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FinCEN Extends $3 Million Carrot to Card Club and Casino: Reduce Assessed Civil Penalty by Completing Compliance Undertakings

FinCEN announced on May 3, 2018 that Artichoke Joe’s, a card club and casino located in San Bruno, California and founded in 1916, has entered into a revised civil money penalty assessment regarding alleged deficiencies under the Bank Secrecy Act (“BSA”).  The most interesting aspect of this revised assessment is that it allows the casino to reduce its original $8 million penalty by $3 million if it successfully completes certain compliance undertakings.

No press release has been issued to date by FinCEN regarding this revised assessment, so its specific genesis is unclear.  Nonetheless, the revised assessment illustrates that financial institutions facing Anti-Money Laundering (“AML”)/BSA enforcement actions might be able to mitigate the financial consequences — not only when negotiating the initial penalty assessment, but even after it has been imposed — by undertaking steps towards enhanced compliance and monitoring.  It is also unclear whether the onerous nature of the original assessment, when compared to the available financial resources of the assessed institution, may have played a role in the revision.

On November 15, 2017, FinCEN originally assessed a civil money penalty of $8 million against Artichoke Joe’s, doing business as Artichoke Joe’s Casino (“AJC”), which represented a “financial institution” and a “card club” within the meaning of the BSA .  The original assessment contained no section regarding compliance undertakings for the casino to perform.  According to the original assessment, the FinCEN action was not the first run-in with law enforcement experienced by AJC:

. . . . The Internal Revenue Service (IRS) examines card clubs for compliance with the BSA under authority delegated by FinCEN.  IRS conducted an examination of AJC in 2015 that identified significant violations of the BSA.

On May 9, 2011, AJC entered into a stipulated settlement with the California Bureau of Gambling Control. AJC agreed to pay a fine of $550,000, with $275,000 stayed for a two-year period, and agreed to modify its surveillance, work with the city of San Bruno to improve coordination with law enforcement, replace employees at the Pai Gow tables, and provide additional training on loan-sharking, illegal drugs, and compliance with the BSA.

The press release issued at the time by FinCEN was more explicit:

“For years, Artichoke Joe’s turned a blind eye to loan sharking, suspicious transfers of high-value gaming chips, and flagrant criminal activity that occurred in plain sight.  FinCEN’s $8 million civil penalty results from the card club’s failure to establish adequate internal controls and its willful violations of the Bank Secrecy Act,” said Jamal El-Hindi, Acting Director of FinCEN. “Casinos, card clubs and others in the gaming industry should consider their risk of exploitation by criminal elements, and understand that they will be held accountable if they disregard anti-money laundering and illicit finance laws.  This significant action highlights the need for all entities, including those in the gaming industry, to build a robust culture of compliance into their policies and procedures to ensure they are not facilitating illicit activities.”

. . . . In March 2011, AJC was the subject of a raid by state and Federal law enforcement which led to the racketeering indictment and conviction of two AJC customers for loan-sharking and other illicit activities conducted at AJC. AJC senior-level employees knew that loan-sharks were conducting criminal activity through the card club and using AJC gaming chips to facilitate illegal transactions. Nonetheless, AJC failed to file any Suspicious Activity Reports (SARs) on this activity. For example, there were several instances in which loan-sharks provided AJC chips to customers on the gaming floor within plain sight of AJC employees.

Indeed, the original and revised civil assessments allege that from October 2009 through November 2017, AJC:

  • Failed to implement an adequate system of internal controls to assure ongoing compliance with the BSA, including by (i) having AML policy which had blank spaces or contained placeholder language such as “Insert explanation of how we intend to accomplish;” (ii) failing to monitor and review subsequent activity by customers on whom AJC previously had filed a SAR; and (iii) failing to have internal controls to mitigate the risks associated with “backline betting,” which allows customers to pool or co-mingle their bets with relative anonymity.
  • Failing to use all available information to identify and verify customer information, and to file complete SARs that fully describe the extent of suspicious activity, including through an adequate narrative section.
  • Failing to file SARs regarding AJC chips allegedly used to facilitate loan-sharking.
  • Responding to a specific government inquiry about loan-shark activity by stating, through a former Facilities Manager, that “It’s a Casino. There’s always [expletive] loan-sharks.”
  • Failing to conduct adequate AML/BSA independent testing, such as by conducting AJC’s first independent test only after the executive of search warrants and arrests by state and federal officials.

