In 2022, Warner Brothers released the movie Elvis, which explores the complex and sometimes contentious relationship between the King of Rock and Roll, Elvis Presley, and his longtime manager, Colonel Tom Parker, played by Hollywood icon Tom Hanks.
Through guile and charm, Parker convinces Presley to give him exclusive control of Presley’s career, which Parker uses to enrich himself over the best interests of Presley. In the 1970s, Parker tricked Presley into signing a five-year Las Vegas casino residency contract even though Presley vociferously expressed his desire to perform internationally.
As portrayed in the movie, Parker, a compulsive gambler, raked up huge gambling debts and the casino executives called in these debts to pressure Parker to get Presley into an exclusive residency deal. Parker did get Presley a lucrative contract, but the performance schedule was so demanding that it left Presley mentally and physically exhausted. To keep Presley on stage, Parker enlisted the services of an ethically questionable doctor who prescribed Presley prescription drugs, to which Presley eventually became addicted.
Unbeknownst to Presley, Parker negotiated a side agreement with the casino where his gambling debts were forgiven, and Parker got unlimited credit as long as Presley continued performing at the casino.
Presley eventually discovered Parker’s true intentions and attempted to fire Parker. However, because Parker obtained so much financial control, Parker threatened to sue Presley for all his remaining wealth. As a result, Presley was forced to continue the arduous performance schedule and forgo his dreams of touring internationally.
Presley died in 1977 from a heart attack likely brought on by his addiction to prescription barbiturates. According to the movie, Parker’s frauds against Presley were exposed in a series of 1980s lawsuits involving Presley’s estate.
Parker’s abuses as Presley’s manager highlight a unique casino money laundering risk: A casino patron turning to fraudulent activities out of desperation to fund their gaming compulsion.
According to the Mayo Clinic, “Compulsive gambling, also called gambling disorder, is the uncontrollable urge to keep gambling despite the toll it takes on your life.” In addition, the Mayo Clinic states, “If you have a problem with compulsive gambling, you may continually chase bets that lead to losses, use up savings and create debt. You may hide your behavior and even turn to theft or fraud to support your addiction.”1
When a compulsive gambler turns to fraud out of desperation, it imposes a money laundering risk because of the possibility of illicit funds entering the casino. Pursuant to Title 18 Code § 1957, merely spending illicit funds can be a money laundering criminal violation.
Although Parker’s exploits happened decades ago, a Google query searching for those using funds obtained from fraud or embezzlement to fund gambling will reveal that Parker is not alone. One example that received significant national and international media attention happened in 2021 when the press reported that a Catholic nun stole $835,000 from her church. According to prosecutors, it was to “feed her gambling habit.”2
By no means should casino anti-money laundering (AML) personnel attempt to determine whether a person is a compulsive gambler. Only a trained clinician has this capability. The overwhelming majority of casino patrons are responsible gamblers and enjoy the entertainment value casinos provide. Moreover, many gaming patrons walk out of casinos as jackpot winners. Commendably, casinos dedicate significant resources to encourage responsible gambling.
Though patrons that commit crimes to fund their gaming represent a fractional portion of total customers, the risk is real and must be considered in a risk-based AML program. The Fraud Triangle, a tool used by fraud examiners, can assist in identifying higher-risk situations.
The Fraud Triangle
In the 1970s, Dr. Donald R. Cressey, a well-respected criminologist, created a model that predicted when someone might be at high risk for committing fraud. According to Cressey, three factors must be simultaneously present for an ordinary person to commit fraud. These factors are as follows:
Pressure is what motivates a person to commit fraud, such as financial hardships, maintaining lavish lifestyles and addictions. According to the Ohio State Office of State Auditors’ explanation of the Fraud Triangle, “One common pressure is a gambling problem.”3
Rationalization is the process of a person talking themselves into committing the crime. Most people who commit fraud are first-time offenders and consider themselves honest people.4 According to the state of Ohio’s Office of State Auditor, those attempting to square their moral compass with committing fraud may say to themselves, “I will pay the money back,” “They will never miss the funds,” or “They do not pay me enough.”
Those in the throes of compulsive gambling may rationalize committing a financial crime with the thought that they will eventually win big and make the whole amount they defrauded.
Opportunity is the availability of a means and method to commit fraud. If a person is an employee, it may be a weak internal control or poor management oversight. It also may be a person abusing their position of authority to seek financial gain. A key consideration with opportunity is the person’s capability to exploit the opportunity. Some frauds require a high degree of skill and cunningness to pull off.
In the case of Parker, the pressure was his gambling compulsion. The opportunity was exclusive control over Presley’s career and the high degree of trust Presley bestowed on him. The rationalization was that Parker believed he made Presley a star, and without his management, Presley would still be unknown. Therefore, Parker felt he deserved more credit for Presley’s success.
Due Diligence: Applying the Triangle
As a regulatory expectation, casinos are required to conduct enhanced due diligence (EDD) reviews on patrons that meet a gaming volume materiality threshold—generally, their top-tier patrons—to gain reasonable confidence in their source of funds.
If the due diligence review reveals a concerning economic incongruity when comparing the patron’s apparent source of funds and/or wealth with their level of gaming, then there is a higher risk that the pressure side of the triangle exists. This is especially true if the patron has a history of liens, bankruptcies or has been denied casino credit.
