA, but that extraterritorial section has been abandoned. One reason why state attorneys such as Missouri have taken legal action against offshore Internet gambling operators has been the fear of the operation being a 'money laundering scheme'.⁷⁴

The FATF in February 1998 warned that Internet 'casinos in several countries offer complete anonymity to potential gamblers, the later placing their bets by way of credit card. The risk of laundering is even more patent if the casinos in question also manage the accounts of their Internet customers'.⁷⁵ One English expert has opined that a virtual casino could circumvent laws such as the Money Laundering Regulations (1993).⁷⁶ A representative of the International Narcotics and Law Enforcement Affairs testified before Congress that the Caribbean Financial Action Task Force has brought Internet gambling and cyberpayment experts together to discuss anti-money laundering efforts and in July 1997, along with FinCEN, 'co-sponsored a Casino Regulatory Conference in Aruba as part of the CFATF typologies exercise. The conference identified vulnerabilities to money laundering within the gaming industry and as well as minimum regulatory and legislative standards needed to address those vulnerabilities.'⁷⁷

Certainly, Internet gaming might have minimised money laundering if it is a government-operated lottery. Liechtenstein, widely regarded as a money-laundering haven because of its laws on trusts, operates a lottery where over 35 per cent of the proceeds go to charities such as the International Red Cross. It would be very difficult for a money launderer to utilise these facilities as an effective money laundering device.

Australian states, such as Queensland, are on the verge of legalising Internet gambling. In Queensland the Interactive Gambling (Player Protection) Act contains about 250 sections and was passed in March 1998. The Queensland Treasurer, Joan Sheldon, stated:

'We realize there are complex issues in trying to regulate net gambling ... but we believe the inherent limitations the technology imposes upon regulators can be used to the consumers' advantage. With everything on line and recorded in central computers, regulators will be able to monitor games more easily than say a blackjack table in a real casino where all bets and pays will be recorded. Operators licensed by the Queensland government will meet the highest probity and integrity standards.'⁷⁸

Thus, why would a punter attempt to launder money in Internet Queensland gambling where all bets are recorded and all punters are registered.

A similar analysis was made by Brian Farrell, an official with the State of Victoria Casino and Gaming Authority. Farrell stressed:

'Anti-money laundering controls are also enhanced by the player registration process. A lot has been said about the potential for money laundering in the "virtual world" and no doubt this is a major cause for concern for anti-money laundering agencies. However, for regulated Internet casinos the opportunities for money laundering will be minimal. In the virtual world where money will be exchanged for anything that can be digitized a regulated Internet casino will not be attractive to a criminal attempting to launder money. The true value of many things that can be digitized (such as software or information) is often impossible to quantify and in these circumstances the greatest challenge to anti-money laundering agencies will be to catch those using the intangibility of digitized "things" to legitimize illegal or unexplained income. Regulated Internet casinos in Australia will have stringent account establishment rules and audit trails which will discourage the criminal element from trying to wash illicit or unexplained income.'⁷⁹

WEST INDIES

The number of Internet casinos/sports books has increased dramatically each year, with many operational entities located in the West Indies. 'It's not the risk to customers of getting ripped off. Or the dangers faced by addicted gamblers as they stare into a computer screen. The biggest concern for US authorities over Internet gambling sites that originate on Caribbean islands and are set up through confidential offshore banking ventures is the potential for laundering money. It is my sense that there is nobody today in the world that has yet enacted a regulatory process that guards against the dangers of money laundering in Internet gambling.'⁸⁰

More complex would be Internet gambling in a country such as Antigua. It is undisputed that Antigua has a negative image when it comes to banking regulations. In 1995, for example, the European Union Bank started by two Russians with dubious criminal records began what it called the first Internet bank and became a haven for money laundering until the owners in 1997 disappeared with its assets of millions.⁸¹ Of the 68 offshore sports bookies in the Caribbean and Central America about 27 are in Antigua (12 operate Internet sports books, 19 operate virtual casinos and four have licences to operate both). Antigua charges $100,000 annual fee for an Internet casino licence and $75,000 for a sports licence (lower because they employ more Antiguans), and a 20 per cent tax for overseas telephone bills. Applicants are subject to a background check, and the government claims over 300 applicants were rejected. The 1994 Free Trade and Processing Zone Act created a tax-free zone where industries, including gambling profits, are tax-free and there is financial secrecy. One entity, WorldWide Tele-Sports, employs 85 persons and accepts bets between $100 and $20,000.⁸²

