Contributed By Dickinson Wright PLLC
Marijuana Money Challenges Nevada Casinos’ Anti-Money Laundering Compliance
Casinos with gross annual gaming revenues in excess of USD1,000,000 are financial institutions in the United States. That is the state of the law since 1985 under the Bank Secrecy Act (BSA). In 2017 and beyond, a casino that falls below this gross revenue threshold, as codified in Title 31 of the United States Code, is more likely a fast-food restaurant with a single slot machine. As a function of this dollar minimum threshold, virtually every casino in the United States must satisfy anti-money laundering (AML) statutes and rules, regulations and compliance requirements, including the obligation to file various monetary activity reports. Those specific reporting responsibilities fall directly on the Compliance Department and its lead officer, which in turn means the odds are rather good that the regulatory and enforcement roulette wheel will land directly on the Chief Compliance Officer’s number. The reason is simple – in 2017 and beyond, regulators and law enforcement view a casino’s Chief Compliance Officer and the Compliance Department as a “gatekeeper”, the line of defence between casino for business and recreation versus casino as tool for unlawful financial activity.
The United States Department of the Treasury Financial Crimes Enforcement Network (FinCEN) enforces the BSA. As a result, casinos are subject to a wide range of anti-money laundering rules and regulations, including the requirement to file FinCEN Forms 104, Currency Transaction Reports, known more commonly as CTRs, and FinCEN Suspicious Activity Reports, known more commonly as SARs. Casinos that fall under these requirements are also required to maintain an anti-money laundering compliance programme with internal controls sufficient to ensure reasonable compliance with the BSA requirements. As a result, casino compliance departments are often on the cutting edge of legal developments regarding anti-money laundering, and most Compliance Officers or Directors at a casino classified as a financial institution can quote the formal regulatory requirements.
Given that background, many casino executives nevertheless are reluctant to allocate spending towards legal consulting for their BSA/AML compliance programmes. The casinos already have selected and hired their in-house experts, and allocated significant resources towards compliance, viewing doing so as sufficient. So, what value and additional insight does a law firm such as Dickinson Wright add for the casinos?
First, a law firm is privy to statutory or regulatory developments to which a Compliance Officer may not have access until after implementation of the law or regulation. Often, lawyers from Dickinson Wright are involved in commenting on relevant legislation for clients. This early notice is critical for casinos to be ahead of changes in the law and to avoid or mitigate potential penalties under the BSA. Additionally, law firms, particularly those with Dickinson Wright’s breadth of experience and knowledge bases, are well-positioned to view a cross-section of matters and bring a different and often critically objective perspective.
Second, and essential, a law firm skilled in developing and counselling on compliance programmes knows how to do so under the attorney-client privilege, including for the implementation of and updates to a casino’s BSA/AML compliance programme. A casino benefits substantially from knowing that the discourse related to programme revisions, implementation and training can become subject to the cloak of confidentiality, which may not be available where the work is by in-house counsel and is not under the direction of the Compliance Department. FinCEN’s 2016 assessment of a penalty on a Nevada casino for failing to establish and implement an effective AML compliance programme, failing to file the suspicious activity reports, and failing to retain certain required records, highlights how the protection of the attorney-client privilege is desirable for a casino confronting a compliance challenge.
On 17 August 2016, FinCEN’s Associate Director for Enforcement, Thomas Ott, reaffirmed the prior FinCEN Director’s statements from 2014 articulating the compliance imperative for casinos. Ott emphasised that FinCEN expects casinos to source their cash and will continue to push casinos towards the same compliance standards that the Government requires other financial institutions to use. Those same compliance expectations in recent years have translated into US Government enforcement actions against compliance officers, albeit not yet in the gaming industry. Specifically, quoting the former FinCEN Director, Ott pressed the point that “casinos are required to be aware of a customer’s source of funds under current AML requirements.” Associate Director Ott also said that “[r]egulations explicitly require casinos and card clubs to file SARs on ‘funds derived from illegal activity’…. In short, identifying and understanding a customer’s source of funds is not simply a ‘best practice,’ it’s a regulatory expectation that casinos take all reasonable steps to do so.”
Given these statements by FinCEN, what changed recently in Nevada that triggers a red flag for casinos? In one word, “marijuana”. In three words, “marijuana without banking”. Admittedly, marijuana in Nevada is not new information. Marijuana is classified as a Schedule I federally illegal substance under the Controlled Substances Act. In contrast to marijuana being illegal under federal law, since July 1, 2017, Nevada offers state-regulated sales of recreational marijuana. Whereas the amount of cash generated related to medical marijuana sales in Nevada may have been manageable, the owners and operators of recreational marijuana dispensaries now are dealing with an unprecedented amount of what federal law enforcement perceives as illegally-sourced cash proceeds. In Colorado, 8% of tourists visiting in 2015 who responded to a survey said they visited a marijuana dispensary. Per the Las Vegas Convention and Visitor’s authority, Las Vegas had 42,936,109 visitors in 2016. If only 8% of those visitors purchased USD25 of recreational marijuana product, that volume would introduce an additional USD85,872,218 of cash that banks and credit unions in Las Vegas will not accept – and fear accepting – for deposit.
