Jennifer Shasky Calvery resigned last month as director of the Financial Crimes Enforcement Network, the U.S. Treasury Department’s money-laundering watchdog. She had accepted a senior compliance position at HSBC, the global banking giant she once helped nail for .9 billion as part of a settlement with the Justice Department that included an admission from the bank that drug cartels had laundered at least 0 million through its doors.
She’s the second FinCEN director to join HSBC, which has struggled since the settlement to “de-risk” the business in terms of its compliance with U.S. anti-money laundering regulations. She’s leaving behind more than one casino operator capable of feeling the bank’s pain.
During her years at FinCEN, which began in the fall of 2012, the industry was slammed for more than $145 million in civil penalties for violations of the AML provisions of a body of federal law known collectively as the Bank Secrecy Act. Most of those penalties were built on her experience as a crime fighter with the DOJ and the work of a separate enforcement squad she created within FinCEN not long after she took office.
(The most the industry had forked over prior to that, going all the way back to 2000, was a little over $4 million, according to Courthouse News Service, which tracks civil litigation for the legal profession.)
“Unlike her predecessors, she was a prosecutor, not a regulator, and she brought that to her tenure,” says Carl A. Fornaris, who co-chairs the Financial Regulatory and Compliance Practice of corporate law powerhouse Greenberg Traurig.
“There was a kind of change of direction there,” says Grant Eve, a partner in the firm of Joseph Eve CPAs, a Montana-based firm in the forefront of regulatory compliance, testing and training for the industry. “Calvery comes in, a stand-alone enforcement division gets set up in 2013, and we’re seeing the results of that. It’s been a huge evolution in KYC and customer due diligence, and it’s just expanded.”
Not surprisingly, casino compliance budgets have increased more than two-thirds over this time, according to the American Gaming Association, and for as many operators that are relieved to see her go, that has to come with a consideration of the possibility that her replacement may be even tougher.
Certainly there’s no questioning her legacy. The “risk-based approach” to compliance she championed—part and parcel of an organizational philosophy defined rather more vaguely as a “culture of compliance”—has fundamentally altered the rules of engagement, not only for casinos but across the world of financial services, and with them everyone’s AML obligations have gotten more complex and a lot costlier.
A risk-based approach, as the term suggests, means that AML programs will vary from one operator to the next and among properties within the same company, depending on management’s assessment of the risks presented by the nature of the product and its gaming offering. The controls that result must also include comprehensive employee training. They must also be tested in-house and independently for effectiveness.
As the industry’s principal lobbying arm on federal issues, the Washington, D.C.-based AGA defines its role in all this as that of a “facilitator,” in the words of Whitaker Askew, vice president of government relations. The association’s job, he says, is to disseminate knowledge and serve as a two-way channel with the authorities “to help educate the financial community and the Treasury Department on how seriously the industry takes AML compliance.”
The best practices the association has helped codify in partnership with the industry include an array of customer due diligence processes, which likewise vary with a property’s evaluation of its potential exposure to financial crime. These processes can range from vetting sources of player funds to verifying an occupation and conducting criminal and civil litigation checks—and that’s just the beginning.
There could be factors requiring management to consider the risk of financial crime in a player’s home jurisdiction. They may have to check the player against sanctions lists and make a determination as to whether the person is prominent enough politically to be involved in corruption or bribery or in a position to launder illicit funds. They may have to identify and evaluate known associates, even search for negative reports in the media. Procedures must be in place for identifying junket representatives and for conducting due diligence on front-money accounts.
They must, in other words, be their own bad cops.
“It’s a burden to casinos, and it takes time and money to do it. It’s definitely not easy,” says Eve.
Enforcing a Culture
Historically, the U.S. government thought about money laundering mostly in terms of fraud and drug trafficking. That changed with the September 11 terrorist attacks. While most criminal abuses of the financial system remain fraud-related, combatting the financing of terrorism became a national security priority, and this would figure prominently later in 2001 in the language of the USA Patriot Act, which radically expanded the powers of federal, state and local authorities to monitor the activities and correspondence and the business and commercial associations of U.S. citizens and foreigners alike, both within the country and abroad.
It incorporated a separate act of Congress, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, written specifically “to increase the strength of United States measures to prevent, detect and prosecute international money laundering and the financing of terrorism.”
The Bank Secrecy Act, the body of federal law governing AML, was beefed up to ensure that financial institutions took effective precautions such as establishing AML programs, hiring dedicated compliance directors and implementing staff training. What constitutes a “covered financial institution” under the BSA became more broadly defined as well, as have reporting requirements, which are seen as critical to the government’s ability to pursue criminal, tax and regulatory investigations and act on information that could prove useful for counter-terrorism purposes.
The baseline for reporting is the CTR, the Currency Transaction Report, a staple of the Bank Secrecy Act, which applies to any transaction or related transactions that exceed $10,000 in a day. For a casino this includes cash-in and cash-out, and it applies to all commercial and tribal facilities that generate more than $1 million in annual gaming revenue. Suspicious Activity Reports (SARs) cover any transaction over $5,000 that smells fishy.
