U.S. Regulatory Regime Favorably Cited in Report for B.C. Attorney General

First Part in a Two-Part Series on Gaming Industry and AML

British Columbia’s (“B.C.”) Attorney General David Eby recently released an independent and very detailed report examining money laundering in B.C.’s gaming industry and providing 48 recommendations to combat the problem. Eby appointed Peter German, a former deputy police commissioner and leading expert on money laundering, to conduct a six-month investigation into allegations of money laundering in the Lower Mainland casinos after reports emerged that one Vancouver-based casino accepted $13.5 million in $20 bills over the course of one month in 2015.  See Peter M. German, QC, Dirty Money: An Independent Review of Money Laundering in Lower Mainland Casinos Conducted for the Attorney General of British Columbia (Mar. 31, 2018) (“German Report”). 

Following German’s investigation, which included over 150 interviews with industry and government insiders in B.C., Ontario, and the United States, German issued the German Report to detail his findings and recommendations. The report reveals that a multitude of alleged criminal syndicates, tied primarily to China, have used Vancouver-area casinos to launder money.  It highlights the anti-money laundering (“AML”) challenges faced by a predominantly cashed-based industry, and also underscores the systemic issues that have made B.C.’s gaming industry an alleged breeding ground for money laundering: a dysfunctional, fragmented regulatory regime that lacks independence.  To streamline and strengthen B.C.’s regulatory framework, the German Report recommends creating an independent gaming regulator analogous to the regulatory regime in the United States.  The German Report focuses on the Nevada Gaming Commission and Nevada Gaming Control Board, whose Enforcement Division “acts as a first line of defence against organized crime and bulk cash buy-ins[,]” whereas the federal Financial Crimes Enforcement Network, “[i]n partnership with Internal Revenue Service, acts as the enforcement arm for most money laundering issues.”

In announcing the German Report, Eby blamed the former Liberal government for “turn[ing] a blind eye to the escalating money laundering in B.C. casinos.” He also stated his acceptance of all 48 of these recommendations.

In this post, we will describe the findings and recommendations of the German Report.  In the next post, we will contrast the B.C. regulatory regime described in the German Report with the AML regulatory regime in the United States involving the gaming industry, and the recent enforcement actions which it has produced.

The German Report’s Findings

The German Report states that criminal syndicates, largely based out of China, began laundering dirty money in Vancouver’s casinos on a large scale beginning around 2010. In a typical scheme, dubbed the “Vancouver Model,” Chinese individuals agree to accept cash, typically in $20 stacks, in Canada from a lender.  The lender and an underground banker in China then settle accounts.  After this, the individual uses the cash to buy in at a casino, gambles, and receives either a check or a high denomination of bills upon leaving the casino.  At its peak in July 2015, B.C. casinos reported $20 million per month in suspicious transactions.  However, this number already has dropped precipitously, with casinos reporting only $200,000 in suspicious transactions in March 2018.

The German Report identifies three main causes of the Vancouver Model: (1) a dysfunctional and fragmented regulatory regime; (2) a lack of regulatory independence, and (3) inadequate resources to effectively monitor the industry.

According to the German Report, B.C.’s regulatory regime is comprised of several layers of bureaucracy fraught with dysfunction and “divisive rivalries” among the various regulatory entities. Moreover, these regulatory entities serve dual – and, at times conflicting – roles.  The British Columbia Lottery Corporation (“BCLC”), whose sole shareholder is the province, has the “primary goal” of “maximiz[ing] the revenue which government obtains from gaming.” The BCLC currently accrues about 65% of the gaming industry’s revenue, which is used to fund the province’s social welfare programs.  However, the BCLC is also tasked with supervising the “conduct and management” of the industry. The BCLC contracts with service providers to operate casinos and is responsible for reporting suspicious activity to B.C.’s Financial Transactions and Reports Analysis Centre of Canada (“FinTRAC”). FinTRAC, in turn, reviews reports detailing suspicious activity and disseminates material to numerous agencies.

The Gaming Policy and Enforcement Branch (“GPEB”) serves as the primary regulator of the industry and specifically regulates all “gaming operations, facilities, employees, equipment and activities in the providence.” However, the GPEB’s power is constrained by the fact that it cannot encroach upon the BCLC’s jurisdiction.  This means that the GPEB is precluded from undertaking “any activity related to the conduct, management or operation of gaming.” As a result, the report finds, the “GPEB relies ninety percent on [BCLC] investigators and [service provider] surveillance reports.” Moreover, the GPEB also operates as the B.C. government’s policy center for gaming. As the report explains, GPEB employees are often “mired down” with work assigned by the B.C. government– such as position papers and briefing notes – to “the detriment of enforcement and other responsibilities.”

According to the German Report, the BCLC and GPEB historically have operated at odds with one another rather than work in coordination. As a result, both entities lack key information possessed by the other, leading to the “perception that GPEB and, to a lesser degree, BCLC do not sufficiently understand the economics and business of gaming.” Moreover, as the report notes, GPEB employees are “frustrated by the lack of tools to regulate BCLC and to carve out a role in the AML landscape.”  The GPEB is “constantly being reminded by the BCLC that it does not have conduct and manage responsibility, leaving BCLC in the role of pseudo-AML regulator of its own franchisees, the casino operators.”

This fragmented regulatory scheme also has led to the imposition of onerous, oftentimes duplicative requirements on casinos and service providers. For example, service providers are subject to separate audits by the BCLC, GPEB, FinTRAC, and the providers’ own company auditors. In addition, casino operators are responsible for completing and submitting transactional reports to both BCLC and GPEB.

Finally, the German Report finds that the current framework lacks sufficient resources. It describes the BCLC’s current AML unit as small and emphasizes that fact that the unit does not work nights or weekends.  BCLC has one senior employee on call to help casino service providers after traditional business hours. As a result, the report explains, the BCLC currently fails to adequately address AML issues in real-time.

The German Report’s Recommendations

To address its findings of dysfunction, the German Report recommends the following:

• Creating an independent gaming regulator to regulate the industry in one streamlined, coordinated approach analogous to the United States’ AML regulatory framework;
• Amending the governing law to “clearly delineate the roles and responsibilities” of BCLC and the independent regulator;
• Requiring the BCLC to report to the independent regulator;
• Requiring service providers, instead of the BCLC, to complete all necessary reports to FinTRAC;
• Creating a Transaction Analysis Team to meet at least once a week to review suspicious transaction reports;
• Creating a Gaming Enforcement Police Service (“GEPS”) to provide around-the-clock AML surveillance; and
• Imposing mandatory training for front-line gaming personnel.

Attorney General Eby has stated his government’s commitment to implement all 48 recommendations. After receiving an interim report in December, Eby’s government has already implemented some of the regulations.  It credits this early implementation to the recent arrest of an international money laundering suspect, Dan Bai Shun Jin, in May.