Following the recession of the last decade, many states explored creative options to generate additional revenue without increasing income or sales taxes. Given the popularity of lotteries, some states – including Illinois, South Dakota, West Virginia, and Oregon – legalized video gambling machines. State governments, local municipalities, machine operators and business owners all share in the revenue the machines generate. The State of Illinois reported that video gambling machines generated $913 million1 in 2015. There are large sums of cash involved in this industry! As with any new method of placing currency into the financial system, financial institutions must assess the risks of being utilized as a conduit to launder funds. In order to manage the risks associated with video gambling, institutions should establish procedures to assist in identifying and monitoring video gambling activity.
For example, familiarity with business types that frequently have privately owned Automated Teller Machines (ATMs) such as gas stations, convenience stores and liquor stores minimize the time spent in identifying business customers that have them. To assist in identifying new and existing customers that may have video gambling machines installed on their premises, institutions should review state law to find out which businesses may install the machines. As an example, the Illinois Video Gaming Act permits video gambling machines to be placed at any establishment that serves alcohol on the premises, fraternal organizations such as lodges, veteran’s organizations and truck stops that sell diesel fuel and have a convenience store.
There are several key players in the video gambling industry, all of whom may have accounts with your institution. Financial institutions should not only be aware of the business location where the machine is placed, but also attempt to determine if the business owner is servicing the machine or if a third party placed and manages the cash. Additional licenses may be granted to businesses that manufacture, distribute or operate the machines. Any of these business types may share the revenue the machine generates with the state and the business owner where the machine is placed. Each business type presents unique risks for money laundering or illicit activity. The due diligence the financial institution performs will vary depending on the business’ role in the video gaming industry.
As with any higher-risk customer activity, the BSA Officer should evaluate the risks associated with video gambling customers and document this in the BSA/AML Risk Assessment. This should include a quantitative analysis of the number and type of customers that are involved in video gambling, the volume of activity the customers generate relating to video gambling. This risk factor can be further quantified by expressing the volume of activity as an estimated percentage of the business customers’ overall revenue. The Risk Assessment can also include a qualitative narrative explaining the inherent risks and the internal controls the financial institution implemented to mitigate the risks.
To understand the risks associated with video gambling, financial institutions must understand the flow of cash with respect to the machines. Unlike a privately owned ATM where the ATM owner must place cash into the machine and the owner receives ACH credits for the cash withdrawals, a video gambling machine only accepts cash from the gambler. Winners receive a receipt from the machine for any winnings and the business owner pays cash to the winner. Net losses are split between the business owner, the terminal operator and the state and local governments. The terminal operator removes cash from the machine and deposits cash in their accounts.
The state collects taxes from the terminal operator’s account. The business owner will receive a periodic Automated Clearinghouse (ACH) credit or check from the terminal operator. AML risk could arise from an operator and business owner collaborating to “gamble” illicit proceeds into the machines with the intent of losing purposely so that the operator can comingle the illicit cash and split the profits with the business owner. However, state governments tax video gambling proceeds between 30 and 73 percent, so the premium to launder funds in this manner is steep. Most operators service multiple machines, so large cash deposits will be common. The greatest risk of laundering money is the comingling of illicit funds without first passing them through a video gambling machine. The institution may also see the business owner withdrawing nominal amounts of cash from their account to pay winners. Again, familiarity with state law can assist in monitoring this activity. Illinois limits the payout to any single winner to $500, so a business owner’s cash withdrawal activity to service winners should not be significant.
Customer due diligence is critical to identifying and monitoring customers involved with video gambling machines. Institutions in states that have legalized video gambling may consider adding a question to customer due diligence forms inquiring if businesses own, rent space, operate or service video gambling machines. If due diligence procedures require a site visit or Google Earth internet search, checklists can be updated to include a review for video gambling machines or signage. Similar to due diligence procedures for privately owned ATMs, institutions should consider requesting copies of state licensing from the business owner, terminal operator, distributor or manufacturer to ensure they are operating in accordance with state law. Some states may also have this information publicly available.
