Posts Tagged ‘Bank Secrecy Act’

Comments on NJ iGaming Regs Part II: Account Transfers and Staking

June 24th, 2013 No comments

We continue our discussion of New Jersey’s Division of Gaming Enforcement draft regulations for internet gaming with player-to-player transfers and staking considerations.

New Jersey’s draft iGaming regulations expressly prohibit player-to-player fund transfers.

N.J.A.C. 13:69O-1.3(g) reads: “A casino licensee shall not permit a patron to transfer funds to another patron.”

Nevada, the only jurisdiction in the U.S. currently with live real-money internet poker taking place, has promulgated the same prohibition in its interactive gaming regulations.

Why, at least initially, are states prohibiting player-to-player fund transfers?

The transfer of funds from one account to another inherently raises money laundering questions.

In the United States, the Bank Secrecy Act (“BSA”) is the primary anti-money laundering federal statute. Under the BSA, casinos are required to report to the U.S. Department of Treasury certain suspicious financial transactions. (Read this for background discussion on how the BSA may apply to intrastate iGaming in the U.S.) It’s possible a player-to-player transfer on an iGaming site could be deemed suspicious, implicating the BSA.

Player-to-player transfers would require iGaming operators to have suitable mechanisms in place to ensure compliance with the BSA. Developing and testing such mechanisms would almost certainly significantly prolong the process an operator must endure before receiving approval from the regulators to launch an iGaming site.

Primarily for this reason, I believe New Jersey regulators, like Nevada, feel that the benefits from authorizing player-to-player transfers is outweighed by the added burdens in the early stages of the iGaming market.

Why do we care about having player-to-player transfers?

A player-to-player transfer adds much ease to engaging in staking activity. Suppose Player 1 agrees to pay for Player 2’s online poker tournament buy-in of $1,000. With transfers authorized, Player 1 could simply send from his online account $1,000 to Player 2’s account to buy the seat.

Without a player-to-player transfer, a number of other fund delivery methods are available, such as bank account transfer, writing a check, or delivering cash.

With alternative transfer options, what’s the big deal if there are no player-to-player transfers on an iGaming site?

Following the money for tax purposes.

Let’s follow the money with and without authorized transfers in the Player 1 and Player 2 example. If Player 2 places in the money, they agree to split the winnings 50-50.

With iGaming Account-to-Account Transfers

Suppose Player 2 wins $20,000 (net of the buy-in) in the tournament. Assuming Player 2 is a U.S. resident, the iGaming operator would normally issue a Form W-2G to Player 2 reflecting the winnings.[1]

A W-2G of $20,000 to Player 2, however, does not mirror the economics of the transaction between Player 1 and 2. Player 1 and Player 2 actually won $10,000 apiece.

Player 2 could have to explain to the IRS with sufficient documentation the staking arrangement. This could create an unnecessary burden for Player 2, as many IRS employees do not understand gambling issues. It could take several months before a case disputing with the IRS is transferred to someone knowledgeable at the IRS who does understand the issues. It would be much better to avoid the situation altogether, if possible.

To avoid the accounting issue for its players, an iGaming site could have an option set up that actually has Player 1 directly buying Player 2’s seat for a $1,000 entry online poker tournament, with the players also letting the site know before the tournament of their agreed percentage distribution of winnings, if any.

That way, when Player 2 wins the $20,000, the site already knows that $10,000 is attributable to Player 1. The site could automatically credit each account $10,000 instead of crediting Player 2’s account $20,000 and leaving it to Player 2 to transfer the $10,000 to Player 1.

It’s easy to follow the money with account-to-account transfers: Player 1 buys Player 2’s seat for $1,000. Player 2 wins $20,000, and the site credits Player 1 and Player 2’s accounts $10,000 apiece, also issuing W-2Gs to each for the same amount. Very transparent and easy to explain to the tax authorities if questioned.

Without iGaming Account-to-Account Transfers

Without a transparent transfer between Player 1 and 2 on the iGaming site, is there any way for the players to have the operator issue two W-2Gs of $10,000 apiece?


The IRS created Form 5754 to address the situation. Upon placing in the tournament, Player 1 and 2 could provide to the iGaming operator a completed 5754 so that the operator issues two W-2Gs, similar to above.

Unfortunately, however, I don’t see all iGaming operators accepting the form, similar to the brick and mortar casino situation.

If an operator doesn’t accept 5754, then the players are left in the cold to prepare other documentation to substantiate each step of the staking process.

Under these circumstances, it would be foolish for Player 1 to give Player 2 the buy-in money in cash. How would Player 2 then prove to the authorities that the buy-in wasn’t his original funds? Receipt of the funds by check or bank wire would make far more sense.

Plus, the players would likely have to prove that they agreed to split the winnings, and that the winnings, if any, were distributed pursuant to the agreement.

Miss any of these crucial steps in “following the money” and Player 2 could have insufficient evidence to prove that half of the winnings were in fact not his. Then Player 2 could be responsible for paying income tax on the full $20,000. Not a situation Player 2 wants to be in.

Yes, player-to-player transfers and staking activity for iGaming are for the benefit of the players. An iGaming site shouldn’t care how player’s winnings are distributed.

As gaming industry stakeholders jockey for position in the emerging iGaming industry in the U.S., it’s easy to lose sight of adequately looking out for the players. Considering the express prohibitions on player-to-player transfers, this issue may be just one of many examples.

[1] If Player 2 is not a U.S resident, then the operator would issue a Form 1042-S and withhold thirty percent of the winnings. For this post, we will keep the discussion to U.S. residents. Read this for a detailed discussion of the issues facing nonresidents for staking activity.

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

January 9th, 2013 No comments

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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