Licensing Under the Illinois Video Gaming Act

Without input from the Illinois Gaming Board (IGB), the Illinois legislature and newly ascended Gov. Patrick Quinn have made video poker devices legal in bars, restaurants and truck stops across the state, as well as in facilities operated by fraternal and veteran organizations. Establishments where liquor is sold may operate devices only during hours when liquor can be legally sold. Truck stops may operate devices at any time. Each licensed location can have five devices. Video poker, blackjack and line games are legal.

According to IGB member Rev. Eugene Winkler, “It’s going to be a huge debacle to get this all together … a terrible burden.” The IGB has 60 days to come up with rules governing the video poker system.
According to IGB Chairman Aaron Jaffe, “This is going to have a tremendous impact on the board … There is no appropriation for this bill… It’s a frustrating situation … and lawmakers want tax money tomorrow. How is it possible?”

The IGB enjoys its reputation as the toughest regulator in the world of gaming. In the past, IGB members and staff have demonstrated a willingness to drill down on its license applicants further than any other gaming jurisdiction. Past Illinois casino license applicants’ lives have been put under a microscope by the IGB. Each license applicant has had to prove itself to be squeaky clean before being issued a gaming license. The past due diligence of IGB staff members has resulted in licensing investigations taking longer than applicants anticipated. Nothing suggests the approach to licensing under the Video Gaming Act (VGA) will be any different. The legislation adapted the regulations of the Illinois Riverboat Gaming Act (IRGA) as they apply to discipline, investigation, licensing and the operation of gaming. Consequently, it appears that the rigors of licensing under the VGA will be identical to the way it is under the IRGA. In addition, the VGA has added additional suitability criteria for the IGB to consider in licensing. The VGA:

Prohibits a person from having a license in any capacity if they have been found by the board to …
•    Have a criminal record, reputation, habits, social or business associations, or prior activities that pose a threat to the public interests of the state or to the security and integrity of video gaming
•    Create or enhance the dangers of unsuitable, unfair or illegal practices, methods and activities in the conduct of video gaming
•    Present questionable business practices and financial arrangements incidental to the conduct of video gaming activities

In light of Illinois’ regulatory history, plus the fact that the IGB has acknowledged that illegal video devices have been operating throughout the state for years, there is no doubt that additional scrutiny will take place for all video gaming license applicants. Special scrutiny will likely be given to current distributors, operators and establishment owners who have already been involved with video gaming devices. Winkler said, “ … you’ll have to take into account the video poker games in place. They’re illegal. And they are under the aegis of the mob.” A blind eye to past illegal operations conflicts with licensing criteria clearly set out in the new VGA. No one can expect this IGB or its staff to look the other way in licensing applicants under the VGA.

Based on language in the VGA, which adopts the IGB’s existing Riverboat Gaming Rules, it is likely that applicants for each level of license will be required to fill out detailed disclosure forms if they hold more than a 1 percent financial interest in a license. Broad, unfettered discretion will be in the hands of the IGB as to who may be licensed under the VGA. The act further places the burden on the applicant to prove to the board’s satisfaction that he or she is suitable to receive a VGA license.


