The American Gaming Association (AGA) recently released a memo regarding sweepstakes casinos and the potential threat that their lack of regulation posed to consumer protection. The memo asserts that the “sweepstakes” model uses a dual-currency system to mimic traditional gambling while claiming to avoid gambling laws, posing risks to consumers due to the lack of regulatory oversight. The memo urges regulators and legislators to scrutinize and potentially legislate against these sweepstakes models to ensure compliance and protect consumers. The AGA memo and actions taken against offshore operators by jurisdictions like Michigan showcase the broader push by the industry to either regulate or eliminate non-regulated forms of gaming in the United States.

Lack of Anti-Money Laundering Laws

While pointing out perceived consumer protection risks, the memo itself does not address another critical area that poses a threat to the US financial system: the risk of money laundering or other illicit activity. Without AML laws, sweepstakes casinos can become conduits for money laundering activities. The dual-currency system and the ability to exchange virtual currency for real money makes it easier for illicit funds to be laundered through these platforms.

The existing AML framework in the United States, primarily governed by the Bank Secrecy Act (BSA), focuses on traditional financial institutions and regulated casinos. However, newer gaming verticals such as sports betting, sweepstakes casinos, daily fantasy sports, and skill-based games are not explicitly covered under these laws. This creates several challenges:

1. Lack of Reporting Requirements: These newer institutions are not required to implement robust AML programs, conduct customer due diligence, or report suspicious activities. This makes it difficult for regulators to detect and prevent money laundering activities.

2. Regulatory Ambiguity: The absence of clear AML regulations for these institutions leads to ambiguity in their operations. Operators may not be aware of their obligations, and enforcement agencies may struggle to apply existing laws to these new models.

Federal Government’s Stance

The federal government has recognized the potential risks posed by these newer forms of gaming and has made reference to the fact that they may be operating as unlicensed money transmitters. This has significant implications:

1. Unlicensed Money Transmitters: If sweepstakes casinos and similar platforms are deemed to be operating as unlicensed money transmitters, they could be subject to federal prosecution. The BSA requires money transmitters to register with the Financial Crimes Enforcement Network (FinCEN) and comply with AML regulations.

2. Lower Monitoring Thresholds & Robust Requirements: If they are, in fact, deemed to be money transmitters, sports betting, sweepstakes, daily fantasy sports and other gaming institutions could be required to comply with robust regulations that have monitoring thresholds of $2,000, less than half of the standard in the gaming industry.

3. Need for Regulatory Clarity: To mitigate these risks, there is a need for clear regulatory guidance on how AML laws apply to newer gaming institutions. This would help operators understand their obligations and ensure compliance with federal regulations. Rather than fighting each other and waiting for the chips to fall one way or the other, all of these gaming and gaming adjacent operations could work together to ensure fair regulation.

Government Logjam

A change in the traditional definition of casinos under the BSA would require a Rulemaking. However, FinCEN is a small agency with a lofty set of goals established by the AML Act of 2020 that leaves little room for smaller industries such as gaming. Add to that, FinCEN’s most recent Director has an incredibly strong sanctions focus, having served as the Director of OFAC in her previous role. There are currently two global conflicts with heavy sanctions implications that are taking even more of FinCEN’s limited resources, adding to the diminished focus on gaming. Even if FinCEN is not focused on gaming, it may not stop the Department of Justice from prosecuting these new age institutions under § 1960, the criminal code for unlicensed money transmitters.  

Coming Together

As discussed in our previous blog, "The NMLRA and How Outdated Regulation Exposes the Gaming Industry to Risk", the industry could come together to propose a petition for rulemaking that would update the definition of “casino" to cover all of these new types of wagering. For sports betting operators who already have robust AML teams, this serves as a way to level the playing field against their daily fantasy, skill based and sweepstakes counterparts. For the latter groups, it provides a way to protect themselves against future prosecution and eventual regulation as money transmitters. Regardless of whether these groups can band together or not, anyone can submit a petition for rulemaking that would eventually make its way to the federal registry. This little nudge for FinCEN could go a long way.

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