Money Laundering: Rapid Growth of Casinos Makes Them Vulnerable (Letter
Report, 01/04/96, GAO/GGD-96-28).
Pursuant to a congressional request, GAO examined: (1) the extent of
legalized gaming in the United States; (2) currency transaction
reporting requirements for casinos; (3) whether the same transaction
reporting requirements apply to tribal casinos; and (4) the Internal
Revenue Service's (IRS) efforts to ensure that casinos are complying
with currency transaction reporting requirements.
GAO found that: (1) 48 states permit some form of legalized gaming,
including riverboat casino gaming and Indian gaming; (2) the amount of
cash wagered annually in casinos has grown from $117 billion in 1984 to
$407 billion in 1994; (3) the Bank Secrecy Act (BSA) requires casinos to
report currency transactions over $10,000, obtain additional identifying
information about customers opening a line of credit, and develop BSA
compliance programs that meet certain requirements; (4) although Nevada
casinos report customers that purchase chips in cash amounts over
$10,000, they do not report customer identification information on
verified winnings over $10,000 or cash exchanges involving small
denomination bills over $2,500; (5) tribal casinos are not subject to
BSA, but they must report currency transactions in accordance with the
Internal Revenue Code (IRC) provision regarding cash received in a trade
or business; (6) IRS has made efforts to educate tribal casino officials
on IRC reporting requirements to ensure that they are complying with
federal regulations; (7) IRS needs to use its enforcement resources to
complete compliance reviews of other nonbank financial institutions and
to ensure that individuals and businesses are complying with tax laws;
and (8) new BSA regulations will relieve some of the pressure on IRS by
requiring casinos to take a more active role in ensuring their own
compliance with BSA.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: GGD-96-28
TITLE: Money Laundering: Rapid Growth of Casinos Makes Them
Vulnerable
DATE: 01/04/96
SUBJECT: Financial institutions
Reporting requirements
Indian affairs legislation
Tax law
White collar crime
Compliance
Banking regulation
Law enforcement
Currency and coinage
Indian lands
IDENTIFIER: IRS Currency and Banking Retrieval System
Nevada
Treasury Financial Crimes Enforcement Network
Treasury Currency Transaction Report
Treasury Currency Transaction Incidence Report
Atlantic City (NJ)
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Permanent Subcommittee on
Investigations, Committee on Governmental Affairs, U.S. Senate
January 1996
MONEY LAUNDERING - RAPID GROWTH OF
CASINOS MAKES THEM VULNERABLE
GAO/GGD-96-28
Money Laundering and Casinos
(181995)
Abbreviations
=============================================================== ABBREV
BSA - Bank Secrecy Act of 1970
CBRS - Currency and Banking Retrieval System
CTRC - Currency Transaction Report by Casinos
CTR - Currency Transaction Report (Nevada Form)
CTIR - Currency Transaction Incidence Report (Nevada Form)
DCC - Detroit Computing Center
FinCEN - Financial Crimes Enforcement Network
GAGR - Gross annual gaming revenue
IGRA - Indian Gaming Regulatory Act of 1988
IRC - Internal Revenue Code
IRS - Internal Revenue Service
NGCB - Nevada Gaming Control Board
Letter
=============================================================== LETTER
B-259791
January 4, 1996
The Honorable Sam Nunn
Ranking Minority Member
Permanent Subcommittee
on Investigations
Committee on Governmental Affairs
United States Senate
Dear Senator Nunn:
The Subcommittee has been reviewing new trends in money laundering
activities as well as the government's ability to confront them.
This work has indicated that improved compliance with the Bank
Secrecy Act of 1970 (BSA) by financial institutions has forced many
money launderers to find other means of disguising their illicit
proceeds. In your request letter, you expressed concern about the
use of the nation's growing gaming industry to launder illicit
profits. In response to your request, we are reporting on
the extent of legalized gaming in the United States, especially
that taking place in casinos;
currency transaction reporting requirements for casinos;
whether the same reporting requirements apply to tribal casinos;\1
and
the level of enforcement efforts to ensure that casinos are
complying with currency transaction reporting requirements.
There have been both new legislation and recent changes to existing
federal regulations that will affect currency transaction reporting
for casinos. We have included information on these changes in this
report. The report also makes a recommendation to the Secretary of
the Treasury regarding efforts to deter money laundering in casinos.
--------------------
\1 Tribal casinos are gaming casinos owned and/or operated by Indians
who belong to federally-recognized tribes in the United States.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Legalized gaming is expanding rapidly across the United States.
Currently, 48 states permit some form of legalized gaming--lotteries;
charitable bingo; card room gaming; pari-mutuel wagering; and games
of chance, such as roulette, craps, slot machines, and blackjack,
that take place at casinos. Casino gaming is among the fastest
growing forms of gaming, and new casinos are continuing to open
across the country. Two areas of notable growth are riverboat casino
gaming and Indian gaming, which includes casino and bingo operations.
Since 1991, close to 60 riverboat casinos have started operations,
and in the last decade, Indian gaming operations have grown from very
few to about 237 separate operations--119 of which were tribal
casinos--as of March 1995.
The amount of cash wagered annually in casinos, as estimated by
International Gaming and Wagering Business, a gaming industry trade
publication, has grown from about $117 billion in 1984 to about $407
billion in 1994. Casino gaming accounts for more than 80 percent of
the amounts wagered in gaming activities around the country. The
proliferation of casinos, together with the rapid growth of the
amounts wagered, may make these operations highly vulnerable to money
laundering.
BSA and its implementing regulations have been a major weapon against
money laundering. Among other things, they require that most
financial institutions, including certain casinos, report to the
Internal Revenue Service (IRS) specific currency transactions over
$10,000. The information is to be used by law enforcement and
regulatory agencies to identify individuals engaging in large cash
transactions who may be attempting to conceal their participation in
crimes that generate large amounts of cash. In 1994, several changes
to the BSA reporting and recordkeeping requirements for BSA casinos
took effect. Among other things, since December 1, 1994, these
casinos have been required to obtain and verify additional
identifying information about customers who open an account or
establish a line of credit, as well as to develop BSA compliance
programs that meet certain requirements.
Nevada casinos have an exemption from certain BSA reporting
requirements under an agreement with the Department of the Treasury.
Nevada has its own currency transaction reporting and recordkeeping
requirements that are generally similar to those under BSA. For
example, like BSA casinos, Nevada casinos report identifying
information for purchasers of chips in cash amounts over $10,000.
However, Nevada casinos also have some distinct differences. For
example, unlike casinos under BSA, Nevada casinos do not report
customer identification information on payouts over $10,000 in
verified winnings. In addition, Nevada prohibits certain cash
transactions that could lend themselves to money laundering, such as
cash-for-cash exchanges involving small denomination bills for larger
denomination bills in amounts over $2,500. Nevada officials believe
this additional prohibition deters money laundering.
Under the Indian Gaming Regulatory Act (IGRA) of 1988, tribal casinos
were not subject to BSA, but were to report currency transactions
pursuant to a more limited Internal Revenue Code (IRC) provision
regarding cash received in a trade or business. However, the Money
Laundering Suppression Act of 1994 expanded the definition of a
"financial institution" subject to BSA reporting and recordkeeping
requirements to include certain tribal casinos. In addition,
Treasury and Nevada officials are discussing changes to Nevada's
regulations so that they will more closely mirror BSA requirements.
These changes and implementation of the 1994 act should bring more
consistency and uniformity to transaction reporting for casinos and
improve the information available to law enforcement.
Federal enforcement efforts to ensure that casinos comply with
currency transaction reporting requirements have varied from
education visits to compliance reviews at casinos. IRS' Examination
Division, which is responsible for ensuring that casinos comply with
BSA reporting and recordkeeping requirements, had performed
compliance reviews at most casinos in Atlantic City, New Jersey, and
had begun compliance reviews at some riverboat casinos at the time of
our review. IRS had made efforts to educate some tribal casino
officials on IRC reporting requirements, but had not completed any
compliance reviews at tribal casinos. Nevada's regulations require a
yearly interim compliance review by state officials, as well as a
full audit every 2 to 3 years, at every casino.