Summary of the VGA
Definitions

Licensee. A licensee may be an individual, partnership or corporation. No licensee may hold multiple licenses. Municipalities and political subdivisions may hold a referendum and prohibit video gaming through an ordinance.
Manufacturers. Manufacturers are entities licensed to manufacture or assemble terminals. There are no residency requirements.
Distributors. A distributor is licensed to buy, sell, lease or distribute gaming terminals and parts. The distributor must be an Illinois resident or have done business in Illinois for at least 48 months prior to the effective date of the act, subject to the rules executed by the IGB.
Terminal Operators. A terminal operator owns, services and maintains video gaming terminals for placement in licensed establishments. A terminal operator must be an Illinois resident unless the operator has performed its respective business within Illinois for at least 48 months prior to the effective date of the act. No terminal operator may own or have a substantive interest in more than 5 percent of the gaming terminals in the state. No terminal operator may give anything of value to a licensed establishment, including a loan or financing arrangement, for the purpose of placement of video games in the establishment.
Establishment. A location with an Illinois Liquor License where liquor is served, a veteran or fraternal organization operation, or a truck stop wherein a written agreement on file exists between the terminal operator and the establishment. The licensed establishment must maintain on premises an adequate video gaming fund to immediately pay out winning receipts. The licensed establishment must also limit play to persons over 21 years of age and maintain an area for the device that excludes patrons who are under 21. The odds of winning must be posted on or near the device. The establishment must not be within 100 feet of a school or place of worship under the Religious Corporation Act, or within 1,000 feet of an intertrack wagering facility or the dock of a licensed riverboat.
Technician. A person licensed to repair, service and maintain terminals.
Licensed Terminal Handler. A person allowed to possess or control a terminal or have access to the inner workings of a terminal. This does not include an individual, partnership or corporation defined as a manufacturer, distributor, supplier, technician or terminal operator under the act.

Video Device Requirements 
Each video gaming terminal must meet minimum standards set by independent outside testing laboratories. Each terminal must accept cash and simulate the play of video poker, line up or blackjack, utilizing a microprocessor that allows the player to receive free games or credits that can be redeemed for cash. The device may not directly dispense coins, cash or tokens, and it is not for amusement purpose only. The device must be capable of dispensing a receipt or ticket that can be cashed out with a designated person at the licensed establishment.

Each model of video gaming device, at a minimum, must:

•    conform to federal law and regulations, including the FCC Class A Emission Standard;
•    theoretically pay out not less than 80 percent over the lifetime of the machine;
•    use a random selection process to determine the outcome of each play of the game and meet 99 percent confidence limits;
•    display an accurate representation of the game outcome;
•    not automatically alter paytables on internal computation of  hold percentage;
•    not be adversely affected by static discharge or other electromagnetic interference;
•    be capable of detecting and displaying power reset, door open and door just closed;
•    have the capacity to display complete play history, outcome, intermediate play step, credits available, bets, placed, credits, pair and credits cashed out for the last 11 games played;
•    have a theoretical payback that is not capable of being changed without making a hardware or software change;
•    be designed so that replacement parts or modules required for normal maintenance do not require replacement of the electromechanical meters;
•    have nonresettable meters in a locked area of the terminal that keep permanent record of all cash in, all winnings made by the printer, credit paid in and credits won by the player;
•    provide an on-demand display of stored information as determined by the board and preserve such stored information for 180 days after a power loss to the server;
•    have one or more mechanisms that accept cash in the form  of bills;
•    shut down to prevent stringing, slamming, drilling or other illegal means to obtain credits; and
•    have accounting software that keeps an electronic record that includes total cash inserted, the value of winning tickets claimed, the total credit played and the total credit awarded, and the payback percentage credited to the player.

All terminals must also be linked by a central communication system (CCS) to provide auditing program information. The CCS must use a standard industry protocol and have functionality to enable the IGB to activate or deactivate individual gaming devices from the CCS. Terminals may also be required to display Amber Alert messages at the IGB’s discretion.

Financial Interest Restrictions

Disclosure of a financial interest in ownership and operation will be required by each applicant who owns more than 1 percent. A substantive interest in a partnership, corporation, organization, association or business means:

•    when, with respect to a sole proprietorship, an individual or his or her spouse owns, operates, manages or conducts, directly or indirectly, the organization, association or business, or any part thereof;
•    when, with respect to a partnership, the individual or his or her spouse shares in any of the profits or potential profits of  the partnership activities;
•    when, with respect to a corporation, an individual or his or her spouse is an officer or director, or the individual or his or her spouse is a holder, directly or beneficially, of 5 percent or more of any class of stock of the corporation;
•    when, with respect to an organization not covered above, an individual or his or her spouse is a holder, directly or beneficially, of 5 percent or more of any class of stock of the corporation; or
•    when an individual or his or her spouse furnished 5 percent or more of the capital, whether in cash, goods or services, for the operation of any business, association or organization during any calendar year.