Now that recreational cannabis sales are a reality for Nevada, this effectively puts the Nevada casino compliance officers and departments on notice that proceeds from marijuana sales are forthcoming into the casino cash-receipts stream. As regulated financial institutions, casinos have an obligation to update their BSA/AML compliance programs and identify whether cash transactions at their properties source from these federally illegal marijuana sales proceeds.
Dickinson Wright attorneys recently participated in a casino AML conference where senior representatives of FinCEN, IRS Criminal Investigations, and the Department of Justice’s Money Laundering and Asset Recovery Section acknowledged clearly the legal and regulatory compliance challenges for casinos and card clubs from marijuana-sourced cash proceeds. The representatives of these federal agencies repeatedly highlighted information-sharing among casino departments and data analytics as methods that would bolster compliance efforts and assist in identifying reportable suspicious activities. The importance of having a comprehensive risk-based compliance plan was repeatedly demonstrated, with the risk of compliance plan failures having the potential for compliance officer and corporate criminal liability in cases of willful and egregious Title 31 violations.
Obviously, this problem exists only as long as federal law continues to classify the manufacture, distribution and dispensing of marijuana a crime. The issue is sufficiently complicated such that United States Senators from both political parties, as recently as December 2016, wrote to the Acting Director of FinCEN urging FinCEN to update its guidance for the legitimate direct and indirect businesses operating in the legal market for marijuana to enable financial institutions to deal with what federal law presently considers illegally-sourced proceeds. Such is the cannabis cash conundrum of how financial services businesses, including casinos, can interact with marijuana-related businesses while complying with BSA regulations and 2013 DOJ guidance to federal prosecutors about enforcement in an environment of conflicting state laws.
Besides having regular contact with state and federal lawmakers and regulators, knowledgeable outside counsel can provide an important and valuable layer of protection for compliance officers in dealing with FinCEN investigations through the attorney-client privilege. A 2016 settlement between FinCEN and a Nevada casino, in which the casino settled BSA violations for an agreed-upon USD1,000,000 civil penalty payment, reveals a litany of problems, almost a “what not to do” list. One day after public release of the FinCEN penalty assessment, the successor owner-operator whom the Nevada Gaming Control Board approved to purchase and operate the affected casino property, following the FinCEN penalty assessment, stated such issues “will never happen” under his watch. This demonstrates and reflects the Nevada Gaming Control Board’s heightened sensitivity to BSA/AML compliance, and the expectations that the Gaming Control Board imposes on owners and operators to meet their BSA/AML obligations. BSA/AML compliance is a major criterion considered for gaming licence approval.
Involving legal counsel in the daily activities of a compliance department understandably could become prohibitively costly. At a certain point, however, decisions may evolve from daily compliance to the need to implement timely and appropriately measured remedial actions, in an effort to mitigate potential civil or criminal penalties. At that point, involving legal counsel is essential; doing so earlier not only would be prudent but also may have a prophylactic mitigating effect. Thus, the timing of retaining counsel is critical. Again, insight from the referenced FinCEN penalty assessment on the Nevada casino informs that timetable.
FinCEN summarised the violations as the casino “failed to establish and implement an effective anti-money laundering program, failed to report suspicious activity, and failed to secure and retain certain required records.” FinCEN follows this summary with an interesting commentary, “A strong culture of compliance is key to any financial institution’s ability to comply with the BSA. [The casino], however, lacked a culture of compliance.” The concept and imperative of “culture of compliance” is not unique to casinos, and the examination of a company’s compliance programme and culture is a critical issue in DOJ and Securities and Exchange Commission (SEC) settlements. And, if the casino owner or operator is a publicly-traded company, that implicates additional significant compliance and disclosure issues with which the Dickinson Wright lawyers are acutely familiar.
FinCEN pointed out that “[t]he employee responsible for managing the Casino’s compliance with the BSA was routinely disregarded by her managers, including the day-to-day gaming operations personnel … [she] complained that the Casino frequently failed to file SARs for activity that she believed was required to be reported.” In other words, FinCEN’s circumspect description of the employee was code for “whistleblower”; recent cases highlight to casinos the risks that “whistleblowers” present and the importance of dealing with whistleblowers appropriately. FinCEN wrote further that “[m]any of the prepared SARs the BSA compliance officer submitted to her direct manager for approval to file were ignored and went unfiled.… During an IRS examination in 2010, the BSA compliance officer’s direct managers instructed her to stop speaking with the examiners. Despite her role as the designated BSA compliance officer, she was never allowed by the casino’s management to see the IRS’s final examination report, and her requests to her managers to discuss the examination results were denied.”
