Gambling, money laundering and tax prosecution
Sometimes numbers don’t add up, says David Rotfleisch.
“I’m shocked, shocked, to find out gambling is taking place here,” says Captain Louis Renault (Claude Rains) to Rick (Humphrey Bogart) in the 1942 classic movie Casablanca, having been told by the Gestapo to shut down the club and as he accepts his cut of the gaming winnings.
Recent stories and op-eds highlight what has always been true of the casino industry — it’s the poster child for money laundering. Arguably, Las Vegas and its casinos were created precisely to facilitate money laundering. The government, represented by Captain Renault in the film, is dependent on its cut of gaming profits and is not as inclined to look in the backroom with vigour as it should, as the news stories have pointed out.
But not all large amounts of cash gambled in casinos are nefarious and ill-gotten.
I received a call last year from a potential client who was accused by CRA of having more than $25 million in unreported income based on his casino gambling in Ontario. An obvious money laundering operation that CRA latched onto and that would be handled through a tax prosecution instead of a criminal prosecution, I thought. Wrong!
My new client was Asian, but not Chinese, and was adamant that he did not have unreported income and the scope of his gambling was greatly exaggerated. He gambled perhaps $5 million over the four-year audit period.
Most of that money came in through the Hawala system and was a result of the sale of real estate in his home country. Part of the money was provided by a partner with whom he sometimes gambled.
There was multiple counting of the same funds in those (casino) reports.
Hawala is an alternative remittance channel that exists outside of traditional banking systems. Investopedia defines Hawala as “a method of transferring money without any actual movement.” Hawala originated in South Asia during ancient times, and is used throughout the world today, particularly in the Islamic community as an alternative means of conducting funds transfers.
CRA relied on various casino reports, including FINTRAC reports, to determine what they said was unreported income. We spoke to the casino manager who advised us the reports used by CRA were neither produced expressly for them nor reliable for the purposes that CRA used them.
We met with the casino’s senior financial people and went through the purpose and function of each report in detail. There was multiple counting of the same funds in those reports, since they met the needs of the casino or FINTRAC, and were not meant to show the total amount of funds gambled. So, for example, if our client exchanged $20,000 for chips, this would show as a purchase. If he deposited his remaining chips (or winnings) and then went for lunch, the deposit would show up as new funds, and so on.
The only “hard” report was the FINTRAC report of transactions over $10,000. We did an extensive analysis and reconciliation of all of the casino reports and the FINTRAC reporting. The result of this analysis confirmed our client’s estimates of the amount gambled. We drafted extensive submissions to the CRA auditor that showed the audit report was seriously flawed.
The case is still ongoing since the tax auditor only reduced the alleged unreported income somewhat and did not respond at all to our detailed submissions.
We have had to file a Notice of Objection and will be arguing the case with an appeal officer.
As part of the appeals process, our client is dealing with the Hawala to obtain records of funds transferred in. Given the reluctance of the Hawala to produce the records it is required to maintain for both tax and FINTRAC purposes, it is my suspicion that the Hawala is offside in its reporting requirements.
So, while CRA may at the end of the day nab a tax felon, it won’t be my client. He did nothing wrong. The Hawala may be part of a moneylaundering operation, or it may not.
Assumptions are dangerous and not all is as it seems in the world of casino gambling.