The Mexican Edge

“It is always darkest before the dawn…”

For decades, Mexico’s gaming market has endured turmoil, and it doesn’t seem to be getting much better. The land-based market is rife with problems such as violence and security issues, casinos operating illegally, and outdated gaming practices. And Mexico’s online gaming market could lose U.S. customers if—or rather when—Internet poker is legalized in the U.S.  Here’s an examination of the issues this market is facing.

The legalization of Internet poker in the United States would not be good news for Mexico’s gaming operators. It looks likely that Internet poker websites will soon be operating legally in the U.S., and should that become the case, Mexican Internet casinos will lose most, if not all, of their U.S. poker customers.

Current U.S. federal law prohibits any Internet casinos from accepting wagers originating from within the U.S. In the past, this technicality was ignored by Mexican, as well as most foreign, Internet casino operators. However, if U.S. poker players are given the choice of playing cards in regulated U.S. cyberspace rather than some place that isn’t so regulated—and could be illegal—it’s a good bet that most would stay and play on U.S. sites.

All political signals point to a change in the legal landscape regarding Internet poker games. This move is meant to keep U.S. poker bucks in the U.S. federal legislation to legalize online poker has been introduced, and the federal and state governments only have to establish the legal guidelines to open up the floodgates of profit in this already highly successful gaming arena. Once passed into law by the U.S. Congress, states can do the same, letting the games begin and the money roll in. Every government needs money, and taxing gaming is the kind of quick revenue generator that governments love.

Uncle Sam is serious about all of the gaming revenue leaving the country without regulation; however, not getting a cut of the action is the real issue. When you consider that 80 percent of all Internet casino wagering activity is by U.S. players, which adds up to billions of dollars bet every year, it’s no surprise that the government is flexing its muscles and bringing the hammer down fast and hard.

Recently the feds pulled the plug on several big-name poker websites. This was a result of the companies attempting to disguise illegal transactions involving funds originating from the U.S. These fraudulent attempts to cash out poker bucks was clumsy, to say the least. There is now a mad scramble for the golden poker jackpot because Internet casino operators know that their time is short and they must get while the getting is good. Everyone wants a piece of the huge U.S. market—in California alone there is an estimated 1 million online players.

On the Ground
It’s no secret that Mexico is undergoing its most severe security crisis in living memory. The National Action Party (Partido de Acción Nacional or PAN) has been at the helm of the federal government in Mexico for the past 12 years. President Filipe Calderón and his administration’s attentions have been focused on a violent war with the drug cartels and little else; it has shaken the country’s image, people and economy to the core.

This internal turmoil has damaged Mexico’s once-flourishing international tourism industry to the tune of billions of dollars yearly, and the bleeding isn’t over by any means. Gallons of blood are spilled almost daily in drug-related massacres that rival or surpass in grisliness any bloodshed we read about from war-torn Iraq or Afghanistan. Needless to say, this violence has discouraged major investment and development in the hospitality and gaming industry, as well as many other industries in Mexico.

With the exception of recently legalizing Class III video game content, the government has done nothing to bring the country’s gaming industry out of the dark ages. To do more would require bringing in international-styled regulation and oversight to the jurisdiction. And that, of course, would require enforcement not to be a paper tiger. Action of this nature would be contrary to the best interests of existing Mexican operators. The real power players who pull the strings in Mexico have up-front puppets that dance to their mariachi beat. There is a lot of gray, and very few black and white, areas in Mexico’s gaming industry, and these puppet masters like it that way.

After the recent Narco Terrorist arson attack on a Monterrey casino in which 52 people perished, 700 federal troops were dispatched to this troubled city. Several illegal casinos were shut down, but it’s a well-known fact to locals that there are many more that have no federal authorization to operate. The time is right to crack down on all the illegal casinos in the country, make changes and clean house. The question is, will it happen?

Monterrey is loaded with illegal casinos, and two major drug cartels, the Gulf and Zetas, are in a turf war, fighting for control of the city. The violence is spilling over into the civilian population, and this is unacceptable. All-out gun battles between cartels and fire fights between cartel soldiers and federal troops or police officers are commonplace here.

