by David Vialpando
Artificial intelligence (AI), the application of human intelligence processes by machines, is all the rage in society today and predicted to result in a paradigm shift in the way we work and live. We see the results of machine learning and large language models in our interactions with virtual assistants, like Siri and Google Assistant, and generative technology, like ChatGPT. While many warn of the danger of AI being leveraged by scammers and thieves, others extol the virtue of a technology that can help casinos and tribal gaming regulatory agencies (TGRAs) detect fraud, money laundering, cheats, and theft in real time and with astonishing accuracy.
TGRA financial audits and casino compliance analysis are labor and data intensive pursuits. Analyzing large quantities of data and repetitive tasks are areas tailor-made for AI programs. The use of technology to assist in data analysis, such as cash flow statements, check registers, and anti-money laundering (AML) reports, is nothing new for auditors.
Modern auditors use a variety of Microsoft Excel formulas to apply Benford’s Law to identify potentially contrived or artificial numbers in large data sets contained in general ledgers, income statements, balance sheets, invoice listings, inventory records, timesheet data, and a wide variety of business reports. In 1938, Frank Benford discovered mathematical expectations for naturally occurring numbers. The highest frequency of the first digit in naturally occurring numbers is one (30.1%), followed in decreasing frequency by the number two, then three, all the way to nine (4.6%). Applied Excel formulas assist auditors in identifying potentially contrived or false numbers, which may indicate fraud. Financial statement fraud involves the intentional creation of false or misleading information or data. The numbers four and nine are frequently used in fraudulent entries to remain under mandatory AML reporting thresholds (i.e. $9,999).
Today, AI-driven processes applying data analytics at break-neck speed can perform real-time transaction monitoring, anomaly detection, automated auditing tasks, predictive analysis, and AML compliance monitoring and reporting. Tracking property-wide electronic gaming devices and electric table game play for patron activity, like the added play scams currently sweeping the industry, enables casino management and TGRAs to quickly respond and prevent this fringe activity believed to be associated with money laundering. AI processes can be applied in other money laundering strategies such as minimal play schemes, cheque dumping, high-roller account manipulation, and third-party transactions.
It is important to understand that AI is not a panacea in the fight against fraud and money laundering detection. Trained and experienced auditors are needed to analyze and verify concerns when suspicious transactions have been flagged by the AI solution. AI can be designed to assist casino compliance and TGRA auditors in implementing a risk-based AML approach in the areas of customer risk profiling, transaction-based controls, customer due diligence, and “know your customer” processes. AI-assisted AML strategies leverage predictive analytics to identify suspicious betting behavior, transaction abnormalities, and patron risk patterns in real-time. AI can assist by automating tedious tasks like data extraction, transaction testing, and reviewing complex documents. Traditional TGRA audits frequently involve analyzing financial records for transactions which have occurred in the past. AI processes can provide real-time, continuous monitoring and auditing of financial transactions. AI solutions require access to large volumes of high-quality data. Inconsistent or incomplete information can adversely impact the accuracy of AI algorithms. This fact emphasizes the need for robust data security and information storage systems with consideration given to privacy concerns, verifying data sources, data cleansing, data governance practices, and access controls. This is where the TGRA can assist in developing regulations and internal controls concerning the application of AI in various areas of the casino, including finance and compliance.
Natural language processing enables AI systems to understand and interpret human language. This capability extends AI’s effectiveness well beyond processing numerical data to interpreting notes, explanations, and management discussion and analysis (MD&A) which accompany financial reports, contracts, emails, pdfs and narrative documents to assess regulatory compliance and the effectiveness of the casino’s internal controls, and identify material misstatements and risk factors. Through natural language generation, AI produces computer-generated deliverables in a format readily understood by humans.
Data mining strategies facilitated by AI processes, like Python, SPSS, and Tableau, can facilitate financial statement fraud detection through classification (an algorithm that can predict whether a financial statement contains fraudulent information or not), clustering (grouping similar data points together based on unique characteristics), prediction (analyzing trends and patterns), regression (identifying outliers), visualization (analyzing network relationships), and anomaly detection.
The increasing prevalence of technology-assisted audit processes has given rise to proposed changes in audit standards. In March 2023, the Public Company Accounting Oversight Board issued a proposed new standard, AS 1000, General Responsibilities of the Auditor in Conducting an Audit, relying on, “advancements in technology affecting the availability of electronic audit tools and the use of audit software.” This new standard is designed to advance beyond the traditional rules-based approaches to more time efficient and accurate processes. According to the Association of Certified Fraud Examiners’ 2024 Anti-Fraud Technology Benchmarking Report, 83% of respondents surveyed for the study anticipate that their organizations will incorporate AI technology within their anti-fraud initiatives over the next two years.
Evolving fraud schemes and the complexity of casino financial processes demand advanced auditing and regulatory compliance solutions. Leveraging AI levels the playing field for modern TGRA auditors and casino compliance personnel and provides the edge they need to protect vital tribal assets.
David Vialpando is Executive Director of the Pala Gaming Commission and Vice-Chairman of Tribal Gaming Protection Network. He can be reached by calling (760) 510-4559 or email dvialpando@palagc.org.