The assessments explain that FinCEN arrived at the original assessment of $8 million by considering the financial condition of AJC and ability to pay; the size and sophistication of AJC (described as “one of the larger clubs operating in California”); the severity and duration of the BSA violations at issue; AJC’s awareness of loan-sharking activity on its premises; AJC’s adoption of remedial measures and cooperation with the IRS and FinCEN; and FinCEN’s “recent enforcement actions against casinos and card clubs and the impact that its penalty against AJC would have on compliance with the BSA by the casino and card club industry.”

This is hardly the first time that FinCEN has brought an AML/BSA enforcement action against a casino.  As we have blogged, because the gaming industry has been known to attract some bad actors who attempt to use its financial services to conceal or transfer illicit wealth, AML compliance remains a key concern in this growing business sector.

Successful Completion of Undertakings May Yield $3 Million Reduction in Penalty

The revised assessment contains a new Section IV, entitled “Undertakings.”  It further states that “FinCEN hereby imposes a penalty in the amount of $8,000,000, with $3,000,000 suspended pending compliance with the Undertakings set forth in Section IV of the Consent. If AJC fails to comply with the Undertakings set forth in Section IV of the Consent, AJC shall pay the entire penalty of $8,000,000.”

The compliance Undertakings, which entail a written certification of compliance by AJC involving a narrative section supported by “exhibits sufficient to demonstrate compliance,” are relatively typical for compliance requirements contained within a settlement with the government.  As noted, what is unusual is that they have been entered into almost six months after the initial penalty assessment.

Summarized, the Undertakings require AJC to:

  • Hire a qualified independent consultant, subject to FinCEN approval, to conduct two annual reviews of the effectiveness of AJC’s AML program, and to submit an annual written report regarding each review.  The annual reviews will describe any recommended modifications or enhancements to AJC’s AML program, and the consultant’s workpapers will be available to FinCEN upon request.  AJC must either implement any recommendations or propose alternatives, and must provide a written report to FinCEN regarding its implementation of any recommendations.
  • Maintain a BSA compliance officer.
  • Adopt and maintain an AML program which addresses specific issues identified by FinCEN in the assessment.
  • Hire (another) qualified independent consultant, subject to FinCEN approval, to conduct a “look back” regarding transactions from December 31, 2011 to December 31, 2014 to determine whether activity was properly reported in SARs.  Again, the consultant will prepare a written report for FinCEN; the consultant’s workpapers will be available to FinCEN; and AJC must comply with any recommendation from the consultant or FinCEN that additional SARs be filed.

It is unclear whether the parties encountered an impasse when originally entering into the November 2017 assessment regarding future compliance undertakings, whether it was anticipated at the time that a revised assessment was on the horizon once the details were worked out, or whether there was some other behind-the-scenes scenario.  Regardless, the revised assessment underscores the need for, and opportunities presented by, post-violation remediation.

Copyright © by Ballard Spahr LLPNational Law Review, Volume VIII, Number 127
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About this Author

 Peter D. Hardy, Ballard Spahr, Philadelphia lawyer, White Collar Defense lawyer, Internal Investigations, Consumer Financial Services, Privacy and Data Security, Tax
Partner

Peter Hardy advises corporations and individuals in a range of industries against allegations of misconduct—including tax fraud, money laundering, Bank Secrecy Act, mortgage fraud and lending law violations, securities fraud, health care fraud, public corruption, Foreign Corrupt Practices Act violations, and identity theft and data breach.

Mr. Hardy has extensive trial and appellate court experience. He oversees internal investigations, advises in potential disclosures to the Internal Revenue Service, and has litigated complex criminal matters at the trial and appellate levels. He...

215.864.8838
Stefanie Jackman, Ballard Spahr law firm, Partner, financial services institutions lawyer
Partner

Stefanie H. Jackman devotes her practice to assisting financial services institutions facing government investigations and enforcement actions, as well as defending them in individual and class action lawsuits. Ms. Jackman regularly handles matters arising under an array of federal and state consumer financial laws, including UDAP/UDAAP statutes, FDCPA, FCRA, TCPA, EFTA, SCRA, and TILA. Ms. Jackman represents clients across the financial services industry, including banks and nonbanks, mortgage banking lenders and servicers, debt collectors and buyers, third-party...

678-420-9490
Terence Grugan, Attorney, Ballard
Attorney

Terence M. Grugan is an associate in the firm's White Collar Defense/Internal Investigations and Commercial Litigation Practice Groups. In his white collar practice, Terence represents individuals and entities who are targets, subjects, or witnesses in criminal, regulatory, or administrative government investigations, including investigations conducted by the Department of Justice, Internal Revenue Service, Securities and Exchange Commission, state attorneys general, local, state, or federal inspectors general, and local law enforcement. Terence has defended clients from...

215-864-8320
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