Two recent cases further highlight the risks presented to casinos by whistleblowers. One resulted in an international casino operator and gaming company paying a total of USD15.9 million to the US Government to resolve allegations of more than USD62 million in corrupt payments to a consultant in China over a five-year period. The DOJ resolution in early 2017 was a non-prosecution agreement, including a USD6.9 million criminal fine. The resolution in mid-2016 with the SEC was a settled agency administrative proceeding that charged inaccurate books and records (to conceal the payments) and a failure to have and implement appropriate financial controls, plus a separate civil monetary penalty of USD9 million. The same company resolved a money-laundering investigation three years earlier with a non-prosecution agreement and payment of more than USD47 million for failing to file SARs in connection with the activities of a single customer. These three matters involving one company all appear to have arisen from information provided to the Government by one whistleblower.
The other recent casino case involving whistleblowers spotlights the risks to companies, particularly those that are publicly held, of retaliating against the whistleblower. In September 2016, the SEC charged a casino-gaming company also headquartered in Las Vegas with violating the anti-retaliation provision of the US federal securities laws for firing an employee, with several years of positive performance reviews, who reported to senior management and to the SEC that the company’s financial statements may be distorted. Although the ultimate conclusion of a corporate internal investigation was that the financial statements contained no misstatements, the company settled the retaliation charges with the SEC and paid a USD500,000 civil penalty. Such corporate investigations, including considering financial statement misstatements, failures in internal controls and allegations of retaliation against whistleblowers – including interacting appropriately and knowledgeably with the DOJ and the SEC – are areas in which Dickinson Wright practises actively. Similar anti-retaliation laws exist in various states, and whistleblowers also can bring civil litigation claims asserting wrongful termination.
Turning back specifically to the FinCEN casino case, retention of legal counsel would have been advisable at two points, if not more. One clear juncture at which to involve outside counsel was when the casino’s compliance officer prepared and recommended the filing of a SAR, and management either ignored her request or made a determination not to file the SAR. Involvement of experienced legal counsel at that point not only provides a third-party opinion for management to assist in its analysis but also to advise about personnel actions that management may contemplate (such as the risks of retaliating against the whistleblower). Reliance on the advice of counsel also can become an element of penalty abatement, and certainly a persuasive argument in support of abatement in federal civil and criminal matters, as long as the party seeking to assert the defence satisfies fully its requirements. In addition to the benefits of a casino asserting reliance on counsel (there is no legally recognised reliance on auditor or reliance on compliance officer defence), the casino derives the added protection of the attorney-client privilege protecting the analysis and communications in anticipation of litigation. There may be instances when a compliance officer is not aware of all facts or certain information available to upper management, and involvement of an attorney as a backstop to management’s determination is entirely appropriate.
A second logical insertion point for outside legal counsel in the referenced FinCEN case scenario occurred when the casino compliance officer responded directly to IRS Small Business/Self-Employed Division examiners. Frequently overlooked is that the IRS conducts the audits, and Dickinson Wright, unlike many law firms, has a former IRS Senior Revenue Agent among its Las Vegas attorney ranks. IRS and other federal agents, if approached properly, may go above and beyond their enforcement investigation roles during an examination and provide non-legal guidance or interpretive insights to a casino that can help with remedial measures. Such guidance and insight often come after discovery of violations.
US federal law enforcement agents conducting investigations are not present to coach or assist in a casino’s compliance process. Instead, it is entirely the obligation of the casino to do so. The primary functions of the IRS agents and other federal enforcement officials are to find instances of non-compliance and then determine the application of penalties, civil and criminal. Involvement of an attorney early in the process enables management to assess the risks at an earlier point and craft an appropriate response to each risk, including appropriate remedial measures. Federal agents often prefer to work with knowledgeable representatives, including counsel, and the use of a representative does not imply a failure to maintain a “strong culture of compliance” that FinCEN wants to see clearly.
The breakdown of communication between the compliance department and the company’s executive group is readily apparent and spelled out publicly in the FinCEN order relating to the Nevada casino. Early intervention of outside counsel – Dickinson Wright attorneys would have proactive meetings with compliance officers and their supervisors at the executive management level – would mitigate an employee's concerns about their candour and transparency with the regulators, because the compliance objectives of both FinCEN and the organisation will align. However, to the extent there are policy questions to address, a Dickinson Wright lawyer would provide counsel within the confidential structure of the attorney-client privilege. In brief, the casino’s apparent failure to involve outside counsel early in the process, or at least strategically, appears to have resulted in a stronger position for FinCEN, as evidenced by the penalty imposed.
This coming-together of intense focus on AML compliance at casinos, holding accountable gatekeepers, ever-increasing whistleblower activity and the imminent introduction of legalised marijuana in Nevada emphasises the importance of casinos and gaming companies consulting early and timely with knowledgeable counsel capable of advising on these complex issues. At Dickinson Wright, we have a depth of experience and contacts that we put at our client’s fingertips to address gaming-specific and other issues, compliance reviews and examinations, and internal and external (including state regulatory, DOJ and SEC) investigations, based on the needs and desires of our clients. And, our clients benefit from the added insight and perspective of former DOJ and SEC lawyers and former state regulators.