CASINOS AND MONEY LAUNDERING: GAMBLING ON

C O N F I D E N T I A L MANAGUA 000936

SIPDIS

SIPDIS

INL/LP FOR ED SUTOW AND ELIZABETH CARROLL

E.O. 12958: DECL: 04/18/2016
TAGS: EFIN ECON SNAR PTER NU
SUBJECT: CASINOS AND MONEY LAUNDERING: GAMBLING ON
NICARAGUA'S FUTURE

REF: A. MANAGUA 725

B. 05 MANAGUA 3223

C. 05 MANAGUA 3183

D. 05 MANAGUA 2662

Classified By: AMBASSADOR PAUL TRIVELLI FOR REASONS 1.4 (B,D).


1. (C) SUMMARY: The number of casinos in Nicaragua has grown exponentially over the last few years, just as the attractiveness of the country as a transit point for narcotics and illegal weapons. These trends - - combined with a weak regulatory system for the gaming industry, judicial corruption, and little enforcement of financial and white collar fraud crimes due to inadequate resources of the Nicaraguan National Police (NNP),and lack of will on the part of the National Prosecutor's Office - - make Nicaragua's casinos near-perfect vehicles for the laundering of ill-gotten proceeds. In addition to the vulnerability to narcotraffickers, international terrorists could also take advantage of the lax control of casinos to launder money. REFTEL D documents the presence of the Colombian paramilitary group United Self-Defense Forces/Group of Colombia (AUC) and REFTEL A highlights the involvement of several members of the local Arab community who are involved in various illicit activities, including money laundering, smuggling of goods and people, and perhaps fund raising for violent Palestinian groups. NNP Economic Crimes Unit investigators, officials of the Nicaraguan Tax Agency (DGI),casino managers, and bank executives, each told econoff about both the risks presented by money laundering in casinos and the inability to effectively monitor activities at these establishments, much less confront the problem. END SUMMARY.

The Growth of Casinos
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2. (U) Casinos have existed in Nicaragua since the 1950's, including during the revolutionary government years of the 1980's. Until the entry of Pharaoh's Casino in May 2000, however, these gaming operations had been small and often attached to strip or night clubs. According to DGI records, there are currently 28 casino companies in Nicaragua that run over 60 game rooms across the country. These figures do not count smaller establishments that only offer machines (slot, video poker, etc.) since, under Nicaraguan law, a business must have table games to be considered a casino. Indeed, there are at least 610 additional gambling businesses with over 6,000 machines in the country. DGI collected four million Cordobas in taxes from gambling operations in 2004 and 13 million in 2005. Projections are that DGI will collect almost 20 million in 2006. These figures are all the more dramatic, considering the fact that in 2004, 11 casino owners successfully argued for (or otherwise obtained) an injunction declaring that they do not have to pay any taxes at all, as they pursue a lengthy case challenging the constitutionality of the tax law.

How Casinos Are Used For Money Laundering
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3. (U) Law enforcement, banking, and casino contacts described how casinos are used for money laundering. As high-volume cash businesses, even legally operated casinos are attractive venues for money laundering. Table games, especially, require a great deal of cash handling on the gaming floor. Consequently, commercial casinos pose a greater money laundering threat because they offer more sophisticated account services - especially in Nicaragua where there is little oversight. Vulnerabilities include holding chips for a period of time and later cashing them in or having the casino wire transfer the money; using chips as currency to purchase narcotics, with the drug trafficker later cashing in the chips; or using the chips to gamble in hopes of generating certifiable winnings. Criminals also use casinos to launder counterfeit money and large currency notes that would be conspicuous and difficult to use elsewhere. Money launderers often use agents to cash-out multiple transactions or layer transactions to disguise their source.

Limited Oversight
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4. (U) Obtaining a license to operate a casino in Nicaragua is not difficult. The Nicaraguan Tourism Institute (INTUR) collects a 25,000 Cordoba fee but runs no background checks. The NNP does run local and Interpol name checks and verifies that the facility will not cause a traffic problem. According to Floyd Sing, CFO for Pharaoh's Casino, it is actually possible to obtain a license in one day. Nicaraguan casinos are also not subject to any special taxes; they simply must pay an advance on annual income tax each year consisting of $25 per machine and $300 per table. (Note: The owners of the 11 casinos with the injunction own just under 5,700 of the 6,000 known machines in Nicaragua. The Government of Nicaragua (GON) is receiving no income from any of those machines. According to an industry insider, these owners are earning at least $10,000 a day with judicial protection from having to report or pay taxes on those earnings. End Note)


5. (C) During an April 3 meeting with econoff, Melvin
Estrada, a DGI administrator, lamented that the GON ability
to keep tabs on gaming operations is hamstrung by existing
law. While the DGI maintains a unit dedicated to regulating
casinos, it can only collect information for tax purposes.
The injunction obtained by 11 casinos, however, prevents DGI
from even entering the premises of those businesses.
Furthermore, Estrada reported that penalties are so weak that
many establishments do not keep proper records. He opined
that it is impossible to know if most of these businesses are
or are not involved in money laundering, but that he would
not doubt it if several were.