In addition to ensuring compliance by casinos, IRS must use its
limited enforcement resources to meet its broad responsibility for
compliance reviews of other nonbank financial institutions--estimated
to number over 100,000. Simultaneously, it must use its enforcement
resources to assure compliance with the tax laws by individuals,
businesses, and other categories of taxpayers. Examination Division
resources have declined since 1989, and given the increasing numbers
of casinos, it seems likely that the Division will be able to conduct
only a limited number of compliance reviews at casinos.
Recent changes to BSA regulations may relieve some of the pressure on
IRS' enforcement resources. These regulations, effective December 1,
1994, could enhance compliance by requiring casinos to take a more
active role in ensuring their own compliance with BSA. For example,
Treasury officials are working to develop a partnership with the
gaming industry to encourage casinos to know their customers and
identify suspicious transactions to law enforcement officials. Given
IRS' resource constraints, we believe that Treasury should explore
the possibility of identifying similar, less resource intensive
options to help casinos deter money laundering.
BACKGROUND
------------------------------------------------------------ Letter :2
Money laundering is the use or conversion of money gained from
illegal activity, such as drug smuggling, as or to money that appears
legitimate and whose source cannot be traced to the illegal activity.
Law enforcement officials have estimated that between $100 billion
and $300 billion in U.S. currency is laundered each year.
BSA\2 and its implementing regulations\3 require financial
institutions to maintain records and to file with IRS currency
transactions reports for certain transactions exceeding $10,000.
These reports create a "paper trail" of records that is useful in
regulatory, tax, and criminal investigations, such as money
laundering cases. In 1985, BSA regulations were amended to include
certain casinos, with gross annual gaming revenues (GAGR) over $1
million, under the definition of a financial institution.
Prior to BSA's application to casinos, money laundering activities
could occur in casinos in a variety of ways without a mechanism in
place to deter and detect it. For example, an individual could
purchase gaming chips with large amounts of cash, do little or no
gaming, and then redeem the chips for a casino check without any
record of the transactions. Under BSA regulations, casinos are
required to maintain records and file reports for currency
transactions by, through, or to them that exceed $10,000. However,
according to Treasury and IRS officials, there is no such requirement
for transactions under $10,000. In congressional hearings, Treasury
officials have recognized and testified that casinos are primarily
cash-based businesses that perform many of the same services as banks
for their customers, such as cashing checks and placing money on
deposit, and these officials expressed concern about the potential
use of casinos as an avenue for moving funds generated by illegal
activity.
IRS' Examination Division is responsible for monitoring and enforcing
compliance with BSA reporting and recordkeeping requirements for all
financial institutions under its jurisdiction, commonly referred to
as "non-bank financial institutions."\4 This monitoring includes
conducting periodic compliance reviews at over 100,000 nonbank
financial institutions, including casinos. Treasury's Office of
Regulatory Policy and Enforcement, formerly the Office of Financial
Enforcement, is responsible for promulgating and providing
interpretive guidance on BSA regulations, reviewing violations found
by IRS, and recommending assessment of civil penalties, if warranted,
against noncomplying institutions.
BSA provides the Secretary of the Treasury with authority to
prescribe an appropriate exemption from its requirements. Treasury's
exemption regulation allows an exemption to casinos in any state
whose regulatory system substantially meets BSA's reporting and
recordkeeping requirements. In 1985, Treasury granted such an
exemption from certain BSA requirements to casinos in Nevada. The
Memorandum of Agreement between Treasury and Nevada permitted the
state to assume regulatory responsibility for currency transaction
reporting by its casinos, as well as required the state to enact
certain laws and establish certain procedures to implement its
regulatory system. As a result of the agreement, Nevada revised the
Nevada Gaming Control Act and adopted Nevada Gaming Commission
Regulation 6A (hereafter referred to as Regulation 6A), which
contains the requirements for currency transaction reporting by
Nevada casinos. The agreement also stipulated that, for the
exemption to stay in effect, changes to such state regulations
require Treasury's approval and, similarly, that changes in BSA or
its regulations must be reflected in the state's regulations if
required by Treasury.
IGRA\5 was enacted to provide a statutory basis for the operation of
gaming by Indian tribes, as well as to provide a means for the
regulation of such activity. IGRA classifies the different forms of
Indian gaming--ranging from bingo to more common casino games such as
roulette, craps, slot machines, and blackjack--into three classes of
Indian gaming. (App. I describes the three classes.)
Generally, under IGRA, Indian tribes may establish Class III gaming,
such as roulette, craps, slot machines, and blackjack, on Indian
lands as long as the proposed gaming is not prohibited in the state.
IGRA requires that tribes sign written agreements, or compacts, with
the states if the proposed gaming meets the definition of Class III
gaming operations (hereafter referred to as tribal casinos). The
compacts describe the scope of Indian gaming permitted and define
state and tribal authority related to gaming operations. Under IGRA,
tribal casinos are subject to the currency reporting requirements of
IRC section 6050I. The IRS Examination Division is responsible for
ensuring that tribal casinos comply with these requirements.
BSA and tribal casinos are to file currency transaction reports with
the IRS' Detroit Computing Center (DCC) for inclusion in a national
database, the Currency and Banking Retrieval System (CBRS). Nevada
casinos file currency transaction reports with the Nevada Gaming
Control Board (NGCB), which subsequently sends the reports on to DCC.
IRS and other law enforcement agencies are to use the BSA portion of
the database for civil and criminal enforcement and tax purposes.
Currency transaction reports filed by BSA and Nevada casinos, as well
as the reports filed by tribal casinos under section 6050I, are
included in the database. Certain information from the reports filed
by BSA and Nevada casinos is accessible to all 50 states for law
enforcement purposes and to all federal law enforcement agencies
through the Financial Crimes Enforcement Network (FinCEN).\6
Transaction information filed by tribal casinos is generally not
accessible to law enforcement because it is reported on transaction
forms that record income tax information and thus are currently
subject to disclosure restrictions.
--------------------
\2 P.L. 91-508, 84 Stat. 1114 (1970).
\3 BSA's implementing regulations containing the reporting and
recordkeeping requirements for financial institutions (including
casinos) are promulgated by the Department of the Treasury at 31
C.F.R. part 103.
\4 In addition to casinos, other "non-bank financial institutions"
include check cashing businesses; telegraph companies; currency
exchangers; wire transfer agents; and issuers, sellers, and redeemers
of travelers' checks or money orders.
\5 P.L. 100-497, 102 Stat. 2467 (1988).
\6 FinCEN is a Treasury organization that was established in April
1990 to support law enforcement agencies by analyzing and
coordinating financial intelligence.
OBJECTIVES, SCOPE, AND
METHODOLOGY
------------------------------------------------------------ Letter :3
Our initial objectives were to determine (1) the extent of legalized
gaming in the United States, (2) the currency transaction reporting
requirements for casinos, (3) the currency transaction reporting
requirements for tribal casinos, and (4) the level of enforcement
efforts to ensure that casinos are complying with currency
transaction reporting requirements. Because changes in reporting
requirements were being planned during the time of our review, we
added an objective to provide information on the changes in federal
regulations and legislation.
To determine the extent of legalized gaming in the United States,
we reviewed testimony, reports, and articles concerning the
gaming industry, including its extent and growth.
To determine the currency transaction reporting requirements for
casinos, including tribal casinos, we reviewed BSA, the BSA
implementing regulations under 31 C.F.R. part 103, IGRA,
Nevada's Regulation 6A, and section 6050I of IRC. We also
interviewed officials from NGCB and IRS' Criminal Investigation
and Examination Divisions in Washington, D.C.
To determine what efforts have been made to ensure that casinos are
complying with currency transaction reporting requirements, we
interviewed officials at Treasury's FinCEN, Office of Regulatory
Policy and Enforcement, and IRS' Criminal Investigation and
Examination Divisions. In addition, we interviewed officials
from NGCB and IRS officials in Nevada, New Jersey, Louisiana,
Mississippi, and Connecticut. We also interviewed casino
officials in those states. We reviewed and analyzed IRS
management reports and currency transaction reporting data from
the CBRS at IRS' DCC.
