Federal and state regulators penalized a well-known, palatial Las Vegas casino $9.5 million dollars due to broad failures in its anti-money laundering controls, chief among them failing to properly monitor high-risk, high rollers and report related suspicious activities.
The penalty handed down by the Financial Crimes Enforcement Network (FinCEN) and state agencies against Caesars Palace continued the bureau’s recent aggressive stance against high-profile casinos, a fusillade that has nearly eclipsed the $100 million mark this year alone after years of the sector remaining relatively free of significant program scrutiny or hefty penalties.
The casino had “systemic and severe AML compliance deficiencies,” FinCEN said in a statement and gave free reign to the riskiest customers in its private gaming salons, which are reserved for Caesars’ wealthiest clientele and “who may gamble millions of dollars in a single visit, and which openly allowed patrons to gamble anonymously.”
That FinCEN and the state penalized Caesars in tandem means that regulators at all levels “have made it clear money laundering is a prohibitive practice and it’s up to the casinos to take affirmative action,” said Joe Kelly, a professor of business law at SUNY College in Buffalo, NY. “Ignorance is no longer an excuse.”
Even though casinos have had anti-money laundering (AML) program duties since the early 2000s, there have been certain casinos, even large, storied operations, that have been reticent to engage in extensive due diligence on wealthy foreign gamblers, inquire about source of funds or monitor them for potential suspicious activities, according to analysts and former government officials.
Instead, these high rollers were feted with plane tickets, expensive meals and other freebies and extensive lines of credit, in many cases being actively shielded from AML staff. But that sentiment could be changing in the aftermath of the Caesars penalty and considering the recent intense focus on casinos by US Treasury and Justice Department officials.
“I don’t think casinos are going to be giving any more free passes to their high rollers,” Kelly said, adding that gaming establishments are now more likely to engage in deeper, more detailed know-your-customer initiatives, train their staff to look for suspicious activities and ensure their systems can log and aggregate large transactions and can flag out-of-scope, aberrant actions.
The order also notes critical training failures of even the most basic AML concepts.
For example, some of these Caesars employees mistakenly believed that the requirement to report suspicious activity related to cash transactions only. The marketing executives at Caesars’ branch offices similarly lacked a basic understanding about the types of activities that should be considered suspicious, which must be filed on a suspicious activity report (SAR).
Even more egregious, according to FinCEN, was their “erroneous belief that filing a CTR (which merely identifies the existence of a particular transaction above a certain monetary threshold) relieves a casino from filing a SAR (which notifies FinCEN and law enforcement about suspicious financial transactions).”
KYC, or not to see, due to a ‘blind spot’ in monitoring fat cats
“Caesars knew its customers well enough to entice them to cross the world to gamble and to cater to their every need,” said FinCEN Director Jennifer Shasky Calvery. “But, when it came to watching out for illicit activity, it allowed a blind spot in its compliance program. Every business wants to impress its customers, but that cannot come at the risk of introducing illicit money into the U.S. financial system.”
Caesars also marketed these salons through branch offices in the U.S. and abroad, particularly in Asia, but failed to adequately monitor transactions, such as large wire transfers, conducted through these offices for suspicious activity, according to FinCEN.
In its penalty order, FinCEN stated the casino intentionally violated AML rules since February 2012 and that the organization also did not “supply sufficient resources to its BSA compliance department.”
Caesars also did not “consistently monitor” foreign branches, including those in Monterey Park, CA, Tokyo, Singapore and Hong Kong, a gateway to well-to-do Chinese. The casino missed filing dozens of suspicious activity reports and customer transaction reports as a result of allowing some customers to gambling using the credentials of associates.
The penalty order notes that one foreign patron, for example, deposited $50,000 in cash into Caesars’ Hong Kong bank account without the marketing executives at that branch office or Caesars’ AML compliance staff deeming the transaction suspicious or conducting any inquiry regarding the source of funds.
Caesars also routinely accepted third-party checks at its Hong Kong branch office for marker payments without seeking to verify the relationship between the third-party and the patron receiving the marker.
“In general, the marketing executives at these branch offices rarely, if ever, referred suspicious activity to Caesars’ BSA compliance department. They also lacked a basic understanding of the types of activity that should be considered suspicious.”
Caesars missed reporting many instances of obviously suspicious activity, including “bill stuffing,” typically depositing and taking out money while engaging in minimal gaming and “chip walking,” where patrons get out a significant quantity of chips, and leave the casino without redeeming them, in addition to patrons engaging in structuring transactions below reporting thresholds.
To improve its compliance programs, FinCEN is requiring Caesars to engage in an independent external review, report its progress more frequently to FinCEN, bolster employee training and testing, including attendance records, and engage in a look-back, or transactional review, through home and foreign officers to look for missed reportable activity between January 2012 and December 2014.
Massive sector, but regulated with light touch, until recently
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 in recent years.
At the same time, it is only recently that casinos, particularly large Vegas operations, have gotten serious scrutiny from federal regulatory agencies. The result has been a growing number of enforcement actions and ongoing investigations.
In June, 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 all the way back to 1998.
In August 2013, Sands Corp. agreed to pay the US Justice Department $47.4 million to settle allegations that it had failed to identify nearly $60 million in suspicious transactions.
In the August 2013 non-prosecution agreement, prosecutors said that compliance personnel at the Venetian-Palazzo failed to flag roughly $45 million in wire transfers and $13 million in cashier’s check deposits between February 2005 and March 2007 by Zhenli Ye Gon, a Chinese national accused of trafficking narcotics.
The casino engaged in the transactions despite the fact that Ye Gon used multiple third parties to move the funds, including foreign casas de cambio, and compliance officers could not link him to most of the businesses he said he owned.
Two months later, Caesars Entertainment Corp., the parent company of Las Vegas-based Caesars Palace, disclosed in regulatory filings that it could be subject to a civil monetary penalty from FinCEN, with reports that the bureau was also probing the financial crime defenses at the MGM Grand and Wynn Las Vegas.
Some casinos, though, may still shirk their compliance duties in favor of wooing the gamblers with the deepest pockets, believing that any related AML penalties would be smaller than the income they would generate, said Peter Gallo, an international financial crime consultant.
The penalties are “just going to be an occupational hazard that the casinos are going to face as long as they are attracting cash from customers but don’t know the individual or source and ownership of the cash,” he said.
“The risk can be removed from the industry simply by treating casinos like banks,” Gallo said. “Casinos are a strange kind of financial institution which offers a widely varying rate of return for a very short time.”
The core issues to overcome for the sector to better be able to track down potential criminal actions is to upend the current dynamic where the wealthiest get the least amount of scrutiny, due to fears they will simply go to another casino with fewer questions.
“All money laundering comes back to answering two very simple questions: who exactly is this customer and where did the money come from,” Gallo said. “You can have the person’s name, ID and DNA sample, but that will still not explain why and where he got the $5 million in a suit case.”