asiamaze Working Papers

A Safer Bet
Removing the
Money Laundering
Risk from the
Gaming Industry

Peter A Gallo
June 2006

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This series of Working Papers is published by Pacific Risk Ltd, Hong Kong. The views expressed in them
are, as far as possible, independent of any political objective or policy objective of any government or
international body.

Extracts may be reproduced, translated or quoted without cost, subject to full accreditation being given to the
original author.

Copies of this and other publications are available on www.asiamaze.com or from:

Pacific Risk Ltd
GPO Box 7278
Hong Kong

Tel: +852 2518 3848

e-mail: publications@asiamaze.com

© Peter A Gallo. June 2006.

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Table of Contents

Introduction .................................................................................................................................... 4

The Oldest Trick in the Book ......................................................................................................... 5

Laundering as a business ............................................................................................................. 6

International Tourism & Internet Gambling .................................................................................... 9

e-Gambling in Practice ................................................................................................................ 10

Civil Liberties and Privacy Issues ................................................................................................ 12

Other Gambling Risks ................................................................................................................. 13

Freedom to choose, freedom to gamble ......................................................................................14

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Introduction

Gambling, particularly casino gambling, is patently not just a passing fad. Like it or not, it is here
to stay, its popularity is growing throughout Asia. The boost brought about to the economy of
Macau since foreign casino operators were granted a licence in the territory has patently caught the
imagination of other Governments around the region. In addition to the revenue promised by
legalised gambling, the flip-side of the coin is that in an increasingly mobile world, governments
who refuse to license such facilities have little chance of protecting or insulating their citizens from
the vice.

Reversing their traditional ban on gambling for the first time, Singapore recently permitted the what
appears to be the most expensive casino development in the world, and Thailand too recently
buckled to the inevitable and passed legislation to permit casinos there. The introduction of casinos
has been discussed in Japan for several years. Other countries are starting to think seriously about it
too.

Existing casino facilities, like the Genting Highlands resort in Malaysia are now faced with
considerable competition, as are those countries like Vietnam and South Korea that do currently
have licensed gambling. Macau is not standing still either, several more foreign companies have
plans to invest several billion dollars in new casino developments there, in addition to those that are
already in operation.

Focusing on the mass market rather than the elite wealthy few, the potential market is enormous,
and the gaming industry is prepared to invest heavily.

Despite the understandable financial attraction, the legalisation of casinos also raises a number of
negative concerns, such as the social consequences of compulsive gambling, as well as the
assortment of other criminal activities that are associated with it.

The practical problem that legislators face, however, is that gambling is here to stay, and simply
ignoring that fact and refusing to permit legal gambling is guaranteed to achieve only two results:
firstly, it encourages people to travel and gamble abroad rather than spend their money at home, and

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secondly, it encourages illegal operators to fill the gap in the market, ensuring that the profits are
made by Organised Crime syndicates rather than legitimate gaming companies who will pay some
of their winnings back to the government in the form of tax.

The pragmatic view would be that if you cannot stop them; at least licence them. That way, they can
be run in a legal manner that takes congniscance of the very real popular concerns that those
opposed to gambling will voice, whether on ethical or religious motives. Human nature being what
it is, casinos do breed other vices, such as loansharking – with all the violence and intimidation that
that involves as well as prostitution, drugs, and money laundering.

There are many other forms of gambling besides casino gambling, there is traditional horse racing,
soccer betting and, indeed, betting on the outcome of just about anything associated with sport.

If such a thing as the 'perfect' money laundering scheme actually exists, however, casinos remain
the favourite for that accolade. Casinos offer the advantage, though not unique, of allowing the the
player to leave the premises with an amount of money equal to the amount they entered with.

The Oldest Trick in the Book

Take a million dollars in cash that is the proceeds of crime, and at the same time, write a cheque for
a thousand on your legitimate checking account. At the casino, buy a million dollars worth of chips
with cash and a thousand dollars worth of chips with the cheque, then join the end of the buffet line
for dinner.

Having eaten, cash in one million one thousand dollars worth of chips with the cashier, receiving a
casino cheque for the full amount. Hey presto, this cunningly sophisticated scheme has immediately
allowed you to launder a million dollars without even going near a table. As if that alone were not
good enough, it even leaves a paper trail to prove it.