Disclosures 
Each person seeking and possessing a license as a video gaming terminal manufacturer, distributor, supplier, operator, handler, licensed establishment, licensed truck stop establishment, licensed fraternal establishment or licensed veterans establishment must submit to a background investigation conducted by the board with the assistance of the state police or other law enforcement agency. The background investigation will include each beneficiary of a trust, each partner of a partnership, and each director, officer and all stockholders of 5 percent or more in a parent or subsidiary corporation of a video gaming terminal manufacturer, distributor, supplier, operator, licensed establishment, licensed truck stop establishment, licensed fraternal establishment or licensed veterans’ establishment.

Each person seeking and possessing a license as a video gaming terminal manufacturer, distributor, supplier, operator, handler, licensed establishment, licensed truck stop establishment, licensed fraternal establishment or licensed veterans establishment must disclose the identity of every person, association, trust or corporation having a greater than 1 percent direct or indirect pecuniary interest in the video gaming terminal operation to which the license is sought. If the disclosed entity is a trust, the application shall disclose the names and addresses of the beneficiaries; if it is a corporation, the names and addresses of all stockholders and directors; and if it is a partnership, the names and addresses of all partners, both general and limited.

Application/Annual Fees
Taxes

Tax paid to the state is 30 percent of net terminal income. Revenues must be deposited in a specially created, separate bank account maintained by the video gaming terminal operator to allow for electronic fund transfers of money for tax payment. The tax is due within 15 days of the 15th of every month and within 15 days of the end of each month. Failing to or falsely reporting tax amount is a Class 4 felony. Late payment will have a penalty assessed of 1.5 percent per month.

Enforcement

According to Illinois Rep. Lou Lang, 65,000 video devices “for amusement” only purposes are being operated throughout the state. Each device not conforming to the requirements of the VGA will become illegal upon the expiration of its amusement license or 30 days after the VGA goes into effect. Violating the requirements of a terminal operator or owning, operating, possessing, controlling or allowing any device that awards credits and contains a circuit, meter or switch capable of removing and recording the removal of credits when the award of credits is dependent on chance is a Class 4 felony.

Forfeiture and Additional Penalties
Every gambling device found in a licensed establishment, licensed truck stop establishment, licensed fraternal establishment or licensed veterans establishment operating gambling games that are in violation of this act (unlicensed) shall be subject to seizure, confiscation and destruction. All devices owned, operated or possessed in violation are public nuisances and will likewise be subject to seizure, confiscation and destruction. Operating a video game terminal in violation of this act is grounds to have a license revoked under the Liquor Control Act of Illinois. Allowing games to be played outside of the legal hours of alcohol consumption is grounds for the board to terminate a license.

Video Gaming Revenues 

In 2008, 9,955 legal electronic gaming devices were operated on nine Illinois riverboat casinos, resulting in more than $18 billion being played by Illinois casino customers. Payouts in 2008 were in excess of $1.3 billion. The total play on slots in 2007 was more than $24 billion. The average device in 2008 earned $375 per day, down from $481 in 2007. The average win per machine per day for each riverboat casino location in 2007 and 2008 were as follows:

Consequently, a projection can be made for the new VGA revenue. With the anticipation of 45,000 devices through the state, a review of the Adjusted Gross Revenue based on the casino win per day average of 2007 and 2008, the amount of the Adjusted Gross Revenue per machine could be as high as $137,000 to $175,000 per machine. Using the poorest producing device, at $115 per day, the annual revenue is projected to be $42,000 per device.  The win per day per video gaming device discussed in the legislature was estimated at a lower number of $70 to $90 a day, making annual revenue per device of $26,000 to $33,000.

Revenue Distribution 
Fifty percent of the after-tax profits from a video gaming device will be paid to the terminal operator, and 50 percent will be paid to the licensed establishment. The percentage of interest may not be changed pursuant to a contract between the terminal operator and the establishment licensee.