Experts: ‘disturbing instances’ of casinos flouting compliance informed by tribal gaming exam

The US Treasury has witnessed some casinos in recent exam cycles refusing to yield requested details or allow access to compliance staff in anti-money laundering reviews, a nod to below-the-surface frustrations at certain gaming operations, large and small, say analysts.

The Financial Crimes Enforcement Network (FinCEN) highlighted the issue at a Bank Secrecy Act conference this month during a speech that – while broadly lauding improvements in casino anti-money laundering (AML) compliance and an uptick in filings of suspicious activity – stated that federal examiners in some cases were blocked from performing their duties.

“We are also aware of disturbing instances in which our IRS examiners were denied access to critical information and key personnel during the exam process,” FinCEN Associate Director of Enforcement Stephanie Brooker said June 18 at the conference in Las Vegas. The IRS AML division does the actual exams and forwards penalty recommendations to FinCEN.

“Obviously, obstructing the examination process and failing to address repeated violations are heavily weighted factors that we consider in enforcement actions and penalty determinations,” she said, adding that if IRS examiners also fail to see enough improvement over multiple exams, recidivist behavior, FinCEN is more likely to dig deeper into the overall program.

The comments – likely informed by challenges in examining Native American operations, which can require tribal leader approvals before examiners can set foot on the premises and other large operations shirking exam recommendations – come amid the agency recently handing out some of its most historically significant and largest penalties against the casino sector.

Earlier this month, FinCEN levied a $75 million penalty against the Tinian Dynasty Hotel & Casino for willful and egregious violations of AML rules, including staff coaching patrons on how to evade certain reporting requirements. The penalty was the largest ever against a casino, and among the largest the bureau has ever done.

In March, the agency penalized the Atlantic City, NJ-based Trump Taj Mahal $10 million for extensive program failures, including failing to improve deficiencies noted by examiners in formal actions dating back all the way from 2003 and 1998.

Compliance in the casino area is vital as the sector has, overall, experienced significant growth in the last 15 years, mushrooming from 160 operations in a few states in 1999 to more than 1,500 operations across more than three dozen states and annual revenues of $240 billion.

Permission denied, with attitude

IRS examiners, when requesting information and preparing for onsite exams of Native American casinos, in some cases “must get permission from the tribal leaders to do whatever they need to do,” said David Tilzer, the former head of the IRS AML division in New York.

“Generally, it’s a formality, but the IRS has had instances where there were lots of problems,” he said, adding that there are hundreds of such operations across the country, including some that are very large and complex with riskier wealthy domestic and international clients.

In some instances, tribal leaders gave exam staff  “attitudes” and were reticent, or failed, to allow access to certain areas in a timely manner or to requested documents, Tilzer said. Some Native American casino operators “felt like they could do whatever they wanted,” and were not subject to federal AML obligations.

In other cases, rather than responding to examiners, one casino would change ownership every few months, making IRS staffers even more concerned illicit funds could be flowing through the operation or that the owners and executives were stealing funds directly or by skimming certain gaming areas, he said.

The sector’s chief lobbying group, the American Gaming Association (AGA), is aware of the issues and is trying to nudge casinos toward a stronger compliance mindset.

The Washington, D.C.-based group is currently engaging in a broad review of casino AML programs in a bid to find more substantive, industry-wide cross-cutting compliance foibles before examiners and FinCEN can uncover them and bring more black marks to gaming operations.

The AGA in December also issued its first-ever comprehensive guide on financial crime countermeasures for the gaming sector, covering the key prongs of the financial crime program.

The 17-page guidance focused on creating more stringent written policies, releasing more extensive training to a larger universe of domestic and foreign employees, ensuring the compliance officer and staff have the requisite expertise for the risk of the operation and thoroughly testing human and automated processes.

Over the last two years, FinCEN has changed its historical practice to one in which the agency “presumption is that a settlement of an enforcement action will include an admission to the facts, as well as the violation of law,” Brooker said.

That is a departure from FinCEN’s past practice in which institutions were permitted to “neither admit nor deny” FinCEN’s enforcement allegations.

“It is important that financial institutions and institutions take responsibility when their actions violate the BSA,” she said. “We have implemented this practice in our enforcement actions against all sizes and types of financial institutions and individuals, including casinos.”

Compliance recalcitrance equates to exam resistance

Brooker’s comments are likely directed at any recalcitrant tribal operations and also large mainstream casinos that, like the Taj Mahal case, have been warned, formally chastised and penalized and have continued to give short shrift to creating compliance programs, staffing them with adequate expertise and resources or implementing these rules at the floor level, said a former government investigator familiar with casino compliance programs.

Some owners at tribal gaming operations feel they “are complete sovereign nations” outside the purview of local, state or federal oversight, said the person, who asked not to be named, adding that those sentiments were not the mainstream mentality. “I have heard anecdotal evidence of these leaders sticking their chests out and not cooperating.”

That would be more difficult for, say, a Nevada casino as the examiners could easily contact the local gaming control board and threaten to have their license revoked for not complying with federal rules, said the individual.

The IRS has an Indian Tribal Gaming division and is currently delivering training on AML programs to Native American casinos across the country, most recently in Arizona and New Mexico.

In prior editions of the related newsletter, from the late 2000s, examiners also noted AML issues at tribal gaming operations.

These included failures related to customer due diligence by not investigating mismatched Social Security Numbers, not noting when customers use post office box numbers as an address, leaving out identifying information and submitting inaccurate and incomplete suspicious activity reports.

Beyond lapses at Native American casinos, Brooker was also talking about large casinos that are allowing a “culture of non-compliance to persist,” said the former official.

Some of the recent penalties against casinos, such as the Taj Mahal and Tinian Dynasty for example, reveal the compliance programs “were just train wrecks. You can’t continue to have programs that poor without some kind of indignation” from the IRS and FinCEN, said the person.

The comments are “coordinated and calculated” and evince the sentiments at FinCEN’s leadership level, the person said. Brooker and FinCEN Director Jennifer Shasky Calvery, “don’t speak off the cuff, they are seasoned prosecutors.”

They would not “conflate or inflate something” just to make a media splash or spook the industry, the person said. “They take these issues seriously and see them as a big deal. It’s one thing to disagree with an examiner, but it’s another thing entirely to flat out deny them.”