Former President Vicente Fox, who held office from 2000 to 2006, suggested amnesty for the cartels and a truce. He and his Interior Minister, Santiago Creel, decided in 2004 that it was time to seize the moment—and that moment was spent leveraging the juncture of the political-electoral times for their own benefit regarding gaming law. In doing so, Fox introduced the flawed, inadequate and disastrous new Federal Rules of Gaming. The new regulations kept much of the 1947 Games and Raffles regulations in place, which by today’s gaming industry standards are prehistoric.

To make matters worse, the stroke of the Creel’s pen gave a substantial number of permits for the operation of gaming locations to his political allies. This political favoritism caused a hailstorm of protests resulting in a legal mess of historic proportions that required a Supreme Court decision to resolve, but which only complicated the situation even more. The result has been a proliferation of illegal gambling locations, and the order of the day is regulatory disorder. Lack of real leadership and experience in the operation and management of the industry remains the status quo, and it’s obvious to all the situation is in total disarray. This display of incompetence has dampened any enthusiasm for major casino development investments by foreign operators and entrepreneurs.

In Mexico, there are age-old horror stories attributed to criminal gambling enterprises and obscure political figures from the 1930s. However, you can be assured that most or all of these situations were controlled by the federal government. Today’s PAN government does not want to do anything to affect important interests that might remotely interfere with the upcoming presidential election in 2012. Therefore, we can expect no changes until after the election. Perhaps then Mexico can begin to create a vibrant gaming industry that is in line with the rest of the gaming world.

When it comes to gaming, PAN had a historic opportunity to properly regulate the industry in Mexico; it did not. The reality is that the country’s gaming industry is surreal and sometimes even can be described as a fantasy land. Countless times legislators have said that Mexico should follow the models of highly successful gaming jurisdictions like Nevada, New Jersey or Monaco by installing luxury resorts and casinos in destinations resorts like Acapulco, Cancun or Los Cabos.

Without strict regulation, there will be no major international appetite to invest in the super sun and sand locations that Mexico has to offer and is famous for. For the moment, Mexico is considered by major gaming operators as a secondary market with little or no regulation and best served by a store-front slot parlor business model.

The Mexican gaming industry model was designed in a manner contrary to the principles that govern Nevada, which is used as the ideal regulatory format in most major jurisdictions around the world. This case in four points:

1) There is no independent regulatory body outside of the federal government.
2) Gaming licenses endorse multiple locations and have no minimum investment parameter (i.e., everyone does whatever they want wherever they want to do it).
3) There are permits to operate bingo parlors, numbers/video machines, sports books and Internet casinos, or a combination of all these. (Regulations? Who needs them? Operators would like to keep it this way.)­­
4) Regulation simply does not exist at this point. In fact, comprehensive reform is absolutely necessary. Without it, Mexico’s gaming industry will amount to nothing more than a hill of refried beans and store-front slot parlors.

The thought of propelling the industry to high-end international levels is an expensive and unprofitable endeavor for any politician. Mexico’s M.O. is attaching a double standard to any tough issue; there is always a lot of talk and debate, but the issues are never resolved. The end game is “mañana,” and that means it goes on as business as usual in Mexico. The Mexican gaming industry in the eyes of the world is like comparing 7-Eleven with Walmart. Both provide what the buyer wants, however, one is playing for peanuts the other is making money hand over fist.

I do, despite all these problems, remain optimistic about Mexico’s chances of emerging as one of the world’s major gaming jurisdictions. In time, it has all the makings. To make this possible, there must be decisive government action and the necessary steps taken to get in line with the rest of the international gaming industry. Generating long-term and substantial investment should be the priority, as well as introducing a real change in the game. “Business as usual” is like just another slot machine art rehash: It provides the appearance of something new, but it’s really just the same old thing. In Mexico’s quest to be a major gaming destination, this kind of approach simply will not work any longer.

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