The Casino Industry’s Worst Nightmare – the Feds

Over the course of my career, I have watched the casino industry fight and lose more than one battle with the federal government. The first battle I remember was over silver dollars; it hardly seems believable today, but at one time silver dollars were in circulation in Nevada and they were popular. In fact, they were very popular – especially with dollar slot players. Somehow winning a bunch of those heavy and loud falling silver dollars enhanced the value of a jackpot. However, the federal government in its infinite wisdom decided the silver dollar was going the way of the dodo – into extinction. Nevada casino operators fought the move; they sent delegates to Washington to plead the case, but to no avail.

The next battle between the feds and casinos was over taxes on big winners. The federal government’s tax agency, the IRS, believed any jackpot, keno ticket or winning hand of blackjack was earned income and taxable. The idea, while logical to the IRS, was considered silliness by the industry. Casinos make their money on a simple principle: The house always wins. In the long run, the player loses and the house wins. There are no earnings; winnings are just the fuel for the next wager and eventually the casino wins. Again, casinos sent our deputies to the nation’s capital to explain the facts to the IRS; the industry was certain it would win the case. The facts were so clear, how could any reasonable person not see them? But who ever said the IRS was reasonable. The lobbying efforts, however, were not a total bust. The IRS agreed to tax winnings only over $1500. The IRS recognized that taxing blackjack was unfair because blackjack pays at a one to one ratio and not a hundred to one or a thousand to one like a slot machine. And it could see that tracking winnings would be nearly impossible. It was not a total loss, merely an acceptable compromise for the casino industry.

The next major battle was over the Bank Secrecy Act. In this case the feds wanted to track large cash transactions. The act was intended to create hardships for drug dealers by forcing every business that dealt in large cash transactions to report those transactions to the federal government. Casinos were included in the government plan. Once again, casino emissaries mounted up and rode back to D. C. This time, the best the casinos could hope for was a compromise. And as they had feared, the feds got their way. Nevada was allowed to draft its own regulations, provided the regulations did everything the feds required.

Now, the feds are back again. This time they want casinos to ‘vet’ customers betting large amounts of money. The feds want casinos to make sure that high stakes gamblers come by their money honestly.

U.S. casinos may soon have to vet where their high rollers’ funds come from under a requirement being developed by the U.S. Treasury Department, according to two people familiar with the matter. The move is part of a push to address longstanding regulatory and law enforcement concerns that criminals can use casinos, which have not historically been as closely monitored as banks for compliance with anti-money laundering laws, to convert proceeds of crime into money that appears clean. Under current law, casinos are required to report suspicious activity. A customer who used a large sum of cash to buy chips, gambled briefly, and then asked to cash out with a casino check, for example, would likely get reported to authorities. But existing rules do not explicitly require casinos to vet the source of gamblers’ funds. The new rule, which is being considered by Treasury’s Financial Crimes Enforcement Network (FinCEN) unit and would make such obligations explicit, is in the early stages and may take a year or more to complete, the people familiar with the proposal said. Brett Wolf, Reuters, 3-27-14

Each time the federal government has cast an eye upon the casino industry it has cost casinos a great deal. Conforming to each of the reporting regulations is labor intense and therefore expensive for casinos. Each of the regulations also puts a barrier between the casino and its patrons. The feds force casinos to become the agents of government; that is a long way from the friendly, welcoming, helpful customer service the casino needs and wants to provide.

Everything is simple to the feds. They seem to be thinking, “We want to know where the money those ‘high-rollers’ spend comes from, so it is your job to find.”. How is that going to work? “Please Mr. B, before you make that bet, I need to know where you got your money.” “I am sorry Mr. A, you will have to fill out this application to gamble. It will only take us about three months to investigate you and your source of funds.  Then, if everything is okay you can come back to play blackjack.” Oh yeah, that works. Of course, the industry will fight back. But you know the principle, “The house always wins” and when in Washington, the federal government is the house. Every new federal regulation that applies to the casinos is a nightmare. But this latest proposal to vet customers is the casino industry’s worst nightmare.

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March 2014
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