Failure to file these could cost a company plenty, depending on the perceived willfulness of the violation. Las Vegas Sands, Caesars Entertainment, Trump Taj Mahal, Sparks Nugget in Nevada and the Oaks Card Club in California all have learned this to their considerable expense. FinCEN’s long arm has reached across the Pacific as well, to the U.S. Commonwealth of the Northern Marianas and the Tinian Dynasty Hotel & Casino, whose owners, Hong Kong Entertainment (Overseas) Investments, were fined $75 million for conducting business as if the Bank Secrecy Act didn’t exist.
“Most roads lead back to one single point of failure—a failed compliance culture,” said Stephanie Brooker, who headed FinCEN’s enforcement division at the time.
The government spent most of the years after 9/11 chasing the big financial houses. But then finally they “got in line,” as Fornaris puts it. They also began closing accounts wholesale, simply on the basis of perception, in many cases. It’s all about that “de-risking” mentioned earlier.
An indirect result is that as the banks became more compliant the freer FinCEN was to devote resources to service providers that had fallen under the radar—remittance and cash-transfer businesses, securities and commodities dealers and traders, insurance companies, loan and finance companies, operators of credit card systems and dealers in precious metals, stones and jewels—and gaming not least among them. Calvery cast the net wider still to capture virtual currency and other “fintech” industries and the luxury property market.
“I think the casino industry enjoyed a bit of a quiet period there, from the Patriot Act to around 2013,” Fornaris says. “But it’s not a coincidence that we’re seeing now a much more robust enforcement posture, with an emphasis on this idea of a ‘culture of compliance.’”
Organizationally speaking, we’re talking about those “implicit norms that guide behavior in the absence of regulations and compliance rules—and sometimes despite those explicit restraints,” in the words of William Dudley, president of the Federal Reserve Bank of New York. It’s a mindset that considers above all what should be done, not merely what must be done. “Culture may be hard to see,” Dudley said, “but you can feel it.”
Calvery was not sold early on that the casino industry entirely got it. “And where this understanding is lacking,” she said, “strong enforcement efforts may be needed.”
A Good Foundation
From its vantage point in the nation’s capital, the AGA may have known enough of her reputation to make sure no time was lost in getting her in front of the industry. She’d been at the Justice Department when the internet gambling industry was stood on its ear by the 2011 “Black Friday” indictments. And there was her work on the HSBC settlement.
Later, she would carve a role for FinCEN in the investigation that resulted in a $2.6 billion civil penalty against JPMorgan Chase for the bank’s involvement with the infamous Ponzi schemer Bernard Madoff. FinCEN would garner $461 million of that settlement.
She wasn’t at FinCEN a year when the AGA invited her to Las Vegas in September 2013 to speak at the Global Gaming Expo. So it was, not four weeks after it was announced that Las Vegas Sands would forfeit $47 million to end a Justice Department investigation into why the Venetian Las Vegas had failed to file Suspicious Activity Reports on a series of massive cash deposits made by or on behalf of a suspected international drug trafficker, that Jennifer Calvery was on stage at the company’s Sands Expo and Convention Center adjoining Venetian informing a packed house that attitudes needed adjusting:
“When some casinos say that they are not really in the business of providing financial services, I get the impression that they are saying that they should not have as much responsibility in the AML context as those financial institutions whose business it is to receive, move and protect money.
“And when some casinos say that probing their customers about their activities outside of the casino will drive customers away, I sense that they feel that it is not their responsibility to protect their institutions, and our financial system as a whole, from being used by illicit actors. I fear there may be a culture within some pockets of the industry of reluctant compliance with the bare minimum, if not less. I hope that together we can make a cultural change.”
Before her first year was over there would be an explosion in the number of SARs filed by casinos, some 27,500, which would soar to more than 40,000 in 2014, and it was expected that 2015’s total would be even higher.
“I give her credit,” says Askew, referring to her first appearance before the industry. (She would return the following year to address the first Bank Secrecy Act Conference, a production of the State Bar of Nevada, the AGA and the University of Nevada, Las Vegas.) “She may not have recognized or been aware of the industry’s commitment to compliance, but now I think she would say the industry has a great story to tell.”
How this will play out under her successor “depends on who is appointed and who the next president will be,” says Fornaris. “If you have a Democrat in the White House you will probably continue to see a strong regulatory enforcement environment. If it’s a Republican we may see more of a pro-business environment.”
Askew, a veteran GOP operative, refuses to speculate. “Time will tell,” he says.
But the Calvery era, as he sees it, has laid “a good foundation for the next director to build on in working with the industry in a positive relationship going forward.”
Gaming and government aren’t adversaries, he says; they’re partners.
“At the end of the day, the casino industry and the financial industry at large have an interest in protecting the U.S. financial system.”