Using Illinois again, the Illinois Gaming Board lists all licenses and applications on their website. In addition, monthly reports are available to review revenue per establishment. Institutions banking machine operators can use this information to analyze cash deposits to determine if the amount of cash deposited is comparable to the amount of cash gambled. Institutions that are banking business owners can use the monthly reports to determine if revenue sharing payouts are commensurate with the owner’s share of the machines’ revenue generated. These totals can be tracked from month to month to see if there are unusual spikes in activity or compared to similarly located businesses to see if the volume is unusually high when compared to peers.
Besides due diligence and suspicious activity monitoring requirements, the BSA Officer must also consider the impact of gambling revenue when granted Currency Transaction Report Exemptions. BSA prohibits the granting of exemptions to customers that derive more than 50% if their gross revenue from prohibited sources of which gambling proceeds is one. The BSA Officer must either perform an analysis of the business’ revenue through a review of deposit or financials such as tax returns or request that the business owner sign a certification attesting to their revenue percentages.
Many TCA clients already review ACH activity for known privately owned ATM company names, Money Service Businesses and Virtual Currency. These keyword searches may be expanded to include known business ACH Company names that operate video gambling terminals.
Don’t gamble with your BSA Program. Call TCA at (800) 934-734 to schedule your Independent Audit today!
Electronic Monitoring Keyword Searches
NOTE: This is not an exhaustive list and can change at any time. These are common companies known as of April 2016.
ATM Strings
- FD Retail ATM
- World Pay
- RBS
- CoreData
- ATMpayment
- DataStream
- ElanFS
- CAshDepot
- Cardtronics
- CashCDs
- Metabank
- Onnobeta
- MVNT
- FDC Star System
- Efunds
MSB Strings
- Western Union
- ExchangeEnvies
- MoneyGram
- MoneyOrder
- Cambia Sigue
- Remittance
- GreenDot
- ExpressHundi
- TransferPayment
Virtual Currencies
- Mtgox.com
- Bitstamp.com
- Btc-e.com
- Bitcoin.de
- Cavirtex.com
- Coinbase.com/btc
- Litecoin
- Peercoin
- Freicoin
- Ripple
- Linden Dollar
Video Gambling Operators
- Abraham Gaming
- Accel Entertainment
- Advantage Gaming
- Allied Gaming
- American Video Gaming
- Andy’s Video Gaming
- Angelle & Green Gaming
- AP Gaming
- Arkadian Gaming
- Ashiq Gaming
- Awesome Hand Services
- B & B Amusement
- Barcade Gaming
- Bell Gaming
- Compact Disc Amusements
- Donico Gaming
- DSG Amusement
- Emperor Video Slots
- Fair Share Gaming
- G.F.M. Gaming
- G3 Gaming
- Gaming & Entertainment Management
- Gold Rush Amusements
- Grand River Jackpot
- Great Lakes Vending
- Heck Gaming
- Hyperactive Gaming
- Illinois Gaming and Coin-Op
- Illinois Gaming Investors
- Illinois Gaming Systems
- Illinois Gold Rush
- Illinois Operators
- Illinois Video Gaming
- Illinois Video Slot Management
- J & J Ventures Gaming
- JHey Enterprises
- Lattner Entertainment
- Leisure Time Gaming & Amusements
- Lucky Lincoln Gaming
- LZ Entertainment
- Melody Gaming
- Metro East Video Gaming
- Midwest Electronics Gaming
- Midwest SRO
- Mississippi Gaming & Amusements
- Quad Gaming
- Renville Gaming
- Schaffner Gaming
- Sinbad’s Castle Arcade
- Skyhigh Gaming
- Slot Kings Gaming
- Stellar Gaming
- Tap Room Gaming
- Triple 7 Illinois
- T’s Gaming
- Universal Gaming Group
- Velasquez Gaming
- VIC Entertainment
- WAMI Gaming
