Authors’ Note: In the two prior articles in this series, our colleagues have touched on the gaming policy issues a jurisdiction should consider if it is looking to legalize gaming as well as the aspects of gaming regulatory structure. In this month’s article, we will address licensing, its related investigatory aspect, and the vital role it plays. While there is potential for limitless expansion of this topic, we hope that highlighting these few issues is beneficial. If you have questions or would like to discuss this topic more in depth, please do not hesitate to contact us.
Licensing is the process by which the government of a jurisdiction decides who it will allow to enter or associate with the gaming industry. This is based on the concept that it is easier to exclude unfit persons before they obtain a license, as opposed to going through the legal steps to take a license away from an unsuitable party. Thus, licensing attempts to rely on the regulator’s adeptness to predict an applicant’s future behavior. Several factors exist for licensing. Most notable, to ensure that the conduct of gaming is honest, competitive and free from criminal or corruptive elements, is protecting the industry and maintaining the public’s faith and confidence in fair gaming. For instance, a state’s gaming industry could endure a loss of credibility if a licensee is exposed as having criminal ties, regardless of the licensee’s compliance with gaming regulations.
A properly structured and financed licensing process can readily expose such concerns before they are able to impact the image and integrity of the larger gaming industry. When the Nevada State Legislature created a full-time administrative agency, the Gaming Control Board, in 1955, no standard existed. Now, all established governments that allow gambling impose some form of licensing.1 Consequently, a jurisdiction considering the legalization and regulation of gaming today is afforded the benefit of drawing upon the strengths and weaknesses of its predecessors.
Regulatory schemes typically have a tiered licensing scheme. Tiered licensing involves the categorization of all entities and individuals associated with or partaking in the gaming industry into various tiers, with each tier being subject to different licensing criteria. While regulators may require that both owners and employees be subject to review, the extent of the review may be different. For instance, in Nevada, the first tier is gaming employees who must register with the gaming regulators. This process is fairly simple and involves a two-page form, fingerprint cards and a modest fee. Here, regulators focus on criminal history. The second tier is certain gaming employees and others associated with the gaming industry that, because of their positions, must register and undergo a more extensive review. These registrations, however, pale in comparison to licensing. The third tier involves “restricted” locations. These are places like taverns and convenience stores where a person wants to place 15 or fewer slot machines that would be incidental to the main business. Finally, the most extensive background investigation is for a non-restricted gaming license (full-fledged casinos, manufacturers). These are reserved for people holding the highest-level positions in the gaming industry, such as ownership or top management.
However, a jurisdiction contemplating the legalization and regulation of gambling cannot simply “adopt” another jurisdiction’s licensing procedures. Instead it must be cognizant of several factors in order to engineer a process that captures its intentions and is able to be carried out. To begin, the creation of regulatory tiers and the placing of a group into a particular tier requires an examination of the relationship between the group under consideration and public goals. If a government views hidden interest as potentially detrimental to its public policy, then some level of licensing beyond the operator is usually implemented.2 Take for example gaming profits. If the governmental policy is to prevent gaming profits from going to criminal ventures, then the breadth of the licensing process must extend to persons sharing in the profits. If the goal is to ensure that criminals have no involvement in the gaming industry, the licensing of suppliers of non-gaming goods may also need to be subject to regulatory scrutiny. In contrast, if the nature of legal gaming within the jurisdiction will not produce large revenues, the likelihood of attracting criminals is less likely and may justify less scrutiny.
An emerging gaming jurisdiction also must determine the depth of its licensing regime. For instance, let’s assume the jurisdiction requires a company to undergo licensing in order to operate a gaming establishment. The jurisdiction must also have laws in place to determine who, out of the numerous officers, directors, managers and/or shareholders of a company, are required to undergo investigations and findings of suitability. Take, for example, publicly traded companies. Public company stock is attractive to investors because of its liquidity. Yet with the benefits also come regulatory problems. For all intents and purposes, a public company could not be licensed if all shareholders also had to be licensed, as thousands of shares are traded daily. Consequently, if a jurisdiction wants to encourage publicly traded companies to come to its jurisdiction, it must be willing to license the company without each shareholder having to obtain a license. Waiving licensing requirements for some shareholders, however, poses a risk of allowing unsuitable individuals to own stock in gaming companies. A balance between regulatory concerns and market realities therefore must be reached.
The easiest and most practical way for regulators to acquire knowledge of the beneficial ownership of stocks is through SEC reporting requirements. The SEC rules on who has to report are well established and are supported by legal precedent. For example, under SEC requirements a person acquiring more than 5 percent of the beneficial ownership of any class of voting securities in a publicly traded corporation must report such ownership to the SEC. If, however, a 5 percent threshold would be too low, a 10 percent rule also has a foundation in federal securities law. A 10 percent threshold provides the advantage of making the market even more accessible to publicly traded companies. Some states have further opened the market by allowing institutional investors, who hold stock for passive investment purposes only, to be exempt from the licensing process. In Nevada, for instance, regulators recently set a new maximum limit at 25 percent that institutional investors may hold without obtaining a license. That said, if an institutional investor proposes to hold between 10 percent and 25 percent, it must still undergo a waiver investigation to confirm that the company does qualify as an institutional investor, that it does business lawfully, and that its principals have clean backgrounds.
