The NMLRA and How Outdated Regulation Exposes the Gaming Industry to Risk

In the first of our blog series on the Department of the Treasury’s National Money Laundering Risk Assessment (NMLRA), we explored the identified risks within the gaming industry and how these challenges can be effectively addressed. In part two of this blog series, our focus shifts to the government’s misconceptions of the industry, the ongoing needs for federal support, and the risks outdated regulations pose to the US financial system.

Industry Awareness of BSA Obligations

The NMLRA raises concerns regarding the online gaming industry’s familiarity with Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) implications, particularly with online wager services. Specifically, it states the following:

“For example, online gaming platforms may not have robust AML/CFT controls; they may not be affiliated with a BSA-covered casino or entity; they may be unaware of any BSA obligations to which they may be subject as an extension of any licensing arrangement with a casino; and a BSA-covered casino could have limited visibility into potential criminal activity occurring on its third-party operator’s services. In some instances, casinos and gaming operators that do not meet the BSA’s definition of a casino (often due to a licensing requirement) may be operating as money transmitters.”

It is certainly true that online gaming platforms may not be affiliated with land-based casino licenses, which are the typical definition of a BSA-covered casino. In fact, there are states like Tennessee that have zero brick and mortar properties but have multiple sports betting licenses. However, this perspective overlooks the industry’s efforts for more regulatory guidance and its desire for compliance. To claim that awareness is an issue ignores the pleas of the collective industry through associations like the American Gaming Association. Below is a non-exhaustive list of examples where the industry has demonstrated its commitment to compliance, through calls for action, adoption of best practices, and pleas for FinCEN guidance:

These calls for guidance, updates to regulatory frameworks and calls for partnership on sports betting started before the overturning of PASPA in 2018. They have intensified since then, with several letters, updates to best practices and quotes from industry representatives.

Addressing the Gaps

Given the Treasury’s own admission that these new age gaming institutions don’t qualify under their definitions of BSA institutions, it is incumbent on the government to update the legacy definition. The most recent FinCEN guidance on gaming institutions subject to BSA and the inclusion of sportsbooks dates back to 2007, as detailed in FIN-2007-G005:

Question 1: What gaming institutions are subject to the BSA casino regulatory requirements?

Answer 1: A casino or a card club that is duly licensed or authorized to do business as such, and has gross annual gaming revenue in excess of $1 million, is a "financial institution" under the BSA. The definition applies to both land-based and riverboat operations licensed or authorized under the laws of a state, territory, or tribal jurisdiction, or under the Indian Gaming Regulatory Act. Tribal gaming establishments that offer slot machines, video lottery terminals, or table games, and that have gross annual gaming revenue in excess of $1 million are covered by the definitions. Card clubs generally are subject to the same rules as casinos, unless a different treatment for card clubs is explicitly stated in 31 C.F.R. Part 103.

Question 4: Would a race book or sports pool operator that has a "nonrestricted" Nevada gaming license be considered a casino for purposes of the BSA?

Answer 4: Yes. Operators or owners of a Nevada race book or sports pool, that are duly issued a "nonrestricted" Nevada gaming license, and that have gross annual gaming revenues in excess of $1 million are subject to the casino requirements under 31 C.F.R. Part 103, as well as all other applicable BSA requirements. This would include a Nevada race book or sports pool licensee that obtained a "nonrestricted" gaming license to operate a race book or sports pool on the property of another casino, or that operates a number of satellite race books and sports pools that are affiliated with a central site book.

There have been so many new products and services in wagering institutions, skill based and otherwise, that pose AML risk to the U.S. financial system if not properly regulated. Daily Fantasy Sports operators started launching as early as 2007. Online gambling was legalized in multiple states by 2013. PASPA was overturned in 2018, paving the way for sports betting nationwide. Skill-based games have skyrocketed in popularity over the past decade. There are too many variations of wagering, with potential to move billions of dollars that are exposing the financial system to risk because of a stale definition that isn’t dynamic enough to keep up with technology. There may be debate on which of these should or shouldn’t fall under that umbrella, but by the Treasury’s own admission, there is a gap here that poses significant money laundering risk to the United States.

So how would these definitions be updated? There have been several calls for FinCEN to issue guidance on this topic, but such a sweeping change is likely to require proposed rulemaking. This is a more arduous process. Below is a summarization of the process for proposed rulemaking and how the industry could proactively request such a change.

Beginning the Rulemaking Process – There are several ways that the rulemaking process can begin, from laws passed by congress, presidential directives, an agency’s own analysis, requests from other agencies and a petition from interest groups, corporations, and members of the public. Under the leadership of Director Andrea Gacki, FinCEN has been heavily focused on the ambitious Beneficial Ownership Database, Fentanyl, the fledgling Whistleblower Program, and sanctions/counter terrorist financing related to the major conflicts on the other side of the world. With that, it is unlikely they are dedicating resources to an analysis of the industry at this time. The AGA, regulatory associations, gaming corporations and other members of the public could work in concert to send FinCEN a “Petition for Rulemaking.” This could prompt FinCEN to begin the process.

Developing the Proposed Rule – Assuming FinCEN were to accept the petition or take it upon themselves to suggest a rule, they could either informally gather information from the industry and related organizations or publish an “Advance Notice of Proposed Rulemaking” to allow for public comment to help shape the proposed rule. Agencies typically propose a range of 30-60 days for these notices.

Drafting Rule – Once the initial rule has been drafted, a “Notice of Proposed Rulemaking” would be released with the full text of the rule and would be once again open to public comment for a period proposed by FinCEN.

Termination or Final Rule – Once the comment period is closed, the comments are analyzed, facts are accumulated and experts are conferred with, FinCEN could release the final rule.

This process, though demanding, is essential for aligning the regulatory framework with the current realities of the gaming industry and ensuring gaming institutions have the tools and safe harbor to properly conduct their AML programs.

Oh, is that all?

While the above would be a major industry and governmental push, there is still more that needs to be done. The Treasury is correct in saying that there could be visibility issues and confusion about obligation between traditional land-based operators and their online gaming partners. Even with an updated definition to what constitutes a covered institution under the BSA, the way responsibility and transparency requirements are determined in these market access agreements and similar situations still needs to be addressed. This is an area of opportunity for FinCEN to issue “Guidance” to the industry on how to handle partnerships between traditional gaming institutions and their new age partners. For this guidance to work, there must be serious collaboration, which the AGA and other groups have lobbied for to help address the nuanced situations from state to state.

While the NMLRA points out several risks with the industry’s products and services, as well as challenges with its own compliance regimes , we hope the Treasury’s own bureau acknowledges the risk their current regulatory regime poses. There must be a true public-private partnership to close these gaps and protect the integrity of the US financial system.

ABOUT KINECTIFY

Kinectify is an AML risk management technology company serving gaming operators both in the US and Canada. Our modern AML platform seamlessly integrates all of the organization's data into a single view and workflow empowering gaming companies to efficiently manage risk across their enterprise. In addition, Kinectify's advisory services enhance gaming operators' capacity with industry experts who can design and test programs, meet compliance deadlines, and even provide outsource services for the day-to-day administration of compliance programs.

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The NMLRA and How Outdated Regulation Exposes the Gaming Industry to Risk

The NMLRA and How Outdated Regulation Exposes the Gaming Industry to Risk