Casino Enterprise Management

Authors’ Note:

Over the next year, this periodic column will touch on a variety of topics and opinions related to gaming in Mexico. While the objective is to demystify the processes, opportunities and realities of gaming in Mexico, there will undoubtedly be times when our reports will be colored by our opinions. When these opinions are stated, we will make every attempt to differentiate for our readers the facts versus the opinions. But with the continuing ambiguities and contradictions that exist even for Mexican professionals, we believe it is part of our journalistic obligation to illuminate these subjects rather than ignore them.

Here is a preview of some of the topics to come:

• Current laws and gaming regulations in Mexico: What forms of gaming are legal in Mexico today? What new law(s) are imminent? How can new laws and regulations be reconciled with old concessions? Does the Class II technical standard really apply in Mexico? Are there really technical standards? How are equipment, software and systems reviewed, tested and approved? How do American and non-domestic regulators view Mexican gaming? Is “corruption” a factor?
• Economics of gaming in Mexico: What makes a “good market” or “good location” in Mexico? Current fees and taxes, doing business in a culture of “mordida,” construction costs, labor unions and skilled labor pools.
• Major “players” in the Mexico gaming industry: operators (i.e., CIE, Televisa, Grupo Caliente / Codere and others), manufacturers (i.e., IGT, Cadillac Jack, Bally, Multimedia Games, VGT and others), politicians, key legislators, key regulators, bureaucrats, lobbyists and other influences.
• The prospect of full-fledged casinos: What is the true story about pending casino legislation? Who is controlling or affecting the passage of new casino legislation? Will outside interests and foreign capital be allowed?

For most American gaming companies, Mexico remains a mysterious, confusing and risky business proposition. For years, the Mexican government has sent mixed signals about when, how and if operators and manufacturers could approach the market — including the perennial prospect of full-blown casinos. In the past, it has even appeared as though different branches of the Mexican government had laid claim to different areas of responsibility and oversight over gambling, including what and who is legal at any given moment. Exacerbating these perceptions is the fact that to this day, illegal gambling operations appear to function openly — and side by side with “legitimate” operations — with little or no government intervention, while regulators seem to simultaneously open and close licensed gaming concerns.

This article is the first in a series of candid and informative reports on the true status of gaming in Mexico.

Like most nations competing for a slice of the global economy in this new millennium, Mexico has been moving steadily toward a more liberal position on gambling — if not yet in law, certainly in practice. But despite formidable progress in the past eight years, this country of more than 100 million people is not yet a truly open or effectively regulated gaming market as recognized by most industry operators and American entrepreneurs.

Casinos are not legal in Mexico today, but in addition to Bingo halls, race and sports books, and horse and dog racing, the past few years have seen the introduction of Class II-type gaming devices, and scores of wagering parlors are rapidly opening throughout the country. This current generation of hybrid gaming locations is operated by a few dozen privileged holders of permits issued by the Department of the Interior and the Secretary of Government. These permits are issued through Juegos y Sorteos, or Games and Drawings, a governmental sub-department for gaming oversight.

All gaming in Mexico today remains subject to national regulation under a long-standing federal law enacted in 1947. Despite periodic contention from certain Mexican governors and mayors in recent years, neither states nor municipalities have the authority or the constitutional right to issue gambling permits or licenses for any type of gambling anywhere in the country. The notable exceptions to the centralized regulation of gaming are National Lotteries, which are subject to a specific law enacted for the express purpose of the public benefit (Ley Orgánica de la Lotería Nacional para la Asistencia Pública).

The 1947 Gaming Law vests oversight of gaming to the Secretary and Department of the Interior, or Gobernación. Under the law, besides leisure games such as Checkers, Chess and Skittles, only three basic forms of betting, or apuestas, are legal in Mexico when conducted as approved. These include: parimutuel wagering on horse and dog racing, and Jai Alai; Rifas de Numeros, or Raffles of Numbers; and wagers on cockfighting. Most of these forms of gambling were originally preserved via the 1947 law due to the popular social practice of betting at regional fairs. It is significant but almost incidental that gambling has since expanded to its present state simply through policy changes propelled by entrepreneurial tenacity and politics under different administrations.

In the 1980s a few influential gaming operators of race tracks and Jai Alai frontons began testing the limits of government tolerance under the 1947 law; as a result, parimutuel wagering morphed into off-track race betting and pooled sports betting. For years, race and sports books grew and became both popular and profitable for the anointed permit holders.

Similarly, during the 1990s simple rifas, or drawings, and Raffles of Numbers — historically quaint events held at state and county fairs — evolved into sophisticated Spanish-style Bingo operations. Today scores of Bingo locations are in operation throughout the country; some halls house as many as 2,000 seats.
In the past few years Mexicans have witnessed the introduction of Class II-type gaming devices, which are based on an electronic drawing of numbers from a central server. The devices that are placed must be coinless and require cashing-out at a cashier. Tragamonedas, or money-eaters (the equivalent of the “one-arm bandit” nickname), are specifically outlawed in the 1947 law, which prohibits the direct play of coins and currency. Mexican operators and the equipment companies that supply the central determination games have taken a parallel position to the Native American operators of Class II devices in the United States regarding the legality of these games.