Along with determining who does and does not need to be licensed comes discussion regarding the timing and intensity of the licensing process. A full licensing investigation is the most comprehensive and affords regulators the most protection. Instead of relying on an acquittal as a determination of innocence or relying on tax returns to figure out net worth, regulators themselves review primary source materials. Unfortunately, this also necessitates costly and time-consuming investigations. Partial investigations are cheaper and faster, but they afford regulators less protection, because such investigations typically only check for negative criminal history and sometimes include a personal interview. Therfore, as discussed above, groups must be placed into tiers on a priority basis, with the top priorities being for owners and operators, followed by persons sharing in profits, as well as manufacturers (and distributors) of gaming devices.
Equally important to the timing and intensity of the investigation is the quality of those individuals conducting it. The quality of a jurisdiction’s licensing regime correlates with the quality of that jurisdiction’s gaming staff. A gaming jurisdiction must pay due care and attention when recruiting, selecting, assigning, transferring, promoting and firing employees.3 Because of the unique nature of gaming regulation, employees involved in regulatory functions must undergo specialized training. If a jurisdiction ignores the importance of its gaming staff, its gaming agency will be burdened with personnel who are inexperienced or who do not have the talent or motivation needed to ensure the proper licensing of gaming operations. In light of this, some gaming agencies choose to draw upon the expertise of other state agencies within the jurisdiction. For instance, the Iowa Racing and Gaming Division relies upon the Iowa Division of Criminal Investigation to conduct the investigative review of gaming applicants.
Licensing, therefore, costs money, and often both the gaming jurisdiction and the applicant can incur significant expenses. As a consequence, a gaming jurisdiction must be conscious of its limited capital and prioritize its policy goals accordingly. An emerging gaming jurisdiction should look to exploit all cost control measures that do not compromise the credibility of its licensing regime. One such measure implemented by several gaming jurisdictions is to defer the investigation of an applicant to the findings of another jurisdiction that has recently investigated the same person. Here, the gaming jurisdiction can chose to forgo its investigation completely or to conduct an expedited investigation based upon the findings of the other jurisdiction. This helps save considerable capital and resources that could be better invested elsewhere. Moreover, the integrity of the jurisdiction’s licensing regime will not be compromised as long as it defers only to the findings of established and credible gaming authorities.
A second cost control measure is to collaborate with other gaming jurisdictions on the design and acceptance of gaming application forms and materials. For instance, the Multi-Jurisdictional Background Investigation Form is a specific personal history application form that is recognized by several states. This form is a voluminous document that concentrates on the applicant’s personal and financial history, eliciting detailed information regarding such things as an applicant’s personal, familial, educational, marital, residential, employment and criminal history. By using this form, a jurisdiction can save time and capital that would otherwise be invested into designing such materials and, at the same time, aid the applicants in that they do not have to exhaust resources to complete a distinct application.
Cost-saving measures are important, as gaming jurisdictions often pass certain licensing costs on to the applicant. These costs can be in the form of investigations fees, taxation, etc. When passing on such costs, the jurisdiction should bear in mind that expensive licensure may discourage entitites and individuals from applying. As a consequence, a gaming jurisdiction should always be mindful of the expense of doing business within its jurisdiction.
To summarize, an emerging gaming jurisdiction must take the time to develop and implement a licensing regime that befits its gaming market, or intended gaming market. The jurisdiction can look toward established gaming “models” such as Nevada and New Jersey for ideas and advice, but it must be careful not to simply adopt others’ laws and regulations. If the jurisdiction falls into this trap, it will be ignoring the fact that these models require specialized employees and significant capital investment to become and remain functional. Selecting a model too intricate or too labor intensive may result in the gaming agency ignoring its newly adopted laws and regulations and instead processing applications under an ad hoc system that appears to be both arbitrary and unreasonable. On the other hand, implementing a model too simple and easy to circumvent may also lead to problems. In either event, legitimate gaming operations will be deterred from entering the jurisdiction’s marketplace and, instead, the jurisdiction will become a hotbed for unsavory and dishonest casino operators.
1 International Gaming Institute, University of Nevada, Las Vegas, William F. Harrah College of Hotel Administration, “The Gaming Industry: Introduction and Perspectives,” pg. 82, John Wiley & Sons Inc. (1996).
2 Id. at 83
3 Cabot, Anthony N., “Casino Gambling: Policy, Economics and Regulation,” pg. 135, Las Vegas: UNLV International Gaming Institute (1996).