Casino Enterprise Management

No rational person would question the value of regular doctor or dentist checkups; it is a truism that an ounce of prevention is worth a pound of cure.

Likewise, in public gaming jurisdictions, an agency (typically the auditor general) is charged with the periodic assessment of the performance of all regulatory bodies, and the results of these assessments are reported in a public forum, usually through legislative hearings. A team of inspectors from the agency will review the regulatory responsibilities of the gaming regulatory body and the programs that have been put in place to carry them out. The audit focuses on the processes and reports of the agency to determine its effectiveness.

In tribal jurisdictions, there is somewhat limited and indirect oversight of gaming regulation by the National Indian Gaming Commission (NIGC). Where there is a compact with the state, a state agency may have some limited role in the compact oversight on tribal lands. Finally, mandated external audits and, in some cases, internal tribal audits can provide some insight into the effectiveness and overall efficiency of the tribal gaming commissions. This multi-layered approach can operate to identify regulatory deficiencies. As we have noted in other articles and in public presentations, there are certainly tribal gaming commissions that rival any public gaming regulatory body in effective, focused and professional regulation of gaming operations.

However, when the above safeguards fail—or are not implemented at all—regulatory inadequacies are usually revealed when internal control or revenue audits of the gaming enterprise identify significant asset losses or integrity compromises. By then, the problems may be so severe that the cure, which often comes in the form of a facility closure, is worse than the original illness.

Over the years we have worked with several tribal gaming commissions that found themselves in dire straits due to systemic failures. Essentially these commissions existed only on paper and lacked the capacity and ability to carry out vital regulatory functions. In each instance, it was a case of the commission crossing its collective fingers and hoping that the casino operator and its suppliers did things right. Unfortunately, as Benjamin Franklin aptly put it: “He that lives upon hope will die fasting.”

But how do you know if your commission is at the edge of the precipice? The good news is that a catastrophe does not ordinarily develop overnight. It’s more of a slow descent rather than a sudden plunge. So if you find yourself thinking “Where am I going and why am I in this hand basket?” (we once saw this on a bumper sticker), it may be time for a regulatory checkup.

In our experience there are usually warning signs of an impending regulatory disaster. Alone or in combination, the following portends merit more than the proverbial raised eyebrow.

Are Regular Commission Meetings Held?
By its nature, much of the work done by a gaming commission is confidential. Maintaining this necessary confidentiality, however, does not mean that a commission must be invisible. In our view, there are at least four important commission activities that should take place during public meetings and be recorded in official minutes.

The first public meeting function involves the consideration and issuance of regulations or official interpretations of regulations. As noted below, regulations and their interpretations provide fundamental directions to licensees regarding the expectations of the commission. The adoption of regulations and pronouncements concerning those regulations should not take place in a vacuum or be removed from external scrutiny.

The second important public meeting function involves licensing decisions. It is important that commissions apply licensing criteria fairly and uniformly, and a public meeting provides a forum for demonstrating the commission’s commitment to these principles. It also serves as a mechanism for informing licensees and the community at large of the commission’s approach to license issues.

The next function of the public meeting involves reporting on casino revenue and other general operator management matters. Commissions that we have been associated with always received periodic reports from casino management. Such reports serve to advise the commission and the public of matters that the operator is dealing with or planning that may or may not require regulatory intervention. For example, if the operator plans to change or upgrade its online system, the outline of that plan and its related timetables can be formally presented and discussed at a regular meeting, and the commission can then provide direction to the staff as to its expectations for any regulatory response. The process prevents surprises and keeps all parties on the proverbial same page.

The last critical function that a commission should perform at a public meeting is considering and deciding disciplinary matters. Again, as with licensing, the forum of a public meeting is essential for the perception and reality of fairness. It also serves as a caution to other licensees that the commission takes its regulatory role seriously.

Are Regulations Updated?
It may seem difficult to believe, but we have encountered commissions that have never enacted a comprehensive set of regulations. We’ve also seen regulations that are outdated and a far cry from industry standards.

Regulations should be readily available and used. If you walk into a commission office or the office of a casino manager and do not see a dog-eared, highlighted and underlined copy of the commission’s regulations, something is almost certainly amiss.

Is the Budget Adequate?
If the commission has to go hat-in-hand to the casino operator for its funding or expenditure approvals, it is very unlikely that it will have the ability or inclination to take necessary regulatory actions. The commission budget should be developed internally and submitted through the normal governmental budget process in a line-item fashion with all funding sources clearly identified. Once approved and fully funded, the budget should be expended by the commission without external direction or influence—subject, of course, to ordinary accounting controls and documentation requirements.

Funding should be adequate for basic and necessary commission functions, including regular training, and salaries for staff should be sufficient to attract qualified personnel in the local market.

[Note: For general guidance on the adequacy of commission budgets, please refer to “Regulatory Budgets: How Much is Enough?” which appeared in the September 2007 issue of Casino Enterprise Management.]

Is Commission Staff Accountable?
There is no single litmus test for determining whether a commission staff is performing well. Assessment of staff requires “a day in the life” scrutiny and the review of the work product. A staff that spends its days shuffling papers in the office and never (or hardly ever) produces a report or recommends disciplinary action is a clear sign that no one is minding the store.

The presence of activity, however, is not always an indication that the activity is meaningful. We’ve observed commission staff members spending time at the casino, watching machine installs, drops or drawings, all the while without any real clue as to why they were there or what they were supposed to be seeing or not seeing.

The reason staff exists is to identify significant problems before they threaten assets or integrity and to enforce corrective action. Purposelessly wandering around a casino is simply not regulating.

One good indicia of staff accountability is the existence of a written, clearly defined compliance program and a process for recording and evaluating findings of inspections. If no such program exists, the logical question is what, then, do staff members actually do with their days?

Has Meaningful Regulatory Action Been Taken?
A record of numerous disciplinary or other compliance actions is not necessarily a hallmark of good regulation. However, the absence of any, or only a rare, corrective measure by a commission is a strong indication that someone is asleep at the switch. No one is perfect, and a dearth of compliance actions by a commission certainly does not mean that flawless casino operations or fully compliant licensees have somehow occurred spontaneously. There is always the need for improvement, and prodding by an active and engaged commission is essential to the process.

Final Thoughts
It is a huge mistake to trust assurances that all is well if your commission exhibits any of the above warning signs. Only a thorough and independent assessment of your commission and its activities can reveal whether there is real regulation going on or only the façade. A proper evaluation will look at all of the above factors and many others to determine if the patient is healthy or if some hidden malady threatens future problems. Our message is simple—don’t wait until the patient is on life support to call the doctor. By then … well, you don’t want to find out!

Pat Leen, co-owner of Gaming Regulatory Consultants, was a founding member of the Michigan Gaming Control Board. He can be reached at (517) 256-8619 or pleen[at]grcgaming.com.

Tom Nelson, co-owner of Gaming Regulatory Consultants, was the first Director of Licensing and Enforcement for the MGCB and served for 22 years as Michigan’s Assistant Attorney General. He can be reached at (719) 440-6611 or tnelson[at]grcgaming.com.