Overly simplistic as though that example may be, it illustrates one of the vulnerabilities. Money
launderers, however, are not primarily motivated by the efficiency of the transaction. Their
objective is simply to launder the funds; a service for which they are quite willing to pay a

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substantial fee. He would even be quite happy to pay tax if it resulted in legitimising the proceeds of
crime.

The fact that they leave the premises with as much money as they entered with is not as important
as the fact that they can now offer an explanation for the money they leave with. Leaving
something behind for the casino is a cost of doing business that the launderer is happy to pay, its a
business. Its a sort of financial institution, and that being the case, it is important to accept the
horrible commercial reality; that a money launderer's money is as welcome on the gaming table as
anybody else's, particularly if it is in volume!

Laundering as a business

What sort of financial institution is a casino?

For a start, it is, for our purposes, simply a financial institution that offers very risky 'investments' in
the form of vastly variable uncertain returns over a very short time period. A savings bank, on the
other hand, offers risk-free, fixed returns over a longer time period. Gambling is an investment in
uncertainty more than the conventional risk.

Casinos are also a service industry, ideally suited for the integration phase of any money laundering
scheme. The reason regulators attempt to exclude known criminals from running casinos is not so
much in order to protect the gambling public from the risk that a game may be dishonest, but
because access to a casino, or indeed any gaming operation, allows criminals a simple and perfectly
efficient way of laundering as much money as they can lay their thieving little hands on.

The risk of criminality, however, is not restricted to the operators of gaming establishments. Very
often, the customers themselves are not above suspicion either. People will, given half a chance,
gamble with cash that they deliberately failed to declare to the Revenue, thus laundering, or even
simply utilising, the proceeds of tax evasion.

So, what does that mean? It means that crime and gambling are not altogether unrelated; something
that should come as a shock to absolutely nobody, of course.

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Moreover, interesting as though it may be from an academic perspective, no amount of re-stating

the problem is going to actually solve it.

The challenge is to find what can be done to sever that nexus, not just for Governments to devote
time and their taxpayers money to shaking their heads, sucking their teeth, and concluding that
nothing can be done. This paper presents one possible technology-based solution.

The 'Gambling Licence' e-solution

It is not the gambling itself which is inherently vulnerable to money laundering as much as the
manner in which that gambling is regulated – or allowed to operate with such a lack of regulation,
that is inherently risky.

The risk comes from the relationship that this peculiar form of financial institution has with its
customers. The risk comes from the anonymity of the customers.

The old fashioned idea of a bank that offered perfect anonymity, like the numbered accounts in the
Swiss banks of yore – is one that is an anathema in the modern world, fighting its multi-national
war on such threats as money laundering and terrorist financing.

Why then, does this modern compliance-drive world not use the tools at its disposal to regulate
those financial institution that offers very risky 'investments' in the form of vastly variable uncertain
returns over a very short time period? What is required in the gaming industry is simply regulation;
if casinos were run like banks, in order to gamble, one would need to have something akin to an
account. Cash simply causes problems.

The Digital Substitute

Something has to replace hard cash, and electronic currency can do just that.

There are several varieties of e-money system; what is needed for the gaming environment is
essentially a rechargeable stored value card.

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Such a card could be issued, by an official licensing authority, almost immediately upon satisfactory
proof of identity. It would then be up to the user to take that card to whichever gaming
establishment he wishes to visit, and load it up with as much money as he wishes to play with.

At present, casinos require players to buy chips. Those chips are then used in lieu of cash; but they
are nothing more than a convenient form of currency for use within those premises. An e-cash
system could replace plastic chips, so instead of betting with a pile of tokens, the gambler would
swipe his card for the amount he wished to bet; exactly as is used on many public transport systems.

Generally, e-cash systems have been designed to be flexible, so the user can use the stored value
card to pay for almost any goods or services, irrespective of where and how he loaded charged the
card.

For gaming purposes, however, there is no requirement for this flexibility. Upon entering Casino
'A' the holder first needs to buy some credits. (He can do this with cash, a cheque, or by whatever
other means Casino 'A' finds acceptable, they may even barter a truckload of fruit and vegetables, it
does not matter; value is transferred from the user to his account at the casino, which is stored on
his gaming card.

He can then play whatever he wants.