Antigua has clearly taken measures on stricter gaming controls. In 1997, it enacted the Virtual Casino Wagering and Sport Book Wagering Regulations, which, inter alia, prohibited 'sub-licensing, fraudulent use of license entitlements, falsification of information, unauthorized use of software, and engaging in business not covered by the license'. Antigua has also enacted the Money Laundering Prevention Act (effective 28th May, 1998) and is in the process of revising its International Business Corporation Act and is utilising the Queensland Interactive Gambling (Player Protection) Act 'as a model from which Antigua may adopt provisions if found suitable to our particular requirements'.⁸³

Dominica intends 'to set up and operate the first government-run Internet casino'.⁸⁴ In Grenada, the regulatory authority is uncertain. For example, at one Internet trade group meeting there was a disagreement between a representative of the Grenadan Government and Sports International over who had licensing authority over Internet gaming in Grenada. Sports International insisted it had the monopoly and only it could sub-licensee.

In conclusion, money laundering at casinos may be minimised if governmental operators have a significant presence. Internet gaming, on the other hand, may become part of the Wild, Wild West, or alternatively, be strictly controlled by a government such as Queensland which will result in Significant tax measures which will benefit the regulatory state and hopefully strict controls which will eliminate money laundering.

REFERENCES (1) General Accounting Office, Report to the Ranking Minority Member, permanent Subcommittee on Investigations, Committee on Governmental Affairs, US Senate, Money Laundering Rapid Growth of Casinos Makes them Vulnerable, GAO/GGD96-28, p. 4. (2) Jonathan Winer, Deputy Assistant Secretary, Bureau for International Narcotics and Law Enforcement Affairs before the House Committee on Banking and Financial Services, Federal News Service, 11th June, 1998. (3) Wire Transfer Laundering, Dept. of Justice Alert, Vol. 2, p. 4, Novernber, 1992. See also, Sultzer, S. (1995) 'Money Laundering: The Scope of the Problem and Attempts to Combat It', Tenn. L. Rev., Vol. 63, p.143 (4) Financial Action Task Force (FATF) on Money Laundering Annual Report 1997-1998 p. 65. (5) Inter Press Service, 1st July, 1998. (6) 'South Africa: Muslims to Oppose Casino License Bid', Africa News, 3rd July, 1998; Curtin, M. 'Government Says No To Casino for Dublin', Undated News of Ireland states fear of money laundering was one of the reasons why the Irish Government rejected a proposed casino. (7) Janes Intelligence Review, 1st April, 1998. The FATF states that the closing of Turkey's casinos 'is anticipated by that country to contribute to anti-money laundering efforts', ref. 4, p. 65. (8) International Herald Tribune, 11th February, 1998; Azerbaijan also closed its casinos partly out of fear of money laundering, Agence France Presse, 28th January, 1998. (9) 'Venezuela Gambling Move', Financial Times, 23rd June, 1997, p. 4. (10) Hanley, A. (1998) 'Mafia Drug King Arrested after Five Days on the Run', The Independent, 25th May, p. 8. (11) Financial Times, 23rd June, 1997, p. 4. (12) United Nations (1998) 'Financial Havens, Bank Secrecy and Money Laundering', UN, June, p. 57. (13) Lakshmane, I. A. R. (1998) 'Macao Isn't Going Quietly; Crime Wage Mars China Handover Plans', Boston Globe, 13th June, p. A1. (14) The paper was prepared for a casino regulatory conference sponsored by FinCEN and the Caribbean Financial Action Task Force; Coopers and Lybrand (1997) 'Current Developments Aruban Casinos: Preventing Money Laundering', 16th July, pp. 8, 9. (15) 'The Americas: Mexico Resort to get Floating Casino', Wall Street Journal, 10th June, 1998. (16) Conner, C. et al. (1998) 'Sun Cruz Owner Rules Florida's Casino Industry', St Petersburg Times, 22nd June, p. 1; Lebowitz, L. and McMahon, P. (1998) "US Seeking Millions From Casino