To determine recent changes in federal regulations and legislation,
we reviewed the Money Laundering Suppression Act of 1994 and
recent amendments to BSA regulations; in addition, we confirmed
that Treasury and Nevada officials continue to have ongoing
discussions regarding the differences between BSA and Nevada's
regulations.
To familiarize ourselves with how casinos comply with reporting
requirements and how the requirements are enforced, we selected areas
to visit with large concentrations of casinos. We selected Las
Vegas, Nevada, and Atlantic City, New Jersey, and--for variety of
types of casinos--riverboat casinos in Louisiana and Mississippi, as
well as a tribal casino. For the latter, we chose Foxwoods Resort
Casino in Ledyard, Connecticut, the largest tribal casino in the
country. In appendix II, we list all of the casinos that we visited
for this review.
As agreed with the Subcommittee, our focus was on casinos with GAGRs
over $1 million. We did not verify the accuracy and completeness of
the data we obtained from IRS.
We did our work in Washington, D.C., and the locations visited
between March 1994 and August 1995 in accordance with generally
accepted government auditing standards. We obtained oral comments on
a draft of this report from Treasury and IRS. Their comments are
discussed in the agency comments section of this report. We received
written comments from FinCEN. They are reproduced, along with our
responses, in appendix VI.
RAPID GROWTH OF CASINOS COULD
MAKE THEM VULNERABLE TO MONEY
LAUNDERING
------------------------------------------------------------ Letter :4
Casino gaming is expanding at a rapid pace, and new casinos continue
to open across the country. Although Nevada and New Jersey casinos
still generate the most revenue from casino gaming, riverboat casinos
and tribal casinos have increased their share of total casino gross
annual gaming revenue (GAGR).\7 The expansion of casinos has also
increased the amount of money changing hands, or wagered. According
to International Gaming and Wagering Business (various issues 1988
through 1995), wagering at all types of casinos totaled about $407
billion in 1994, up from about $117 billion in 1984. In constant
dollars,\8
this represents an increase of 152 percent over this period. As the
amount of money wagered annually has increased, casinos may have
become more vulnerable to individuals who attempt to launder their
illegal profits in the fast-paced environment of casino gaming.
--------------------
\7 GAGR is defined as the total amount wagered less payouts returned
to players.
\8 By removing the influence of inflation on purchasing power,
constant dollars are used to compare dollar values at one date
relative to dollar values at another date.
NEVADA AND NEW JERSEY
GENERATE THE LARGEST CASINO
REVENUES
---------------------------------------------------------- Letter :4.1
Although 13 states and Puerto Rico permit games of chance, such as
roulette, craps, slot machines, and blackjack, that take place at
nontribal casinos, Nevada and New Jersey generate the largest casino
revenues. In 1994, Nevada and New Jersey reported combined casino
GAGRs of about $10.2 billion; this represented approximately 56
percent of the total nationally reported casino GAGRs--$18.4
billion--for that year. Nevada has had legalized gaming since 1931
and, as of June 1994, had over 400 casinos, of which about 220
generated GAGRs of over $1 million each. Although casinos operate in
other Nevada cities, including Reno, Lake Tahoe, and Laughlin,
approximately 120 of these 220 casinos are located in Las Vegas.
Reported GAGRs for all Nevada casinos (excluding tribal casinos) were
approximately $6.8 billion in 1994. Appendix III indicates the
prevalence of legalized gaming throughout the country and in Puerto
Rico.
Since 1976, gaming has been legal in New Jersey. Twelve large
casinos, the only casinos in New Jersey, operate along the boardwalk
and in the marina area of Atlantic City. All 12 generated GAGR in
excess of $1 million; their total reported GAGRs for 1994 were about
$3.4 billion. Appendix IV illustrates total GAGRs by gaming
activities and for casinos in 1994.
THE NUMBER OF RIVERBOAT
CASINOS HAS INCREASED
---------------------------------------------------------- Letter :4.2
The growth of riverboat casino gaming has been dramatic. Prior to
1991, there were no riverboat casinos operating in the United States.
Since then, close to 60 riverboat casinos\9 have opened, but several
have relocated due to a high level of competition in some areas.
Initially, riverboat casinos were located primarily along the
Mississippi River in Iowa and Illinois, but they have also expanded
to other locations, such as Tunica, Mississippi (near Memphis,
Tennessee), and New Orleans. Figure 1 shows a riverboat casino.
Figure 1: Riverboat Casino
(See figure in printed
edition.)
As of September 1994, 57 riverboats operated in five states:
Illinois, Iowa, Mississippi, Missouri, and Louisiana. Indiana has
passed legislation allowing riverboat casinos, but none were
operating at the time of our review. Several other state
legislatures have considered legislative initiatives to legalize
riverboat gaming as a means of bringing new revenue into their
states. Between 1992 and 1994, reported riverboat casino GAGRs
increased from $0.4 billion to about $3.3 billion, thereby capturing
about 18 percent of the total casino revenue.
--------------------
\9 The category "riverboat casino" also includes barges and dockside
casinos.
INDIAN GAMING HAS GROWN
RAPIDLY
---------------------------------------------------------- Letter :4.3
The growth of Indian gaming, which includes casino and bingo
operations, has also been rapid. Ten years ago, Indian gaming was
practically nonexistent. However, as of March 1995, we estimated
that there were 237 Indian gaming operations, including 119 tribal
casinos, in 29 states. Between 1992 and 1994, reported tribal casino
GAGRs grew from about $1.2 billion to about $3.0 billion, thereby
capturing about 16 percent of the total casino revenue. As figure 2
illustrates, Indian gaming operations, including tribal casinos, are
currently located throughout the United States.
Figure 2: States With Indian
Gaming Operations
(See figure in printed
edition.)
Note: The 29 identified states
contain a total of 237 Indian
gaming operations, of which 119
are tribal casinos. The
numbers in parentheses are
state totals.
(See figure in printed
edition.)
Source: GAO analysis of
National Indian Gaming
Commission and Bureau of Indian
Affairs data (March 1995).
(See figure in printed
edition.)
Indian gaming may generate large amounts of revenue for some of the
tribes that own these operations. For example, according to a report
by the California attorney general's office, in 1993 three tribal
casinos near San Diego generated a total of over $200 million in
revenues. Foxwoods Resort Casino in Ledyard, Connecticut--owned by
the Mashantucket Pequot Tribe--reported revenue in excess of $40
million per month in 1994. Indian gaming operations may also
generate additional income for the states in which they are located.
For example, in 1994, the Pequot tribe paid the State of Connecticut
about $136 million under a compact governing the operation of the
casino in the state. Figure 3 shows the largest tribal casino in the
United States.
Figure 3: Largest Tribal
Casino in the United States
(See figure in printed
edition.)
Copyright Foxwoods Resort
Casino, 1995, photographer Gary
J. Thibeault, CPP, Westerly,
RI 02891. All requests for
republication should be
referred to the above-named
individual.
(See figure in printed
edition.)
LARGE AMOUNTS WAGERED
INCREASE THE POTENTIAL FOR
MONEY LAUNDERING
---------------------------------------------------------- Letter :4.4
The amounts of money wagered in all forms of legalized gaming have
increased substantially along with the expansion of legalized gaming.
According to International Gaming and Wagering Business (various
issues 1988 through 1995), between 1984 and 1994, the total annual
amount wagered in all forms of legalized gaming jumped from
approximately $147 billion to approximately $482 billion. In
constant dollars, this represents an increase of 137 percent over
this period of time. Casino gaming and Indian gaming operations
together account for the largest amounts of money wagered in
legalized gaming activities. About $368 billion, or 76 percent of
the $482 billion wagered in 1994, was wagered in nontribal casinos;
Indian gaming operations, including tribal casinos, accounted for
about $41 billion, or 9 percent of the total. Figure 4 illustrates
the total dollar amounts wagered, by gaming activity, in 1994. The
shaded areas show casino activity.
Figure 4: Dollar Amounts
Wagered, by Gaming Activity,
1994
(See figure in printed
edition.)
