Who’s in Charge of Regulating the Casino Industry?

Casino regulatory agencies face a variety of challenges—recalcitrant licensees, enraged patrons, media critics and constantly evolving technology to name but a few. Yet some of the most confounding challenges arise from within. As Walt Kelly’s famous cartoon possum, Pogo, put it: “We have met the enemy, and he is us!”

The “enemy” in the world of the casino regulator takes the outwardly benign form of what are euphemistically called “partner agencies.” They are other governmental entities that have either been legislatively vested with a role in regulation or that have some expertise that regulators find useful or necessary to fulfill their responsibilities. The two most prominent examples are legal and law enforcement.

These other agencies are not enemies in the sense that they are foes bent on destruction. Instead they can, and often do, represent separate and distinct agendas, priorities, mindsets or interests that work at cross purposes with gaming regulation. They also may be headed by publicity-seeking political appointees who have ambitions for higher office, which can certainly pose a complication to smooth intra-agency cooperation.

The most serious problem presented by partner agencies stems from the structure of the relationship. In some jurisdictions, the infinitely wise legislators have built in a form of “shared command” in respect to casino regulation. A gaming board or commission is designated as the principal regulatory agency, but authority over discrete aspects of the regulatory process is accorded to the state police and attorney general. In some cases, the areas of responsibility or authority are not precisely defined and the agencies are left to work out the relationship on their own.

Historians are fond of pointing out that the Lewis and Clark expedition stands as one of the very rare examples of a successful shared command. Based on our own experience, we can definitely vouch for that judgment. So, then, how does the regulator marshal the troops, so to speak, and get everyone marching in the same direction? It is not an easy task, but it is critical if the basic mission of casino regulation is to be effectively accomplished.

Understanding Roles
Initially, we need to separate out areas that do not present potential conflicting missions.

Casinos are elaborate and complex entertainment venues that typically include a number of peripheral activities supplementary to gaming, such as bars, restaurants, theaters and so forth. Casino workers may or may not be unionized. All this activity necessarily attracts a host of federal, state and local agencies that are essentially unrelated to gaming activity. Liquor control agents, building and sanitation inspectors, fire marshals, employment security, and workers’ compensation representatives may all have occasion to look into discrete aspects of casino operations or personnel. Generally, such work proceeds without disrupting ordinary regulatory activity.

We are also not concerned with traditional law enforcement or legal activities. The apprehension and prosecution of parking structure muggers or petty thieves, or the defense of typical agency lawsuits, do not pose significant issues of control and coordination.

Our focus instead is those instances where regulatory policies or activities intersect with those of other agencies that must necessarily work closely with the regulator. For purposes of illustration, therefore, we will confine our discussion to the use of law enforcement personnel in the areas of licensing and compliance.

A number of jurisdictions use—or at some point in their history did use—police officers as the sole or primary component of their background investigation units. On the surface, this assignment makes sense. Police officers receive considerable training in investigative and interviewing techniques. They also have training and authorization in accessing criminal histories through the Law Enforcement Information Network (LEIN).

But the use of law enforcement officers can present two distinct problems. Even if they are assigned to the regulatory agency, they remain responsible to their own independent command structure, which can direct such matters as recordkeeping and investigation protocols. More importantly, the basic mission of law enforcement officers is the detection and investigation of criminal activity. Their background, training and orientation are toward specific events that involve violations of criminal statutes. This approach does not always translate well to the much broader scope of a licensing background investigation, which seeks to examine the character of the applicant.