Boat Owner', Sun-Sentinel, 6th August, p. 1; Conner, C. and Glenn, B. (1998) 'Sun Cruz Is Sued; Property Seized', St Petersburg Times, 6th August, p. 1. (17) Sherer, R. (1998) 'No Scrutiny of High Rollers on High Seas', Christian Science Monitor, 19th February, p. 1. (18) Report of the Commission on Casino Gambling in Barbados, May 1995, pp. 80-81, 148. (19) Ibid., p. 75. (20) Moore, M. and Farah, D. (1995) 'Big Night Out Ended Drug Sting', International Herald Tribune, 21st May, p. 3; LaGesse, D. (1998) 'Mexican Banks Indicted in Drug-cash Laundering; US Says Vast Operation has been Broken', The Dallas Morning News, 19th May, p. 1. The sting cost about $30m. (21) LaFranchi, H. (1998) 'After Bank Bust, Mexico Says US Must Settle Old Account', Christian Science Monitor, 21st May, p. 6; 'US Files First Money Laundering Civil Penalty Suit In Casablanca', Money Laundering Alert, September 1998, p. 1. (22) Seper, J. (1998) 'House Votes Against Extraditing Agents: Mexico Wants Officers from Drug Sweep', The Washington Times, 24th June, p. 10. (23a) Ibid. p. 43. (23) Lionel, Sawyer and Collins (1995) 'Nevada Gaming Law', 2nd edn, Ch. 111, pp. 43, 75. (24) Berns, D. (1998) 'Board May Fine Tropicana over Currency Laws', Las Vegas Review Journal, 25th June, p. 1. A Nevada Gaining Control Board member stated 'this is analogous to a triple play in that they've got federal money-laundering violations, state [of Nevada] money-laundering violations and violations for Korean money laundering'; 'Tropicana Must Pay $250,000 Fine For Collecting Gambling Debtrs In Korea', A.P., August 17, 1998. (25) Final Report of the Joint Executive Legislative Task Force to Study Commercial Gaining Activities in Maryland, December 1995, pp. 100-101. (26) Harter, J. and Zambito, T. (1998) 'In Atlantic City, Launderers Find Good Odds, Clean their Bulk Cash', The Record, Bergen County, NJ, 7th June, p. A23, citing Daniel Heneghen, spokesman for the New Jersey Casino Control Commission. (27) 'Get Tough on Tainted Cash', The Record, 17th June, 1998, p. L10. (28) Ibid. (29) Money Laundering Alert, February 1998, p. 7. In contrast, as of November 1994, the Nevada Gaming Control Board fined '22 casinos about $1.8 million', GAO, ref. 1, p. 29. (3(1) Money Laundering Alert, February 1998, p. 7. (31) Haner, ref. 26. (32) Fields, J. and Haner, J. (1998) 'Four Casino Workers Indicted on Laundering Charges', The Record, 12th June, p. A22. (33) Haner, ref. 26; NY Times, 12th June, 1998, p. 138; Fields, ref. 32; The Record, ref. 26. For an interesting example of money laundering at a New Jersey casino, sec Smith, J. L. (1995) 'Running Scared', New York, pp. 141-157. (34) Haner, ref: 26. (35) GAO, ref. 1, p. 13. (36) Los Angeles Times, 19th June, 1998, p. A3. (37) McBride, J. (1998) 'Guilty Plea Made in Casino Case, Ex-planner for Mole Lake Tribe to be Sentenced for Theft, Money Laundering', The Milwaukee Journal Sentinel, 27th May, p. 1. (38) US v Wadena et al., 1998 US App. Lexis 12195 (8th Cir. 1998). (39) Reuters North American Wire, 18th April, 1997; US v Zottola (District Court Western District of Pennsylvania) and US v Zottola, 97 CR 0953T (District Court Southern District of California), April 1997. See also 63 FR 27233 for a list of US litigation concerning casinos and money laundering. One party has pleaded guilty to money laundering in the Zottola case. (40) US Today, 7th May, 1998, p. 1. (41) Nevada Gaming Law, ref. 23, p. 348; N.G.Com.Reg.6; NRS Rev. Stat. s. 463.360(5). (42) Under Regulation 6A, a casino cannot accept more than $3,(1(1(1 for wire transfer, cash or cash exchanges or purchase of a casino's cheque. (43) In 1997 FinCEN had an annual budget of $33m and 162 employees. (44) 61 FR 7054-7056 (23rd February, 1996), effective 1st August, 1996. (45) 63 FR 1919-1924 (13th January, 1998); they will become effective 1st August, 1998; Money Laundering Alert, February 1998, p. 5; FinCEN press release 13th January, 1998, 'anti-money laundering regulation ext