Note: Numbers may not add due to rounding.
\a Indian gaming includes tribal casino and bingo operations.
\b Other includes legal bookmaking and charitable games.
\c Casino gaming includes riverboats.
Source: International Gaming and Wagering Business (August 1995).
According to International Gaming and Wagering Business (various
issues 1988 through 1995), wagering in nontribal casinos increased
from about $117 billion in 1984 to about $368 billion in 1994.\10
Indian gaming increased from virtually none to about $41 billion
during the same period. Figure 5 illustrates the increase in the
total dollar amounts wagered in casino gaming and Indian gaming
between 1984 and 1994.
Figure 5: Increases in Dollar
Amounts Wagered in Casino
Gaming and Indian Gaming, 1984
to 1994
(See figure in printed
edition.)
Note 1: Dollar figures represent actual dollars (no adjustment for
inflation).
Note 2: Numbers may not add due to rounding.
\a Indian gaming includes tribal casino and bingo operations.
Source: International Gaming and Wagering Business (various issues
1988 through 1995).
According to IRS' Criminal Investigation Division, casinos are
particularly vulnerable to the initial stage of money laundering,
called the "placement" stage, in which money from illegal activities
is introduced into the financial system through banks or
cash-intensive businesses. Casinos are also vulnerable to money
launderers because of the fast-paced nature of the games and because
casinos can provide their customers with many financial services
nearly identical to those generally provided by banks. Figure 6
illustrates the dollar amounts wagered in casinos in 1994.
Figure 6: Dollar Amounts
Wagered in Casinos, 1994
(See figure in printed
edition.)
Note: Numbers may not add due to rounding.
\a Other includes casinos in other states and various gaming devices
located in noncasino environments.
\b Tribal casinos do not include bingo operations.
Source: International Gaming and Wagering Business (August 1995).
--------------------
\10 In constant dollars, this represents an increase of 128 percent
over this period.
CASINOS SUBJECT TO DIFFERENT
CURRENCY TRANSACTION REPORTING
REQUIREMENTS
------------------------------------------------------------ Letter :5
Currency transaction regulations and reporting requirements provide
the primary deterrent to, and means of detection of, money laundering
in casinos. However, not all casinos are subject to the same
regulations and reporting requirements. Because the regulations and
reporting requirements for tribal casinos and Nevada casinos differ
from BSA requirements, information reported to IRS differs. These
differences may cause problems for law enforcement officers looking
for a consistent paper trail of records with which to trace all
gaming activity of customers engaged in large cash transactions, as
well as to help identify potential money laundering activities.
COMPARISON OF CURRENCY
TRANSACTION REPORTING
REQUIREMENTS FOR CASINOS
---------------------------------------------------------- Letter :5.1
Generally, BSA currency transaction reporting requirements have
applied to all casinos with GAGRs over $1 million, except those in
Nevada and tribal casinos.\11 Nevada casinos operate under State
Regulation 6A, and tribal casinos under IGRA have been subject to
section 6050I of the Internal Revenue Code (IRC) for cash-intensive
businesses. Table 1 provides a comparison of the three sets of
requirements and the corresponding reports that must be filed with
IRS.
Table 1
Comparison of Laws and Currency
Transaction Reporting Requirements for
Casinos
Type of Related Report(s) Compliance
casino Law provision required responsibility
------------ ------------ ------------ ------------ --------------
BSA BSA 31 C.F.R. Currency IRS
casinos part 103 Transaction Examination
Report by Division
Casinos
(CTRC): IRS
Form 8362
Nevada Nevada Nevada State Nevada Nevada Gaming
casinos Gaming Regulation Currency Control Board
Control Act 6A Transaction Audit Division
Report (CTR)
and
Currency
Transaction
Incidence
Report
(CTIR)
Tribal IGRA\b Section Report of IRS
casinos\a 6050I of IRC Cash Examination
Payments Division
Over $10,000
Received in
a Trade or
Business:
IRS Form
8300
----------------------------------------------------------------------
\a The Money Laundering Suppression Act of 1994 expanded the
definition of financial institutions subject to BSA reporting
requirements to include certain tribal casinos. On August 3, 1995,
Treasury published proposed amendments to the BSA implementing
regulations that would subject certain tribal casinos to BSA
reporting and recordkeeping requirements.
\b IGRA requires certain tribal casinos to report cash transactions
under section 6050I of IRC. Until the proposed BSA amendments become
effective, tribal casinos will remain subject to the reporting
requirements under section 6050I of IRC.
Source: GAO analysis of federal and state currency transaction
reporting requirements.
Information reported to IRS on the nature of the cash transaction and
the identity of the customer varies according to the type of casino
involved. For example, Nevada casinos are not required to report any
information on customers who win over $10,000 if a casino employee
verifies that the winnings are the result of gaming at the casino.
On the other hand, under BSA regulations, casinos are required to
report all cash transactions over $10,000, including gaming winnings.
Tribal casinos currently are required to report only those cash
transactions involving cash receipts by the casino exceeding $10,000.
Table 2 summarizes certain reporting requirements under BSA, Nevada's
Regulation 6A, and IRC. Table 2 also includes certain cash
transactions that are prohibited by Nevada's Regulation 6A because
they could facilitate money laundering.
Table 2
Comparison of Certain Currency
Transaction Reporting Requirements and
Prohibitions for Casinos
Requirements and Nevada Tribal
prohibitions BSA casinos casinos casinos\a
-------------------------- ------------ ------------ --------------
Reporting requirements
All cash in over $10,000 X X X
All cash out over $10,000 X
All cash out over $10,000 X
except verified winnings\b
Aggregation of multiple X X
transactions during a
gaming day\c (in same
gaming area of the
casino)\d
Aggregation of multiple X
transactions during a
gaming day (in different
gaming areas of the
casino)
Detailed currency X X
transaction reporting and
recordkeeping system
Prohibited transactions
Exchanging cash for cash X
over $2,500
Exchanging cash for a X
casino check over $2,500
Exchanging cash for a wire X
transfer over $2,500
----------------------------------------------------------------------
\a On August 3, 1995, Treasury published proposed amendments to the
BSA implementing regulations that would subject certain tribal
casinos to BSA reporting and recordkeeping requirements. Until these
proposed BSA amendments become effective, tribal casinos will remain
subject to the reporting requirements under section 6050I of IRC.
\b Verified winnings are gaming winnings that are verified by a
casino employee as having been won at the casino.
\c Nevada's Regulation 6A refers to a gaming day as a 24-hour period.
\d Aggregation refers to recording multiple transactions conducted by
the same individual within a gaming day and totaling over $10,000 as
a single transaction. With respect to tribal casinos, IRC
regulations for section 6050I provide that initial payments not
exceeding $10,000 must be aggregated with subsequent payments made
within 1 year of the initial payment until the aggregate amount
exceeds $10,000.
Source: GAO analysis of BSA, Nevada's Regulation 6A, and IRC.
--------------------
\11 With regard to tribal casinos, the Money Laundering Suppression
Act of 1994 expanded the definition of a financial institution
subject to BSA reporting requirements to include them. On August 3,
1995, Treasury published proposed amendments to the BSA implementing
regulations that would subject certain tribal casinos to BSA
reporting and recordkeeping requirements.
BSA CASINOS MUST REPORT ALL
CURRENCY TRANSACTIONS OVER
$10,000
---------------------------------------------------------- Letter :5.2
BSA reporting requirements apply to all currency transactions over
$10,000 that take place in casinos, except those taking place in
Nevada and tribal casinos. These requirements include reporting all
cash coming into the casino, such as chip purchases and money placed
on deposit for safekeeping, and all cash going out of the casino,
such as chip redemptions and cash payouts for slot machine winnings.
IRS officials in the New Orleans district told us that the BSA
reporting and recordkeeping system is a deterrent to money laundering
because concealment of transactions would require the involvement of
more than one casino employee. Employees in different areas of the
casino, including those in the cage areas and on the gaming floor,
track customer gaming activity and maintain logs and records needed
to prepare currency transaction reports. According to New Orleans
IRS officials, the BSA system makes it more difficult for a customer
to circumvent currency transaction reporting requirements without the
cooperation of several casino employees. Treasury and IRS
headquarters officials told us that BSA is also a deterrent because
customers know that currency transactions will be reported to IRS.