New Regulations
New regulations for gaming (Reglamento de la Ley Federal de Juegos y Sorteos) were approved by the Mexican Legislature in September 2004. The constitutionality of the new regulations was challenged, but the Mexican Supreme Court upheld the regulations in the spring of this year. The new regulations provide a framework for the establishment of a Gaming Commission, but a political process to implement the regulations is still being pursued. Many of the technical and procedural specifications of the new regulations, as well as transparent licensing processes for future expansion, are being left to the commission and have yet to be clarified. This has left somewhat of a regulatory vacuum and complicated compliance issues for foreign suppliers. Additionally, these delays in maturing the policies and procedures have resulted from the ongoing debate over how, when, where and if full-fledged casinos will ever be allowed.

New operators and manufacturers eager to enter the Mexican gaming market are advised to first understand the persistent realities of gaming in Mexico, including a few basic historical and political facts.

Political Players
Between 1929 and 2000 (the year Vicente Fox became president), Mexico was virtually ruled by a single political party, Partido Revolucionario Institucional or PRI (although the PRI changed names in 1938 and 1946). Every gaming permit ever issued by the Mexican government has essentially been granted as a concesión, a culturally appropriate word for “political-favor”.

It should come as no surprise, then, that the largest direct and indirect holder of gambling permits in Mexico is Caliente, a gaming operations company controlled by Jorge Hank Rhon. Hank is the youngest son of the late Carlos Hank Gonzales, who, until the time of his death in 2001, was recognized as one of the most powerful and wealthy political operatives in Mexico. Due in part to his father’s influence, after acquiring the aging Hipódromo de Agua Caliente in Tijuana, Baja California, Jorge Hank was able to build a gaming empire extending through each of the 32 states in Mexico. This enterprise includes about 100 race and sports wagering locations with off-track betting, Bingo and electronic gaming machines; it is supported by a vast state-of-the-art, real-time satellite video and data network.

Several years ago, with dramatic new political dynamics at play in the country, Hank decided to start following in his father’s footsteps and enter politics. To that end, he began ceding key parts of his diverse gaming operations to third-party management companies after becoming the mayor of Tijuana. Today, the Spanish corporation Codere serves not only as a management company for many of Hank’s gaming locations, but also affords him the time to conduct his current campaign for governor of Baja California. [Note: Hank conceded defeat in the gubernatorial race to José Guadalupe Osuna on Aug.7.]

Besides the dominant Caliente/Codere venture, Gobernación granted Televisa, the dominant television network and media conglomerate, a permit for 66 wagering locations throughout the country just prior to the last presidential election in 2005. Although Televisa is still in the early stages of the roll-out of its “Play-City”-branded electronic gaming parlors, given its enormous marketing power and television leverage, its sprawling enterprise will no doubt be a formidable gaming force in the future.

While perhaps a couple dozen small permit holders have emerged in Mexico with varying degrees of success, one other notable operator of major significance entered the gaming scene with a splash just before the 2000 presidential elections. At that time, the publicly traded CIE (Corporación Interamericana de Entretenimiento) was allowed to assume the existing permits of a bankrupt operator, reportedly in exchange for payment of some of the defunct company’s back-taxes and a commitment to modernize and re-open the Hipódromo de Las Americas, the nation’s showcase race track in the middle of Mexico City that had been dark for many years. CIE recently obtained permission to open another 60+ gaming locations, so the company will certainly provide stiff competition for the other two major operators.

Today Televisa, Caliente/Codere and CIE have the right to open and operate more than 300 wagering locations. Furthermore, each of those large operating concerns has cut exclusive or quasi-exclusive distribution agreements with key suppliers such as Multimedia Games, Bally and IGT, respectively. While these agreements give the major Mexican operators much control over the gaming technology that can enter the market, other electronic gaming manufacturers, such as VGT, Cadillac Jack and Blueberi, have found niches and gaps that have enabled them to establish commercial footholds in the Mexican marketplace.

The Future
As for the future of gaming in Mexico, including the expansion of existing forms and the possibility of full-blown casinos, there is currently much posturing and politicking between the various factions, just as we see in the United States. The difference is that, in Mexico, the Constitutional protections offered to legacy permit holders, along with regulatory concessions that may be made to appease them, may not add up to a level playing field for new investors, foreign operators or even suppliers hoping for a piece of the action. Once Mexico’s Gaming Commission and effective regulations are fully enacted and in place, however, anything might happen.

José Luis Benavides is a practicing attorney and an advocate representing some of the largest corporations in Mexico. He has been intimately involved in lobbying and legislative processes affecting many of the country’s principal institutions and economic interests. He can be reached at    jlbenavides[at]benavideslaw.com.mx.

John Long has been a product and market development consultant for major manufacturers and gaming companies since 1994. He has also been extensively involved in a number of gaming projects in Mexico and has first-hand experience with regulators, operators and suppliers there. Long can be reached at suncomjohn[at]aol.com.

Alfredo G. Lazcano is a litigator with many years of experience, including complex civil cases involving gaming interests as well as the government of Mexico and regulators. He can be reached at (5255) 3187-0690 or als[at]lazcanosamano.com.