However, if the patron appears to have the means to reasonably fund their gaming, then there is a low risk of the Fraud Triangle materializing.
If there is a higher risk from the pressure side, then the next step is to evaluate opportunities. Government programs designed to provide financial relief during the pandemic, such as the Paycheck Protection Program (PPP) and the unemployment relief program, offered a colossal opportunity to obtain funds through fraud without possessing a high degree of skills to deploy the scheme. It is estimated that combined, these programs lost close to $200 billion to fraud, and another $600 billion is still waiting to go out the door. The government has acknowledged these programs were deployed without all the necessary controls because the priority was to get the funds out as soon as possible.5 Indications that the patron received a material PPP loan or establishment of businesses with no apparent economic reality (shell companies) increase the risk of the opportunity side of the triangle.
Other opportunities may have also arisen during the COVID-19 pandemic, with businesses short of staffing and not being able to deploy adequate safeguards to detect fraud. Short staffing may have forced companies to give more responsibilities to employees to oversee assets and funds they would have otherwise been uncomfortable with pre-pandemic.
The due diligence process should be mindful of financial gatekeepers, in particular those with oversight of organizations’ funds and assets and individuals associated with smaller organizations (including nonprofits, churches and charities). This includes responsibilities of collecting revenue or donations, disbursing funds and transferring assets. Attorneys that oversee client trust funds and trustees are also included in this category.
As the population ages, elder abuse has exponentially increased. Elder financial exploitation is the misuse or withholding of an older person’s resources by another. In nearly 60% of elder abuse incidents, the perpetrator is a family member.6 Those entrusted with the care of others may also be financial gatekeepers or may have the capability to exercise undue influence on how elders spend their money.
Positions of trust include anyone that can influence the receipt of a kickback, bribe or obtain personal control of assets to which they are not entitled. For example, Parker used his position of trust to obtain kickback payments in the form of debt forgiveness. In addition, the Financial Crimes Enforcement Network has advised financial institutions to be mindful of politically exposed persons, those in a position of trust with a prominent public position.
AML professionals are not mind readers; they cannot confirm whether a person has to rationalize committing a crime, nor should they attempt to. But given the nature of compulsive gambling, casinos cannot presume the rationalization triangle side does not exist when confronted with higher risks for pressure and opportunity. To mitigate the risk that all triangle legs are present, additional procedures should be conducted to obtain reasonable confidence in the patron’s source of funds.
A good portion of a person’s financial profile is rightfully so private. Searching public records and open-source information will not always yield reasonable confidence in the true source of funds. When confronted with all legs of the fraud triangle, casinos should not conclude the due diligence review merely because no negative news or criminal history has been identified. As stated, most fraudsters are first-time criminals, so relying on negative news or criminal history has limited predictive utility. Plus, many states and municipalities limit public access to criminal records.
Instead, the casino, as a best practice, should consider asking patrons to explain how they fund their gambling. This can dissipate the fraud triangle because patrons can provide information that is not readably available publicly.
Suppose the patron is unable to provide information on how they fund their gaming or provides information that appears to be false. In that case, the casino should consider evaluating the suitability of continuing business with the patron pursuant to a risk-based approach.
Applying the Fraud Triangle during the EDD process provides a systematic method to identify areas of higher risk without having to deal with the subjectivity of determining whether a patron is in the throes of compulsive gambling. But, again, only a clinician can diagnose an addiction to gambling.
Those that commit financial crimes such as embezzlement or Ponzi schemes to fund their gaming, especially when there are sympathetic victims, can generate significant negative media attention and increases the risk of law enforcement (LE) scrutiny and reputational harm to the casino.
The story of Presley and Parker is a cautionary tale. Consider if a similar incident happened today with a highly popular and beloved performer. It would bring significant negative attention to the casino industry.
The risk of compulsive gambling cannot be ignored for casinos that value their reputation among regulators, LE and their community. For AML professionals that want to steer clear of this risk, do not forget Presley and the Fraud Triangle.
- “Compulsive gambling,” Mayo Clinic, June 18, 2022, https://www.mayoclinic.org/diseases-conditions/compulsive-gambling/symptoms-causes/syc-20355178
- Joe Hernandez, “A Nun Stole $835,000 From A School To Feed A Gambling Habit, Prosecutors Say,” National Public Radio, June 10, 2021, https://www.npr.org/2021/06/10/1005101141/a-nun-stole-835-000-from-a-school-to-feed-a-gambling-habit-prosecutors-say
- “The ‘Fraud Triangle’,” Office of the Minnesota State Auditor, August 6, 2021, https://www.osa.state.mn.us/audit-resources/audit-guidance/avoiding-pitfalls-articles/the-fraud-triangle/
- Andi McNeal, “The statistical profile of a fraudster,” Fraud Magazine, September/October 2014, https://www.fraud-magazine.com/article.aspx?id=4294984634
- Ken Dilanian and Laura Strickler, “‘Biggest fraud in a generation’: The looting of the Covid relief plan known as PPP,” NBC News, March 28, 2022, https://www.nbcnews.com/politics/justice-department/biggest-fraud-generation-looting-covid-relief-program-known-ppp-n1279664
- “Get the Facts on Elder Abuse,” National Council on Aging, February 23, 2021, https://www.ncoa.org/article/get-the-facts-on-elder-abuse