BSA reporting regulations require that certain casinos with GAGRs
over $1 million report all currency transactions over $10,000 to IRS.
BSA reporting regulations also require that multiple currency
transactions be reported to IRS as a single transaction if the casino
has knowledge that the transactions (1) were conducted by, or on
behalf of, the same individual and (2) total over $10,000 in a gaming
day. Such currency transactions are to be reported on Currency
Transaction Report by Casinos (CTRC) Form 8362. CTRCs include
specific information about the type of transaction as well as
identifying information on individuals conducting the transactions,
such as their Social Security numbers. (App. V includes an example
of a CTRC.)
CHANGES TO BSA REGULATIONS
---------------------------------------------------------- Letter :5.3
In December 1994, certain changes to BSA reporting and recordkeeping
requirements for casinos became effective. Among other things, the
regulations now require that every casino subject to BSA establish a
BSA compliance program that includes
developing internal controls to ensure BSA compliance,
conducting independent testing (auditing) for BSA compliance,
training casino personnel in BSA compliance,
designating personnel responsible for day-to-day compliance with
BSA currency transaction reporting requirements, and
using existing automated data processing systems to aid in ensuring
compliance.
Casinos must also obtain and verify additional identifying
information about customers who wish to deposit funds, open an
account, or establish a line of credit. This will provide casinos
with information on regular customers in line with Treasury's
intention to require financial institutions to establish
"know-your-customer" programs\12 to encourage casinos to become
familiar with the practices of their regular customers and to report
out-of-the-ordinary, or suspicious, transactions to IRS. It will
also encourage casinos to take a more active role in ensuring their
own compliance with BSA requirements.
--------------------
\12 The purpose of these programs is to have banks and other nonbank
financial institutions become more familiar with their customers so
that they can identify and report activity that is out of the
ordinary and might be linked to money laundering or other illegal
activity.
NEVADA REPORTING
REQUIREMENTS
---------------------------------------------------------- Letter :5.4
Nevada casinos are required to report cash coming into the casino and
cash going out, except verified winnings, on a state Currency
Transaction Report (CTR). Winnings are reported on Currency
Transaction Incidence Reports (CTIR), which do not include customer
identification for
cash payouts greater than $10,000 on wagers or
redemption of chips that exceed $10,000, if the chips are from
verified winnings.
For both of these transactions, a casino employee must verify that
customer winnings are the result of gaming at the casino. Casino
officials believe this employee verification is important because
CTIRs distinguish casino payouts in the form of winnings--a
legitimate gaming activity--from all other currency transactions
conducted in the casino that could be avenues for money laundering.
Both CTRs and CTIRs from Nevada casinos are forwarded by the Nevada
Gaming Control Board (NGCB) to IRS' Detroit Computing Center (DCC).
According to an official at DCC, information from Nevada's CTRs is
entered into the Currency and Banking Retrieval System (CBRS), but
information from CTIRs is not included in the database; CTIRs are
filed separately. IRS and Financial Crimes Enforcement Network
(FinCEN) officials reported that the CTIR information is "useless" to
IRS because the forms, which do not include customer names or any
customer identification, provide an incomplete picture of a currency
transaction. (App. V contains examples of Nevada's CTR and CTIR
forms.)
Nevada regulations generally do not require reporting aggregation
related to gaming in different areas of the casino.\13 Instead,
Nevada casinos are required to aggregate transactions that take place
in the same gaming area of the casino--for example, multiple cash
purchases at blackjack tables--but are not required to aggregate
transactions occurring in different gaming areas of the casino--for
example, chip purchases on blackjack and roulette tables by the same
player. IRS and FinCEN officials believe that, to the extent the
casino has systems in place with which to track a customer's multiple
transactions, or is otherwise aware of a customer's currency
activity, it should report transactions over $10,000. This would
provide a complete record of all reportable gaming activity by casino
patrons.
--------------------
\13 Aggregation of transactions occurring in different gaming areas
of the casino is not required under Nevada regulations unless the
casino has knowledge that the same individual conducted multiple
transactions of the same type totaling over $10,000 within a 24-hour
period.
POSSIBLE CHANGES TO NEVADA'S
REGULATIONS
---------------------------------------------------------- Letter :5.5
Since 1993, Treasury officials have had ongoing discussions with
Nevada casino officials and regulators about possible changes to
Nevada's Regulation 6A aimed at making it more closely parallel BSA
recordkeeping and reporting requirements. Although Treasury
officials have had a continuing dialogue with Nevada officials, no
details were available to us as of September 1995.
NEVADA PROHIBITS CERTAIN
TRANSACTIONS THAT COULD
FACILITATE MONEY LAUNDERING
---------------------------------------------------------- Letter :5.6
Nevada regulations prohibit certain cash transactions that may lend
themselves to money laundering. BSA provisions have no such
prohibitions. Specifically, Nevada prohibits casinos from
exchanging cash for cash in an amount greater than $2,500;
issuing a negotiable instrument, such as a casino check, in
exchange for cash in an amount greater than $2,500; and
effecting any transfer of funds, such as a wire transfer, in
exchange for cash in an amount greater than $2,500.
Consequently, Nevada regulations prohibit casino patrons from simply
exchanging their cash for cash of a different (e.g., larger)
denomination, or for another monetary instrument. For example, small
denomination bills from illicit drug sales cannot be converted to
large bills in transactions exceeding $2,500. Officials at the NGCB
and casino officials we interviewed told us that they strongly
believe that the prohibited transactions specifically prevent and act
as a deterrent to money laundering, even though they have no evidence
to measure the effectiveness of the prohibitions.
According to testimony by an IRS official in 1993, money laundering
has occurred in casinos in a variety of ways, including the
exchanging of large amounts of cash for casino checks and small
denomination bills for larger bills. These types of transactions
involving amounts over $2,500 are prohibited in Nevada under
Regulation 6A.
IRS officials in the districts we visited had different opinions
about prohibited transactions. IRS officials from the Criminal
Investigation and Examination Divisions in the New Orleans District
said that prohibiting certain transactions, as Nevada does, would be
a deterrent to money launderers. The IRS gaming industry specialist
in Nevada told us that prohibiting certain transactions, as
Regulation 6A does, is a strong deterrent to money laundering.
Further, an IRS oversight review of Nevada casinos by the Las Vegas
District in February 1992 noted that prohibiting certain transactions
is one of the strengths of the Nevada system. Conversely, officials
from the IRS Criminal Investigation and Examination Divisions in
Newark said that prohibiting certain transactions does not provide
any information on customers attempting these transactions, nor does
it provide a paper trail of records for law enforcement to follow.
Further, they said that prohibiting certain transactions from
occurring in BSA casinos would require undercover efforts on the part
of IRS to ensure that casinos complied with the regulations.
TRIBAL CASINO REPORTING
REQUIREMENTS
---------------------------------------------------------- Letter :5.7
Under IGRA, tribal casinos have been subject to limited reporting
requirements under section 6050I of IRC that apply only to cash
receipts and include no recordkeeping requirements. Tribal casinos
report such cash receipts over $10,000 on a Report of Cash Payments
Over $10,000 Received in a Trade or Business, IRS Form 8300. In
addition, IRC regulations for section 6050I provide that initial
payments not exceeding $10,000 must be aggregated with subsequent
payments made within 1 year of the initial payment until the
aggregate amount exceeds $10,000.
Form 8300 information is included in the CBRS database. However,
because it contains income tax information, this form is generally
unavailable to law enforcement agencies conducting money laundering
or other criminal investigations. (App. V contains an example of
IRS Form 8300.) In comparison, BSA mandates comprehensive currency
transaction reporting for all transactions over $10,000 and requires
a detailed recordkeeping system.
