In a significant development for the online sweepstakes industry, the U.S. Department of Justice (DOJ) recently announced the first publicized enforcement action against sweepstakes operators for violations of the Bank Secrecy Act (BSA). Two Missouri-based sweepstakes operators have pleaded guilty to conspiring with bankers to willfully fail to implement appropriate anti-money laundering (AML) controls. This alert highlights the key details of the case and the critical lessons learned for businesses operating in the online sweepstakes sector.

Case Summary

The operators offered multiple sweepstakes businesses and maintained accounts at a Missouri bank. Between 2013 and 2019, the operators collaborated with bank officials to bypass essential components of the bank’s AML program. Specifically, they aided in failing to file currency transaction reports (CTR) for transactions exceeding $10,000, as mandated by the BSA.

The DOJ’s key findings include:

·        Misclassification of Businesses: At the bank’s request, the operators signed FinCEN CTR Exemption Review Forms that inaccurately classified their companies as “direct mail advertising” businesses, leading to reduced scrutiny.

·        Submission of False Information: The operators facilitated the submission of a misleading legal opinion letter to the bank, falsely stating that one of their companies had not faced regulatory or legal action.

·        High-Risk Designation: Despite their companies being classified as high-risk and subject to heightened monitoring, the operators exploited the signed exemption forms to circumvent these requirements.

The operators each pleaded guilty to one count of conspiracy to cause the willful failure to implement and maintain an appropriate AML program. They face maximum penalties of five years in prison, with sentencing to be determined by a federal district court judge.

Lessons Learned

1.     Strict Compliance with AML Regulations

This case underscores the importance of rigorous compliance with AML regulations. Sweepstakes operators must ensure that their business practices adhere to BSA requirements, including accurate classification of business activities and proper filing of CTRs for qualifying transactions.

2.     Transparency and Honesty in Disclosures

Accurate and truthful disclosures are critical in maintaining regulatory compliance. The submission of false information, as seen in this case, can lead to severe legal consequences and damage to business reputation.

3.     Enhanced Monitoring for High-Risk Businesses

Operators of high-risk businesses must recognize that enhanced scrutiny is a regulatory necessity, not an option. Attempting to circumvent heightened monitoring can lead to significant legal repercussions and undermine the integrity of the financial system.

4.     Collaboration with Financial Institutions

Building a transparent and compliant relationship with financial institutions is essential. Engaging in conspiracies to evade AML controls not only violates the law but also jeopardizes the operational stability of both the business and the financial institution.

5.     Proactive Legal and Regulatory Guidance

Seeking proactive legal and regulatory guidance can help businesses navigate complex compliance landscapes. Regular consultations with legal experts and compliance professionals can mitigate risks and ensure adherence to evolving regulations.

Conclusion

The DOJ’s enforcement action against sweepstakes operators serves as a stark reminder of the critical importance of compliance in the online sweepstakes industry. As this sector continues its rapid expansion, businesses must prioritize adherence to AML regulations, maintain transparency in all disclosures, and foster cooperative relationships with financial institutions. By doing so, they can mitigate legal risks and contribute to the integrity of the broader financial system.