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Intrastate iGaming: Bank Secrecy Act and Player-to-Player Transfers

Last week we discussed some federal withholding and reporting considerations for intrastate iGaming. The Internal Revenue Code is not the only federal law implicated in this emerging area, of course. This time we examine the applicability of the Bank Secrecy Act (“BSA”).

The BSA is aimed at preventing and detecting money laundering and other financial crimes. Because casinos handle large amounts of cash, they are prone to serving as a vehicle for illicit activity. In order for the government to monitor notable money movement, Congress enacted rules requiring casinos that fall under the definition of a “financial institution” to report certain financial transactions.

A casino or “gaming establishment” (including, for example, a card room) is considered a financial institution if:

  • (a) its gross annual gambling revenue exceeds $1 million; and
  • (b) it is a licensed casino or gaming establishment under federal or state law.

It seems clear iGaming sites regulated pursuant to state law would be considered financial institutions under the BSA. What types of transactions on iGaming sites may operators be required to report? Qualifying financial institutions are required to file with the Financial Crimes Enforcement Network:

  1. Currency Transaction Report by Casinos (FinCEN Form 103); and
  2. Suspicious Activity Reports by Casinos and Card Clubs (FinCEN Form 102).

A casino must file Form 103 for each transaction involving either currency received or currency disbursed of more than $10,000 in a gaming day. Among other things, the form includes the name, address, and social security number of the individual making the transaction. So, if I open an account on a U.S. regulated iGaming site that is a qualifying financial institution and make an initial deposit over $10,000, the site would be required to file Form 103.

Money launderers may seek to avoid triggering the Form 103 filing requirement by making two or more smaller deposits under the $10,000 threshold. This is a no-no.

The practice of conducing financial transactions in a specific pattern with the purpose of avoiding a Form 103 filing is called “structuring,” and is illegal under the BSA. One may go to jail for structuring.

Financial institutions are on the lookout for “structuring” activity. A U.S. iGaming site, for example, must treat multiple transactions as a single transaction if the iGaming site has knowledge that:

  • (a) they are made by or on behalf of the same person, and
  • (b) they result in either Cash In or Cash Out by the casino totaling more than $10,000 during any one gaming day.

If I deposited $6,000 in the beginning of the day and then another $6,000 later in the day on the same site, that iGaming operator would probably have to treat the transactions as a single transaction for purposes of determining whether Form 103 would have to be filed.

A single deposit of $9,999 might seem harmless on its own because Form 103 wouldn’t have to be filed, but such activity may instead require an iGaming operator to file Form 102, Suspicious Activity Reports by Casinos and Card Clubs.

An iGaming site would be required to file Form 102 if a transaction involves or aggregates at least $5,000 in funds or other assets, and the site knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part):

(i) Involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation;
(ii) Is designed, whether through structuring or other means, to evade any requirements of 31 CFR Chapter X or of any other regulations promulgated under the Bank Secrecy Act, Public Law 91-508, as amended, codified at 12 U.S.C. 1829b, 12 U.S.C. 1951-1959, and 31 U.S.C. 5311-5332;
(iii) Has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the casino knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or
(iv) Involves use of the casino to facilitate criminal activity.

Institutions must file these forms pursuant to the BSA E-Filing System. With respect to the BSA, the challenge for iGaming operators in the U.S. will be how to implement practices to ensure compliance.

These practice standards may also be required by state gaming commissions before an iGaming operator is approved for accepting real money deposits in a specific state. Nevada, the only state with internet gaming regulations at this time, requires iGaming operators to comply with the BSA pursuant to NV Gaming Comm’n Reg. 5A.080:

Each operator shall implement procedures that are designed to detect and prevent transactions that may be associated with money laundering, fraud and other criminal activities and to ensure compliance with all federal laws related to money laundering.

We should expect similar minimum standards from other states promulgating iGaming regulations in the future.

Player-to-player transfers

A major part of the game of poker that you don’t see on the table: Staking. As I’ve discussed before (here and here), a “staking arrangement” arises when the “staker” backs up, or puts up, the funds for another player, the “stakee.” The staker and stakee share the winnings, if any, by some predetermined agreement. Given the popularity of staking, iGaming operators have strong incentives to explore the feasibility of making staking easy for its players.

The more straightforward aspect to staking in the iGaming space is handling the distribution of winnings among the staker and stakee. The IRS is aware that gamblers sometimes share winnings, and created Form 5754 to allow for allocation of winnings among multiple recipients for reporting and withholding purposes. If I won $20,000 in an online poker tournament and my U.S. resident backer collects $10,000 of the winnings, we could theoretically submit a completed 5754 to instruct the U.S. iGaming operator to issue two W-2Gs for $10,000 each instead of one W-2G for $20,000 to me. Whether the operator actually acknowledges the form is another story.

The more difficult consideration involves how the “staker” could supply the initial funds to the “stakee” to engage in gambling activity on a U.S. iGaming site. The most convenient method, of course, would have the “staker” transfer funds from his online poker account to the account of his “stakee.” Player-to-player transfers are permitted on the most popular online poker site in the world, PokerStars. PokerStars, of course, is not licensed and regulated in the U.S. If it were, would player-to-player transfers take place between U.S. customers?

My guess is probably not at the outset, for various reasons. One major obstacle is how would an iGaming operator adequately monitor whether player-to-player transfers are for a legitimate purpose such as staking or for something illicit?

As discussed above, casinos must file a Suspicious Activity Report (FinCEN Form 102) if it suspects that a transaction involves or aggregates at least $5,000 has no business or apparent lawful purpose. Will iGaming operators put themselves in a position to have to make that determination each time a transfer request of such amount occurs? Perhaps the “business or apparent lawful purpose” standard could be met if the transfer recipient was required to wager a certain amount of the funds on the iGaming site before being permitted to cash out the funds.

In Nevada, player-to-player transfer issues are academic at this time. NV Gaming Comm’n Reg. 5A.120(9) reads, “An operator shall not allow an authorized player to transfer funds to any other authorized player.”

I spoke with a Nevada lawyer regarding this provision. Although regulators and potential operators are well aware of the attractiveness of player-to-player transfers, regulators don’t want to deal with this difficult issue upon opening the State’s doors to iGaming. After some time of successful operations, perhaps Nevada will soften its stance on the issue and begin to permit player-by-player transfers under limited and controlled conditions.

To learn more about financial transaction considerations for iGaming in the U.S., be sure to check out fellow gaming attorney Stuart Hoegner’s draft paper Cash Is Not King: Thoughts on Financial Transactions in Internet Gaming.

Next time we return to the Internal Revenue Code to examine the possible applicability of the federal wagering tax to intrastate iGaming activity.

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