CERTAIN TRIBAL CASINOS ARE
TO BE SUBJECT TO BSA
CURRENCY TRANSACTION
REPORTING REQUIREMENTS
---------------------------------------------------------- Letter :5.8
The Money Laundering Suppression Act of 1994\14 expanded the
definition of a "financial institution" subject to BSA reporting
requirements to include certain tribal casinos. More specifically,
under section 409 of the act, entitled "Uniform Federal Regulation of
Casinos," the term "financial institution" was expanded to include
both those casinos currently subject to BSA reporting requirements
and Indian gaming operations, such as tribal casinos, with GAGRs over
$1 million. IRS Examination Division officials told us that this
change was meant to provide more consistent reporting by tribal
casinos, as well as a more complete record of customer transactions.
According to FinCEN officials, Treasury's Office of Regulatory Policy
and Enforcement is responsible for drafting, implementing, and
providing interpretative guidance on BSA regulations. This involves
publishing the regulations in the Federal Register and considering
comments before the new regulations become effective. On August 3,
1995, Treasury published proposed amendments to BSA implementing
regulations that would subject certain tribal casinos to BSA
reporting and recordkeeping requirements. This change is intended,
in part, to clarify the currency reporting obligations of tribal
casinos and to bring certain tribal casinos under Treasury's
anti-money-laundering controls. Until these proposed amendments
become effective, tribal casinos will remain subject to the more
limited reporting requirements under section 6050I of IRC. The
proposed regulation permits written comments on or before November 1,
1995, with the effective date being 90 days after publication of the
final rule.
--------------------
\14 P.L. 103-325, 108 Stat. 2243 (1994).
COMPLIANCE REVIEWS HAVE VARIED
FOR DIFFERENT TYPES OF CASINOS
------------------------------------------------------------ Letter :6
IRS' Examination Division is responsible for ensuring that casinos
comply with BSA reporting and recordkeeping requirements. IRS is
also responsible for ensuring that tribal casinos comply with the
section 6050I reporting requirements. The NGCB Audit Division is
responsible for ensuring that Nevada casinos comply with Regulation
6A.
Regulatory efforts to determine compliance with currency transaction
reporting requirements have varied for different types of casino.
IRS has performed some compliance reviews at BSA casinos, as has NGCB
at Nevada casinos. Some transaction reporting violations were found
by both IRS and NGCB, and fines have been assessed at Atlantic City
and Nevada casinos. IRS has also made efforts to inform and educate
the management of newer casinos, particularly riverboat and tribal
casinos, about transaction reporting requirements. However, IRS
compliance reviews at riverboat casinos had only recently begun at
the locations we visited, and consequently results were not available
at the time of our review. Moreover, as of August 1995, IRS had not
completed any compliance reviews of tribal casinos.
COMPLIANCE REVIEWS AT
CASINOS SUBJECT TO BSA
REQUIREMENTS
---------------------------------------------------------- Letter :6.1
Casino compliance reviews are complex. According to the IRS' 1994
BSA Compliance Check Handbook, compliance reviews of BSA casinos
consist of interviews with casino management and employees, reviews
of the casino's reporting and recordkeeping systems--which may be
computerized--and analyses and matches of casino transaction records
with casino filings in the CBRS database in Detroit. IRS'
Examination Division personnel who conduct compliance reviews require
specialized training and knowledge of casino operations and
recordkeeping systems.
Due to the rapid growth of the casino industry, IRS has been training
Examination Division personnel, including revenue agents, tax
auditors and compliance officers, to perform casino compliance
reviews at casinos subject to BSA requirements. IRS policy is to use
computer auditing techniques whenever possible. IRS has also
conducted several training seminars, including a seminar in November
1994 on conducting compliance reviews at riverboat casinos.
In addition to casino compliance reviews, Examination personnel are
responsible, as previously mentioned, for BSA compliance reviews of
more than 100,000 nonbank financial institutions, as well as for both
individual and business tax compliance audits. They are also
responsible for section 6050I compliance reviews on all trades and
businesses.
The IRS Examination Division, like much of the federal government, is
faced with declining resources. Over the past 6 years, Examination
resources have declined from the 1989 level of 31,315, to 28,788 in
1995--a decrease of over 2,500 during that period. We recognize
that, as resources decline, there are fewer and fewer Examination
personnel to conduct IRS compliance reviews, including BSA casino
reviews.
IRS Examination Division officials told us that each of its current
63 districts has a coordinator responsible for (1) identifying
nonbank financial institutions, (2) selecting/targeting for review
institutions with a high potential for noncompliance, and (3)
scheduling compliance reviews. According to the IRS BSA Compliance
Check Handbook, when selecting institutions for a compliance review,
the coordinator is to consider achieving a balanced coverage of the
different types of nonbank financial institutions, including casinos.
In addition, the focus should be on institutions with a high volume
of cash transactions or with abnormal cash activity.
The IRS Examination Division prepares a comprehensive currency and
banking quarterly report that includes the total number (or
inventory) of casinos subject to BSA requirements and the number of
compliance reviews completed. In 1990, a Senate Appropriations
Committee report required that IRS submit this information to the
Committee so that it could track IRS compliance efforts at nonbank
financial institutions, including casinos. In December 1991, IRS
reported an inventory of 146 BSA casinos with GAGRs in excess of $1
million each. In December 1994, the number of BSA casinos reported
had increased to 337.\15
Meanwhile, between October 1991 and December 1994, IRS had completed
24 BSA compliance reviews at casinos.\16
--------------------
\15 This number does not include Nevada casinos or tribal casinos.
\16 During this time period, according to IRS Examination Division
officials, IRS erroneously reported 50 compliance reviews of casinos
to the Senate Appropriations Committee. (Due to data entry errors,
IRS misclassified 26 compliance reviews of telegraph companies under
casinos.)
IRS COMPLIANCE EFFORTS AT
BSA CASINOS
---------------------------------------------------------- Letter :6.2
Between 1986 and 1990, IRS completed compliance reviews at 10 of the
12 Atlantic City casinos, identifying in the process numerous
currency transaction reporting and recordkeeping violations. As a
result, in 1993 Treasury assessed civil penalties of about $2.5
million against the 10 casinos. Among other violations, IRS found
that every casino examined had failed to file some required reports
on currency transactions and, in addition, had not expended
sufficient resources and conducted enough training to comply fully
with the BSA requirements.
According to IRS, compliance reviews in Atlantic City were
accomplished through interviews, on-site inspections of casino
records, and computer matching of casino records with CTRCs filed at
DCC. In addition, according to IRS, casino records that did not
match were traced to original casino documents to determine whether
transactions over $10,000 were reported to DCC and whether they were
correctly reported.
Officials from IRS' Examination Division told us that the Newark
District recently began compliance reviews at the two Atlantic City
casinos that were not reviewed earlier. Newark District officials
reported that they plan to follow a 3-year cycle for compliance
reviews at the 12 Atlantic City casinos--that is, complete
approximately 4 per year.
IRS examiners had just begun to perform compliance reviews at
riverboat casinos at the time of our review. At the time of our
visit, six compliance reviews were in progress in Mississippi. In
December 1994, the Jackson District reported that it planned to
conduct compliance reviews at casinos in the order that the casinos
opened. Casinos under review in December 1994 opened for business in
1992; the 1995 plan calls for review of those casinos opened in 1993.
As of December 1994, there were 34 casinos operating in Mississippi.
IRS officials in the New Orleans District said that they had not
conducted any compliance reviews at Louisiana riverboat casinos. IRS
was working with the Louisiana State Police to ensure that casino
personnel were informed about BSA reporting requirements. Agents
from the New Orleans District said that they had also performed some
educational visits to ensure that casino personnel understood BSA
reporting requirements. IRS Examination Division and Criminal
Investigation Division officials in New Orleans stated that they work
together to ensure that casinos comply with BSA requirements, and
that any potential money laundering would be investigated.
In addition to compliance efforts at the locations we visited--in
Atlantic City, Louisiana, and Mississippi--IRS has also taken steps
both to educate casino officials in other states about BSA reporting
requirements and to ensure that the officials understand their
responsibilities under BSA. Officials from IRS' Money Laundering
Team said that the IRS strategy for compliance for all nonbank
financial institutions is "three Es"--educate, enhance, and enforce.