Half way through the day, he may decide to leave Casino 'A' for a break, and go on to play in
Casino 'B' for a while, or place a bet on the local soccer derby with bookmaker 'C', all without
settling his account with Casino 'A.' The e-gaming card can allow him the flexibility to do this, for
neither 'B' nor 'C' have access to the data relevant to 'A'. At the end of the evening, the player
cashes in his winnings with the Casino, who pay him the amount of his winnings either by cheque,
bank transfer or by crediting the amount to wherever he choses.

The significance is that there is an audit trail that records the amount of money the casino received,
and the source of that money.

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If, for any reason, an individual comes under suspicion for money laundering or another financial
crime, the investigating agency can, subject to the appropriate legal burdens to show just cause,
apply for a court order to examine that suspects gambling records. The e-money system will allow
them to do that, in a similar manner to the way that they could obtain a court order to examine other
financial records, in a bank or an investment firm.

Using a casino to launder the proceeds of crime may not be eradicated altogether, but enforced
transparency suddenly made it a lot more difficult.

Human ingenuity being what it is, motivated by greed, will seek to get around any obstacle that is
places in the way of a fast buck. The most important security feature would be to ensure that
players did not use a card issued to a another person to bet with.

This can be achieved relatively simply by incorporating a digital picture into the chip, so that the
casino employee taking the bet has a picture of the player on the screen in front of him along side
the information about how much be is betting. As an alternative, though possibly less convenient, it
would be possible to have additional biometric security features like a thumb print scan.

In addition to being a self contained store of value, the e-gaming card would also serve as an access
device, allowing the casino to control access to their premises, keeping out any undesirable
individuals who may have caused trouble in the past.

International Tourism & Internet Gambling

This model, of course, works well enough within a defined jurisdiction, but international travel and
gambling on the Internet are a very important element of the gaming industry.

Gambling in many jurisdictions, Macau and Monaco, for example, relies heavily on foreign
tourism. That does not pose any significant problem. An e-gaming card can be issued to a tourist
just as quickly as it can to a local resident; subject only to the delay involved in satisfactorily
verifying his identity, and given that a foreign visitor will, by definition, be clutching his passport or
other travel document in his hand at the time, this should not delay him more than a few minutes on
his way to the casino.

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Internet gambling has been described as the frustration of many law enforcement bodies as these
facilities are usually located in 'offshore financial centres' and the transnational nature of the
Internet makes it almost impossible for any national government to restrict their citizens from doing
business with them.

If money laundering and illegal gambling are genuine concerns for the international community,
however, there are diplomatic and other means of applying pressure on these renegade jurisdictions
to handle all their bets by an e-money system and comply with the basic anti-money laundering
standards. Such pressure has already been applied in dealing with 'unfair taxation', the Financial
Action Task Force's list of Non-Compliant Countries and Territories, and through the US Treasury's
limited use of its powers to impose 'Special Measures' under the USA PATRIOT Act.

With political resolve to deal with the problem, there is certainly no reason to throw in the towel
and declare the problem unsolvable.

e-Gambling in Practice

How could the e-gaming card system get round these problems in practice? How could a Japanese
citizen play online roulette with an internet casino located in Gibraltar?

The casino has to be regulated in the jurisdiction in which it has some form of physical presence; in
this example, it is Gibraltar.

One option would be to go to Gibraltar's local consulate, which by chance happens to be the British,
or perhaps to the local agent appointed by the Gibraltar Gaming Commission, and apply for a
Gibraltar e-gamblers licence. (Banks should be more than happy to act as agents for the issuance of
such licences as it would assist them retain the international funds transfer business.)

Alternatively, international agreements may allow mutual recognition of his local Japanese licence
in Gibraltar.

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The prospect of Internet commerce in general, of course, spawned the development of

'cyberpayment' systems. Although potentially anonymous, these systems have been designed to
provide users with a convenient means of transferring funds from one party to another immediately,
and in a secure manner. Again, to replace cash, such systems need to be universally acceptable.

The e-gambling licence, however, does not require this universal flexibility. The transfer of funds
for gambling purposes need only be bilateral; between the cardholder and the casino and vice versa;
there is no need for any facility to transfer funds between different cardholders.

Removing the multilateral nature of the e-gambling card, the relationship between card-holder and
casino begins to resemble a more conventional credit banking relationship rather than the full
potential of an e-cash system. The cardholder is, in fact, controlling the play of funds that have
actually already been paid to the casino.

From the casino's perspective, this eliminates any credit risk, and although it does not altogether
eliminate it, it also offers a possible means of restricting a gambler's ability to borrow money from
loansharks. Regulations could prevent an account being “topped up” within a 24 hour period, thus
preventing moneylenders making loans to players who are on a losing streak.