In one example from our somewhat distant past, officers spent months investigating a relatively minor casino investor. The individual was a senior official in a major local business and had an impeccable record of community and charitable service. Yet virtually the entire investigation focused on his possible connection to a non-counseled guilty plea to a minor theft the applicant allegedly committed 40 years earlier, when he was a juvenile. The conviction did not appear on the individual’s criminal history, and the courthouse records had apparently been lost in a fire. Available indirect records were inconclusive with respect to identity. In any event, having invested considerable time in the search, the investigators argued strenuously that the individual should be disqualified for failure to disclose the plea on his application. When the matter was presented for review and final recommendation, the investigators received strong support from their command. We first had to assign a regulatory agent to complete the investigation into other aspects of the applicant that had been neglected due to the officers’ narrow focus. Eventually, we recommended approval of the applicant, a decision that produced considerable ill will among the law enforcement investigators.

We attempted to deal with this type of situation by establishing an interdisciplinary review team consisting of senior regulators, law enforcement officers, and auditors that had authority to critique investigations and direct additional investigative activity.

However, the conflicts as to approach and emphasis persisted and finally led to a decision to replace the law enforcement investigators with regulatory agents. The police agency actually brought a lawsuit to challenge this decision, though it was summarily dismissed. Needless to say, the disruption to agency operations was considerable over the several years consumed in resolving these matters.

We know that our experience is not unique. There have been extensively publicized reports from one new jurisdiction where it has been alleged that a police investigator refused to share important information with the regulators in a high-profile background investigation. The police investigators have countered that the regulators were aware of the background issues but licensed the individual over their objection. The subsequent fallout of this episode produced calls by some legislators for an overhaul of the licensing process that would establish it in the law enforcement agency.

Our feeling is that if law enforcement is to assist in background investigations, its role must be narrowly defined and decisions regarding the scope and direction of the investigation must remain with the regulator.

Though licensing is a vital activity, in our view, the regulatory rubber meets the road where compliance is concerned. Again, some jurisdictions have used police officers exclusively for monitoring compliance while others have taken a team approach. In either case some of the same issues that are present in the licensing area occur in compliance as well. The bottom line is that the officers will tend to look to their command structure for direction and guidance regardless of the programs established by the regulatory agency.

In our experience, this divergence manifested itself in a number of awkward situations. For example, the officers were fond of launching covert operations and “stings” without our knowledge, input or approval. Though some of these were well intentioned and may even have had some merit from a compliance perspective, the main effect was to damage the relationship with the operators, who quite naturally resented the “gotcha!” approach. It’s not that the law enforcement methods were wrong or even inappropriate, it is simply that they were inconsistent with the philosophy adopted by the regulatory agency and counterproductive to the goals of the agency.

The most difficult issues, however, developed in the context where a regulatory investigation revealed related criminal activity. One scheme involved slot attendants embezzling by creating false jackpot slips. The regulatory investigation quickly demonstrated a number of internal control violations, online system issues and accounting oversight failures that permitted the scam to occur. Regulatory action, however, was postponed at the request of law enforcement to permit the completion of the criminal investigation. Unfortunately, the investigation dragged on for a number of months without a conclusion in sight. The delay not only frustrated efforts to correct the underlying breakdowns, but also put casino management in an awkward position. Management was anxious to discharge the personnel that the regulatory investigation had established as involved in the scheme but had been directed not to take any action until the criminal investigation had concluded. The situation was eventually resolved after a confrontational, high-level intervention, which unfortunately left some persistent resentment.

The approach of regulators when confronted with serious violations of rules and internal controls is to take swift action to correct any systemic breakdowns and to discipline the licensees involved. Where this conflicts with the legitimate needs of law enforcement to apprehend and prosecute lawbreakers, there needs to be clear guidelines on coordination of activities so that neither interest is harmed. It is crucial that any such methodology be agreed to in advance and reflect a reasonable balance of the respective concerns.

Final Thoughts
Regulators need the expertise and assistance of partner agencies to effectively oversee casino gaming. In our experience, these relationships work best when it is clear to all that the regulatory agency is the final word on matters of regulatory policy and procedure and has ultimate responsibility for setting priorities in these areas. Shared command might have worked for an expedition to the trans-Mississippi West, but it’s a risky strategy in the arena of casino regulation.