IRS has also held training conferences for computer audit
specialists, agents, examiners, and compliance officers to teach them
the complexities of conducting compliance reviews at casinos.
Further, IRS has detailed agents to work with state casino gaming
commissions in Illinois, Indiana, and Missouri to assist in
conducting casino background investigations and to help ensure that
casinos are complying with BSA.
IRS HAD NOT COMPLETED ANY
COMPLIANCE REVIEWS AT TRIBAL
CASINOS
---------------------------------------------------------- Letter :6.3
As of March 1995, the IRS Examination Division had not completed any
reviews of tribal casinos, although under IGRA they have been subject
to the currency transaction reporting requirements of IRC section
6050I since 1988. Officials from the Money Laundering Team in the
Examination Division said that, before undertaking reviews of tribal
casinos, they believed it was necessary to establish procedures and
appropriate protocol for conducting reviews on Indian lands.
In January 1993, IRS announced a delay in planned reviews of tribal
casinos. This temporary delay ended in January 1994. The IRS
national office directive specified that the reason for the delay was
that IRS "did not have a consistent and systematic compliance
strategy" for conducting reviews on Indian lands. According to an
IRS official, a strategy could not be developed until a resolution
was reached concerning an "inconsistency" in the act.\17 FinCEN noted
that this situation creates a reporting ambiguity that may have
confused some Indian gaming operators about their obligations to
report such large currency transactions. While no clear strategy for
conducting compliance reviews on Indian lands has been developed, on
August 3, 1995, Treasury published a proposed regulation to bring
certain tribal casinos under Treasury's anti-money-laundering
controls. According to FinCEN, this change is intended, in part, to
clarify the currency reporting obligations of tribal casinos.
Officials from IRS' Money Laundering Team at the national office said
they had been developing an Indian Assistance Handbook that should
"help to create consistency in IRS district office procedures for
conducting compliance reviews" and foster cooperative relationships
with the tribes involved in gaming activities. According to the team
manager, several agencies, including the Bureau of Indian Affairs and
representatives from the National Indian Gaming Commission, had
worked with IRS to develop the handbook. The handbook is to include
protocol for contacting tribal officials, as well as clarify issues
involving access to casino records for tax and compliance reviews.
However, as of August 1995, the team manager did not know when the
handbook would be published.
--------------------
\17 Section 20(d)(1) of IGRA (25 U.S.C. � 2719(d)(1)) provides that
certain provisions of IRC, including section 6050I, shall apply to
winnings from Indian gaming operations. Section 6050I, in general,
requires a report of cash received by trades or businesses for
amounts over $10,000. IRS and FinCEN note that section 6050I and
section 2719(d)(1) are inconsistent with one another because section
6050I applies to incoming cash ("cash-in") transactions, whereas
section 2719(d)(1) relates to winnings that are "cash-out"
transactions.
NEVADA'S COMPLIANCE EFFORTS
---------------------------------------------------------- Letter :6.4
The NGCB Audit Division conducts three different types of compliance
reviews:
interim audits, to be conducted annually, are to include the
testing of all currency transaction reporting procedures and a
limited document review;
full audits, to be performed every 2-3 years, are to include
extensive document review to test all procedures for compliance
with reporting requirements; and
covert checks,\18 to be conducted periodically, are similar to
undercover operations and are to be used to test casino
compliance with Nevada's currency transaction requirements.
According to a 1992 IRS oversight review, one of the strengths of the
Nevada system is that NGCB is to conduct either an interim audit or a
full audit at all casinos under Regulation 6A at least once a year.
The covert checks are conducted on an unscheduled basis without
advance warning to the casinos. Typically, a NGCB agent enters a
casino and attempts to test compliance with currency transaction
reporting requirements, or tries to conduct a prohibited transaction.
For example:
an agent might try to purchase chips in an amount over $10,000 as a
test to determine whether casino employees properly record the
currency transaction on a CTR; or
an agent might try to exchange $5,000 in cash for another $5,000
cash from the casino, or $5,000 in cash for a casino check.
(Both are prohibited transactions in amounts over $2,500.)
As of November 1994, NGCB had found currency transaction reporting
and recordkeeping violations at 24 casinos and had fined 22 casinos
about $1.8 million.
--------------------
\18 These are referred to by NGCB as "participatory transactions."
CONCLUSIONS
------------------------------------------------------------ Letter :7
Legalized gaming is expanding rapidly across the United States.
Casino gaming is among the fastest growing forms of legalized gaming,
and new casinos continue to open around the country. Two areas of
notable growth are riverboat casino gaming and Indian gaming. Along
with this growth has come a large increase in the amount of cash
wagered at all casinos, which totaled about $407 billion in 1994.
With this much cash changing hands, casinos may be particularly
vulnerable to money laundering in the form of money from illegal
activities being placed into legal gaming transactions.
Recent BSA regulations requiring casinos to establish
anti-money-laundering compliance programs, together with the
implementation of certain provisions in the Money Laundering
Suppression Act of 1994 with respect to certain tribal casinos,
should help to deter or detect potential money laundering. These
actions, coupled with possible changes to Nevada's regulations,
should bring greater consistency and uniformity to transaction
reporting for casinos and improve the information available to law
enforcement. Measures that deter money laundering before it happens,
such as Nevada's prohibited transactions, may also help to combat
money laundering in casinos. Although there is no data to measure
effectiveness, Nevada gaming officials strongly believe in the
preventative aspects of prohibiting transactions that may lend
themselves to money laundering.
The current federal strategy for deterring and detecting money
laundering in casinos involves Treasury, which promulgates BSA
reporting and recordkeeping regulations, and IRS, which performs
compliance reviews. IRS has detailed agents to several state gaming
commissions and taken steps to assure that casinos are complying with
BSA currency transaction reporting requirements. IRS' Examination
Division has done some monitoring of Nevada's compliance program and
has established a cycle for reviewing casino compliance in Atlantic
City. Until recently, almost all of the casinos in the country were
in these two locations. In addition, FinCEN is working to develop a
partnership with the gaming industry and it is their intention to
encourage casinos to know their customers and identify suspicious
transactions.
With its very limited resources, IRS' Examination Division is
responsible for compliance reviews at BSA casinos and over 100,000
other nonbank financial institutions, in addition to the massive job
of ensuring compliance with our federal tax laws through the audit of
individual and business tax returns. It seems likely, given the
competing demands on resources, that IRS compliance review coverage
for casinos will be limited. The new BSA regulations that require
casinos to take a more active role in ensuring their own compliance
with BSA, as well as other money laundering prevention strategies
such as Nevada's prohibited transactions, could be positive steps
toward compliance given the limited IRS resources for compliance
reviews.
RECOMMENDATION
------------------------------------------------------------ Letter :8
We recommend that the Secretary of the Treasury consider the costs
and benefits of an amendment to BSA to allow for the prohibition, as
Nevada does, of certain cash transactions in casinos that may lend
themselves to money laundering.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :9
On September 22, 1995, we obtained oral comments separately from
Treasury and IRS officials on a draft of this report. At Treasury,
we met with FinCEN representatives, including the Associate Director
of the Office of Regulatory Policy and Enforcement. We also met with
IRS officials, including the National Director for Compliance
Specialization. In addition, FinCEN sent us written comments, which
are reproduced in appendix VI. Both FinCEN and IRS provided
clarifications and technical corrections that we have incorporated
where appropriate.
In its written comments, FinCEN said that, in general, the report is
an informative and accurate account of the growth of casino gaming in
America and of the potential threat this expansion poses for
increased money laundering. However, FinCEN disagreed for several
reasons with our recommendation that Treasury consider the costs and
benefits of an amendment to BSA to allow for the prohibition, as
Nevada does, of certain cash transactions in casinos that may lend
themselves to money laundering. FinCEN's reasons for disagreeing
included concern that our work had not demonstrated that the
prohibition of certain cash transactions would in fact deter money
laundering and that additional prohibitions would increase the
reporting burden on casinos. Both FinCEN and IRS noted that, even if
certain cash transactions were prohibited in all BSA casinos, patrons
who wished to launder money at a casino could circumvent the
prohibitions by finding other ways to launder money there.