It is, admittedly, true that these new technologies could be unregulated, and could be used
anonymously, and could be used for criminal purposes.

On the other hand, the technology could just as easily be used to remove some of the anonymity
associated with cash, particularly in areas like gambling which are vulnerable to criminal
exploitation. Instead of presenting this as a potential threat to law enforcement, this new
technology could actually be seen as an asset.

Relocating the problem

Regulation, indeed, electrification of the gaming industry in this manner would, of course, push a
lot of gambling business into the unregulated criminal sector. The question to ask is 'why?'.

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The answer, logically, relates back to the comments above about gamblers betting with untaxed
money.

With a readily available legal alternative, patronising an unlicensed gambling operation could then
be made a criminal offence. It could almost be a strict liability offence, but like corruption, it is
important that both the person laying the bet and the person taking it, be criminally liable.

Civil Liberties and Privacy Issues

Libertarians may, and will, scream that the very idea of conducting all gambling through an e-
money card is an invasion of one's privacy rights, and unreasonable government intrusion on the
right of the individual. It is certainly a restriction on the freedom of choice, but there is a risk that
requires to be addressed. The same libertarian lobby probably offered up the same arguments
against the legislation that required an individual to pass a test and hold a licence to drive a motor
vehicle, or the legislation that classed heroin as a dangerous drug available only on prescription.

There are, undoubtedly, valid legal issues which need to be addressed. In an ideal world, there
would be no need for any restriction on how a private individual used his money to play games, but
the reality is that we live in a far from perfect world.

In the first instance, it is important to consider the level of threat. Gaming facilities like casinos are
vulnerable to abuse as a means of laundering the proceeds of serious crime. Gambling has also
been linked to serious social problems, Organised Crime, the corruption of governments and a
variety of other ills.

Most crime is motivated by financial gain. If one accepts the premise that crime is a vice and it is
society's responsibility to uphold the law and protect the innocent, seizing the proceeds of crime
must be a part of that function. Anti-money laundering legislation seeks to do just that, but to
achieve that aim, it necessarily imposes some restrictions and regulations that impact on law
abiding citizens.

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If an element of bureaucracy and regulation can make a substantial contribution towards severing
the nexus between recreational gambling and these various social ills and criminal activities, it
would be irresponsible not to consider it.

Bureaucracy is never popular and usually more part of the problem than it ever is a solution, but by
mandating all (legal) gambling be done through the medium of a special e-cash system, the up-side
is that it would, if a subsequent investigation were required, all the information is recorded for
posterity. Without anonymity, gaming becomes a lot less attractive for the money launderer.

Other Gambling Risks

There are, as discussed earlier, various forms of gambling, including the office sweepstake, and not
all of them represent a money laundering risk.

Where is the vice in the office sweepstake? All participants contribute an equal stake, it is not run
on a commercial basis for profit, and the losers fund the winner. It is difficult to see how such an
arrangement lends itself to systematic abuse by Columbian drug cartels.

That, perhaps, presupposes that the participants are not themselves, all Columbian drugs barons,
chipping in $1 a head from their share of this week's cocaine sales, but even if they were, whatever
other motive they may have, the exercise is hardly likely to achieve any significant money
laundering purpose.

Similarly, we must consider the risk posed by gambling on such events as horse races or football
games.

Is this sports betting of much interest to the professional money launderer?

The answer to that depends on who owns, or controls the gambling.

A betting office at the local racetrack is as useful a money laundering tool as any if it is controlled
by criminal elements, for the very same reason as would apply to a casino; it can be used as a
vehicle to launder funds. By creating a false history of losing bets, the audit trail could appear to

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support the argument that a multitude of bets were received, all of which lost, of course, leaving the
bookmakers with grossly inflated takings figures, so the proceeds of some other criminal endeavor
can be explained away as the profits of the betting facility.

Casinos tend to conjure up a mental image of blackjack tables and roulette wheels, and give the
ability to gamble higher stakes on these games, this e-money solution is primarily focused on those
games. There are other forms of gambling amusement, however, which are just as important to the
casino operators, notably the 'one-armed bandit' type slot machines.