6. (C) Another hindrance in regulating casinos is the
prevalent judicial interpretation of existing money
laundering legislation. Legal maneuvering aimed at limiting
the criminal liability of ex-president and convicted felon
Arnoldo Aleman has led some prosecutors and Supreme Court
judges to argue that Nicaraguan law proscribes only money
laundering directly tied to drug trafficking. Press reports
and other sources often document cases of drug traffickers
who are arrested with large sums of money but are exonerated
because they do not have drugs in their possession. The case
of the AUC member in REFTEL C is one of the more widely
reported examples. (Note: This individual was rendered to
the U.S. on April 19. End Note.)


7. (C) Lieutenant Alvaro Chavarria of the NNP Department of
Special Crimes confirmed that the Economic Crimes Unit views
money laundering in casinos as representing a broader threat
to law and order in Nicaragua. He noted that there are
likely many crimes taking place in casinos - including money
laundering, loan sharking, and prostitution - but that the
NNP lacks the resources to effectively monitor activities in
these establishments. Chavarria stated that the NNP is
currently running undercover operations involving casinos,
but as offshoots of narcotics investigations and only
tangentally related to the gambling facilities. Law
enforcement and intelligence sources at post share similar
concerns about both the illegal activities taking place in
casinos and the lack of GON and/or USG resources to address
the problem in a meaningful way.

An Insider Shows His Cards
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8. (SBU) In an April 19 meeting, Gaston McKnight, the
President of and a major shareholder in Pharaoh's Casino,
provided his insights on the casino industry and money
laundering in Nicaragua. Pharaoh's is a subsidiary of
Thunderbird Gaming Inc., a firm publicly traded in Canada and
Germany. As such, it is subject to strict internal controls
and must adhere to international accounting standards.
Pharaoh's is also well regarded by GON officials interviewed
by econoff (Comment: This is not surprising since Pharaoh's
pays 85% of all taxes received from legal gambling. End
Comment). Pharaoh's dominates the local market, earning $2.9
million in the first quarter of 2006. It currently employs
450 Nicaraguans and has plans to hire an additional 215 by
the end of the year, as new branches open.


9. (C) McKnight shared his view that it is unlikely that
anybody could launder significant amounts of money in
Nicaraguan casinos without the direct knowledge of the
proprietors. He said, and his CFO confirmed, that Pharaoh's
has never had a single instance of a patron buying in for as
much as $10,000 (which would trigger a report to authorities
in the United States). He does feel, however, that his
competitors are allowing their premises to be used for money
laundering.


10. (C) At a minimum, McKnight questions the sources of financing for new casinos. As an example, he noted that Aladdin's Casino, which is owned by Chinese and Colombian investors, pays $35,000 a month in rent for a small location. In McKnight's view, it would be impossible for this operation to sustain itself without additional revenues unrelated to legitimate gaming. (Note: the total annual operating expenses for Pharaoh's are US $700,000 for branches throughout the country. End Note.) He also pointed out that many Nicaraguan casinos are attached to strip clubs, limiting the clientele base. Finally, he noted that a new casino is being opened at a prominent Managua hotel by a former manager of Pharaoh's who was fired for unscrupulous behavior and has had a hard time obtaining legitimate credit.

A View From the Banking Sector
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11. (SBU) On January 11, econoff discussed money laundering
with Mercedes Deshon, executive director and general manager
of Banco Uno, one of Nicaragua's largest banks. She
explained that the banking sector views Nicaraguan casinos
with suspicion and closely monitors activity by bank clients
who use casino ATMs. Deshon said that her bank has closed
the accounts of several clients who were suspected of using
casinos to launder money, and that she has heard similar
reports from other bankers.

A Terrorist Money Laundering Haven?
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12. (C) In addition to the case of the AUC member, REFTEL A
highlights the involvement of several members of the local
Arab community who are involved in various illicit
activities, including money laundering, smuggling of goods
and people, and perhaps fund raising for violent Palestinian
groups. According to intelligence sources, at least one
Muslim member of the Palestinian business community is also
an investor in a Nicaraguan casino with links to money
laundering activities.

Competing Reform Legislation
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13. (SBU) Prominent National Assembly (NA) Deputy Delia
Arellano has publicly stated that casinos should pay more
taxes and be monitored for possible illegal activities. DGI
official Estrada stated that the GON supports draft U.S.
Department of Treasury-developed casino regulation that would
strengthen oversight and increase taxation. Opponents of the
legislation prevented it from being introduced in the
National Assembly, although the NA Justice Committee passed
alternative legislation. Proponents of the USG/DGI version
hope to amend that draft in plenary session so that the final
bill will be closer to their model.


14. (C) Comment: Concrete examples of money laundering in
Nicaraguan casinos are limited. However, given Nicaragua's
weak government, judicial corruption, and increasingly active
involvement by organized criminal organizations, primarily
connected with international drug and arms trafficking (See
REFTELS B and C),it would be surprising if casinos were not
directly involved in money laundering - perhaps even for
international terrorist financing. Without stricter
regulation and investigative resources, casinos will continue
to operate largely out of the view of law enforcement and
intelligence gathering agencies.
TRIVELLI