Our objectives for this review were to provide descriptive
information on the extent of casino gaming, related reporting
requirements, and enforcement efforts. As we did our work, we became
aware of the issue of IRS' declining resources versus the growth in
casino gaming and the related potential for money laundering. While
our work was not designed to develop specific solutions, we saw the
need for Treasury to explore the feasibility of less resource
intensive ways to deter money laundering. That concept embodies the
intent of our recommendation. It seemed reasonable to us that due
consideration should be given to trying to identify some less
resource intensive options, including the possibility, by prohibiting
certain transactions, of making the laundering process more difficult
and enhancing casinos' ability to self- regulate the issue, while
simultaneously relieving some of the pressure on IRS resources.
Given the federal downsizing environment, accompanied by the growth
in casino gaming, we continue to believe that the identification of
additional, less resource intensive ways to deter money laundering
would be an appropriate step for Treasury.
---------------------------------------------------------- Letter :9.1
As agreed with the Subcommittee, we plan no further distribution of
this report until 30 days from its issue date. At that time, we will
send copies to the Secretary of the Treasury, the Commissioner of
Internal Revenue, and other interested parties and make copies
available to others upon request.
Appendix VII lists the major contributors to this report. If you
need additional information on the contents of this report, please
contact me on (202) 512-8787.
Sincerely yours,
Laurie E. Ekstrand
Associate Director, Administration
of Justice Issues
CLASSES OF INDIAN GAMING
=========================================================== Appendix I
Class Description
---------------------- ----------------------------------------------
I 1. Social games played solely for prizes of
minimal value.
2.Traditional forms of Indian gaming played in
connection with tribal ceremonies or
celebrations.
II 1. Bingo or lotto (regardless of whether
electronic, computer, or other technological
aids are used) played for prizes.
2.Pull-tabs, punch boards, tip jars, instant
bingo (if played in same location as bingo)
and other games similar to bingo.
3.Nonhouse-banking card games that state law
authorizes or does not prohibit and that are
played legally anywhere in the state.
III 1. All forms of gaming that are not Class I or
II gaming and any house banking games.\a
2.Card games such as baccarat, blackjack (21),
Pai Gow, etc.
3.Casino games such as roulette, craps, keno,
etc.
4.Slot machines and electronic or electro-
mechanical facsimiles of any game of chance,
such as video poker, video blackjack, etc.
5.Sports betting and pari-mutuel wagering,
including horse racing, dog racing, Jai Alai,
etc.
6.Lotteries.
----------------------------------------------------------------------
\a A house banking game is any game of chance that is played with the
house as a participant in the game, where the house takes on all
players, collects from all losers, and pays all winners--and the
house can win.
Source: IGRA and National Indian Gaming Commission Regulations.
CASINOS WE VISITED FOR THIS REVIEW
========================================================== Appendix II
(April 1994 to October 1994)
Name Type Location
---------------------- ---------------------- ----------------------
Caesars Casino Atlantic City, NJ
Mirage Casino Las Vegas, NV
Caesars Palace Casino Las Vegas, NV
Star Casino Riverboat New Orleans, LA
Grand Casino Riverboat/barge Gulfport, MS
Foxwoods Resort Casino Tribal casino Ledyard, CT
----------------------------------------------------------------------
TYPES OF LEGALIZED GAMBLING
========================================================= Appendix III
(See figure in printed
edition.)
\a Does not include gaming on Indian reservations, but does include
some riverboat gambling and casinos as well as various gaming devices
located in noncasino environments.
\b Indian gaming includes tribal casino and bingo operations (data as
of March 1995).
\c Other includes legal bookmaking (sports and horse) and charitable
games.
Source: GAO analysis of industry and government data.
TOTAL GAMING REVENUES BY GAMING
ACTIVITY AND FOR CASINOS
========================================================== Appendix IV
Figure IV.1: Total Gaming
Revenues, by Gaming Activity,
1994
(See figure in printed
edition.)
Note: Numbers may not add due to rounding.
\a Other includes legal bookmaking and charitable games.
\b Indian gaming includes tribal casino and bingo operations.
\c Casino gaming includes riverboats.
Source: International Gaming and Wagering Business (August 1995).
Figure IV.2: Total Gaming
Revenues for Casinos, 1994
(See figure in printed
edition.)
Note: Numbers may not add due to rounding.
\a Other includes casinos in other states and various gaming devices
located in noncasino environments.
\b Tribal casinos do not include bingo operations.
Source: International Gaming and Wagering Business (August 1995).
CURRENCY TRANSACTION REPORTS FOR
CASINOS
=========================================================== Appendix V
Figure V.1: Currency
Transaction Report by Casinos
(CTRC), IRS Form 8362
(See figure in printed
edition.)
Figure V.2: Currency
Transaction Report (CTR),
Nevada Form
(See figure in printed
edition.)
Figure V.3: Currency
Transaction Incidence Report
(CTIR), Nevada Form
(See figure in printed
edition.)
Figure V.4: Report of Cash
Payments Over $10,000 Received
in a Trade or Business, IRS
Form 8300
(See figure in printed
edition.)
(See figure in printed
edition.)
(See figure in printed edition.)Appendix VI
COMMENTS FROM THE FINANCIAL CRIMES
ENFORCEMENT NETWORK
=========================================================== Appendix V
(See figure in printed edition.)
The following are GAO's comments on the Financial Crimes Enforcement
Network's letter dated October 24, 1995.
GAO COMMENTS
1. FinCEN stated that our recommendation is vague and ambiguous as
to what specific transactions should be considered. Further, they
said that the report does not provide any basis for determining that
prohibiting certain transactions does in fact deter money laundering
to any appreciable extent. Our descriptive work relating to the
growth of casinos, currency transaction reporting requirements, and
related enforcement efforts was not intended to delineate the costs
and benefits of specific prohibitions against money laundering.
However, in analyzing our descriptive information, especially in
relation to the level of enforcement of anti-money-laundering
provisions of BSA and the likelihood that IRS enforcement resources
will remain limited, the need for less resource intensive means to
deter money laundering seemed evident. We believe that a study to
identify means to deter money laundering in casinos, such as by
prohibiting certain transactions, would be an appropriate step for
Treasury to take as part of an effort to control money laundering
while expending fewer federal resources.
2. Treasury notes that, in addition to the prohibition of certain
cash transactions in Nevada that we cited, other states also have
prohibited transactions, and that we do not cite which of these
Treasury should evaluate. Our work did not include an enumeration of
all transactions that are prohibited by all states, nor are we
suggesting that Treasury undertake such an effort. However, if
Treasury is aware of other prohibited transactions that seem likely
to inhibit money laundering, they too should be considered.
3. FinCEN said that it is Treasury's position that the most
effective means of combating money laundering is to determine which
cash transactions should be recorded or reported, and then to work
with the industry to ensure that suspicious activity is detected and
reported. We agree that these are very useful strategies. However,
this should not rule out adding an additional weapon to the arsenal
against money laundering. To the extent that transactions that lend
themselves to money laundering could be prohibited, the regulation
process could be even more effective. Given the limited examination
resources of IRS, follow-up on all recorded transactions seems
unlikely. Accordingly, we believe that an action that could augment
current enforcement efforts is worthy of consideration.
4. FinCEN stated that Treasury also believes that, given the
diversity of gaming operations among states, it should be up to each
state to determine the appropriateness of prohibiting certain
transactions. We did not suggest that states could not or should not
have their own regulations or prohibitions. However, if Nevada or
any other state has a regulation or prohibition that could
potentially aid the wider fight against money laundering, we believe
that it should be considered for wider application.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII
GENERAL GOVERNMENT DIVISION, LOS
ANGELES
Darryl W. Dutton, Assistant Director, Administration
of Justice Issues
GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C.
Linda R. Watson, Senior Evaluator
LOS ANGELES OFFICE
Kathleen H. Ebert, Evaluator-in-Charge
Brian J. Lipman, Evaluator
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Geoffrey R. Hamilton, Senior Attorney
*** End of document. ***