Playing the slot machines is a very great attraction for many casino patrons, but those machines use
coins, or low value tokens in lieu of coins. As a tool for money laundering, it is difficult to see how
a slot machine can have any appeal at all. The classic problem of any money laundering scheme
that involves money in the form of cash is always the placement stage; how do you get that amount
of cash into the financial system. This has been the undoing of many professional money laundering
operations.

Converting it into coins is not a logical option. If a slot machine takes even a one dollar coin, and
takes say only 3 seconds to spin the wheels, the machine will take $20 an hour. At that rate,
ignoring the logistical effort of changing a million dollars into small change, it would take 50,000
hours – nearly six years - to play a million dollars.

They are not an attractive tool for laundering the proceeds of crime on any scale! Converting slot
machines to take e-cash cards would serve no useful law enforcement purpose at all.

Freedom to choose, freedom to gamble

Gambling, it seems, is human nature, and attempts to regulate it by simply criminalising the activity
have been no more successful than that wonderful strategy of fighting a war on crime by making it
illegal....

People are going to place bets on the outcome of horse races, ball games or almost any other
sporting or political contest one cares to imagine. There may be a social risk that some people will

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be unable to control themselves and gamble the money that should be spent on necessities like
housing, food and clothing.

The freedom of choice to spend their money on cigarettes, alcohol, and sugar-laden junk food for
children. Governments permit pharmaceutical companies to sell drugs to Third World countries that
are banned in their home markets. Governments permit arms dealers to sell weapons and
ammunition in the full knowledge that they will be used

Whether or not this is a reflection of the influence of political lobbyists is another matter; let us
never confuse government policy with what is actually good for us, a mistake often made by
listening to the louder voices of the gaming lobby, drowning out the sound of the lowly policeman,
the priest and the social worker left to clean up the mess.

In fairness, however, any suggestion that legalised gambling will result in otherwise mild-mannered
bespectacled chartered accountant turning into an addict, pawning his children's shoes and
embezzling his employer's money for a seat at the roulette table must be viewed with a degree of
skepticism too. There is a balance to be struck. It is patently unreasonable to claim that gambling
has no negative social consequences, but it is similarly indefensible to insist that it will result in an
immediate collapse of law and order either.

From a law enforcement perspective, the gaming industry is exposed to the risk of money
laundering. Like most criminal choices, money laundering will always follow the path of least
resistance; there is little value in having a compliance regime that imposes heavy compliance
burdens on banks, for example, if other financial institutions are ignored altogether. The criminal
will use whatever means available to launder the proceeds of his crimes, and it stands to reason the
method which is least well policed will attract the greatest flow of criminal funds.

If the anti-money laundering legislation is to be effective – which essentially involves accepting the
principle that criminals should not be permitted to profit financially from their crimes, the anti-
money laundering regime must address the risks in the gaming industry.

Of course, the simplest solution might be just to ban all forms of gambling. That may serve as a a
useful election promise, but it is totally unworkable in practice.

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Similarly, regulation in one jurisdiction alone will have no effect; a fact acknowledged by the
establishment of the Financial Action Task Force in the first place – so action must be co-ordinated
internationally. The alternative allows gamblers to travel across the border from one jurisdiction to
another to take advantage of the less regulated gambling there. That may be convenient for local
crime statistics, but it does absolutely nothing to address the global problem.

What is needed is a compromise that permits individuals to gamble if they wish to do so, but to
prevent the activity from further fueling crime of any sort. Moreover, it would at least be in any
government's interests to have that gambling expenditure channeled into something which is run
legally and leaves an audit trail that leaves their tax authorities in little doubt as to what is going on.

By removing the cash and introducing transparency into gambling, in the manner described in this
paper, the money laundering risks would essentially be removed from the industry.

© Peter A Gallo, June 2006

References
● Williams, Phil. “Organized Crime and Cybercrime: Synergies, Trends, and Responses” (No reference) Professor of
International Security Studies, University of Pittsburgh

● Forbes Asia. Asia's Casino Boom. 9 June 06

● Ehrlich, Timothy H., “To Regulate or Not? Managing the Risks of E-Money and Its Potential Application in Money
Laundering. Harvard Journal of Law & Technology 11 Summer 98: 833.

● BIS, Committee on Payment & Settlement Systems :, Survey of electronic money developments, November 2001

● Zombori, Gyula. “e + Finance + Crime” Report prepared for the Nathanson Centre for the Study of Organized Crime and
Corruption, York University, Toronto, Canada. 15 January 2001

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