Regulatory Reform – Part II

By Christopher W. Hinckley  (@CHinckley_HB)

The need for regulatory reform nationwide has been reinforced by the American Gaming Association’s (AGA) 2011 White Paper that outlines 10 suggested reforms that would greatly benefit states, casino owners, manufacturers of gaming machines and shippers/receivers of gaming equipment. Two of these 10 suggested reforms address the filing requirements for shipping of gaming machines and parts. The bottom line here is that unnecessary shipping paperwork clogs the systems, is not cost-effective, and requires excessive time and human resources to create, use and process.

The Problem in Brief

Consider just a few pertinent facts about these areas of reform. These points demonstrate the extreme impact of the current problem nationwide, and how it might affect your company:

  • 365 sets of shipping jurisdictions
  • The high numbers of variations by jurisdictional expectations and rules
  • 61,000 regulatory filings for five gaming machine manufacturers over 12 months
  • A million or more different combinations of shipping requirements can apply to the shipment of a single gaming machine today

AGA Suggested Reforms

New York regulators can enhance the state’s pro-business stance by implementing the following AGA reform recommendations. Reducing the shipping restrictions in just these two areas of regulation would help to make New York more business-friendly to all companies involved in shipment of casino gaming machines and equipment.

Recommendation #9: Eliminate Prior-Notice or Pre-Approval of the Shipment of Electronic Gaming Machines

This eliminates useless paperwork all around. Regulators rarely deny a pre-approval request and shippers have to deal with variable time frames and with deadlines that mean multiple prior-notices for each machine shipped. Coordination of unnecessary paperwork, along with normal time and attention needed for pure logistics and penalties for missed deadlines only adds to company costs.

Recommendation #10: Reduce the Number of Pre-Approvals for Electronic Gaming Machines

Electronic gaming machines and machine modifications already are tightly scrutinized by state regulators and testing labs. The complex nature of electronic gaming machines and the constant industry quest for meeting consumer demands results in regular modifications of existing machines.

We believe a system of manufacturer certifications could easily replace at least one quarter of the high number of pre-approvals required today. This would reduce manufacturing time and shipping costs, and relieve overall paperwork and human resources burdens. In the highly competitive entertainment industry, it is essential to avoid deadening initiatives or loading unnecessary costs on the primary players within that industry to keep it vital and profitable.

Suggested Industry Reforms

In 2014, the AGA published a White Paper dedicated solely to bringing about reform in this area entitled Streamlining Shipping: Recommendations for Regulatory Reform (David O. Stewart, Ropes & Gray, LLP) in which there are seven recommendations for rule changes designed to successfully address shipping problems while simultaneously enhancing consumer protections. These suggested changes to shipping rules ensure that regulatory approval has been met for games and machines installed in a jurisdiction, and that those electronic machines and games are not tampered with during shipment.

Regional or national standardization of shipping regulations would speed delivery of new products to the gaming public and create important efficiencies for regulatory agencies, manufacturers and operators of electronic gaming machines. At the same time, reduction or elimination of unnecessary paperwork would also cut costs for regulators without reducing the effectiveness of industry regulation.

The AGA suggests these specific reforms:

  • Allow Shipment of Complete Machines – Factory assembly is superior to on-site component assembly. Reduction of delivery requirements, paperwork and errors.
  • Establish a Uniform Advance Notice Period for Shipments - Reduces costs of doing business, simplifies delivery process without reduction in regulatory effectiveness.
  • Allow Shipments Directly to Customers and to Multiple Customers – Reduces shipping costs and delivery times.
  • Allow Shipment Without Express Prior Authorization – Reduces variable authorization delays, eases coordination of shipments, and does not reduce regulatory effectiveness.
  • Exempt Non-Gaming Components from Prior Notice Requirements – There is little reason to fear tampering with non-gaming machine components.
  • Remove the Requirement of Prior Notice for Removing Slot Machines – Facilitates shipment scheduling, reduces administration burdens. Post-shipment notification to regulators is sufficient for monitoring active game inventories.
  • Allow Shipment Notices to be Delivered Either Electronically or Via E-Mail to a Single Regulatory Official – Electronic and e-mail notifications can easily be collected and stored for later use if needed or forwarded to other officials.

Changes suggested by New York regulators offer some relief and hopefully will influence other states and jurisdictions to make similar changes. The best outcome would be to see changes in shipping requirements instituted nationwide, for simplicity, cost-effectiveness and highest benefits to gaming/casino companies, gaming machine manufacturers and shippers. The suggested New York changes make doing casino business in New York more profitable for everyone, including the state.

Regulatory Reform: Part I

By Christopher W. Hinckley  (@CHinckley_HB)

Industry (Casino and Manufacturer) Growth and Resulting Contributions

Gaming has become a critical component of the U.S. economy. The American Gaming Association’s (AGA) annual State of the States report from 2013 showed nearly 1,000 casinos operating in 39 states. As total casino gaming revenue reached historic levels, so have the number of casino jobs (1.7 million), wages paid to casino employees ($73.5 billion), and tax revenues paid to local, state and federal governments ($38 billion). The same year American gaming equipment manufacturers, which build the table games, slot machines, and other casino related products, produced nearly $6 billion in total revenues while employing 31,200 workers whose salaries and wages amounted to $2.3 billion.

Complexity of Regulations

Along with this tremendous growth across a growing number of jurisdictions comes the expectation that casinos and manufacturers adhere to the rules and regulations of each jurisdiction in which they operate, regardless of necessity, redundancy and inconsistent enforcement. The result is an overly complicated business environment requiring disproportionate compliance staffing, inflated travel costs, unnecessary delays in getting product to market and hampered competitive practices. Adherence is nevertheless a given as gaming companies are well aware of the connection between absolute obedience and maintaining their gaming licenses.

Due to the fractious nature of America’s gaming landscape, it’s unrealistic to believe that jurisdictional regulations and practices will ever be uniform. Understanding the insurmountable nature of the problem, industry participants have given up on seeking wholesale changes and instead encouraged modest reforms aimed at lessening their operational burdens while maintaining the integrity of the industry.

AGA’s Regulatory Practice White Paper – 10 Recommendations for Reform

In October 2011, the AGA, with the assistance of a cross section of gaming industry representatives, published a white paper entitled Improving Gaming Regulation: 10 Recommendations for Streamlining Processes while Maintaining Integrity. (David O. Stewart, Ropes & Gray, LLP). The white paper called for 10 reforms perceived to be necessary and within the power of regulators to put into place. They were:

  1. License Terms Should Be Indeterminate, or Extended for at Least Five Years
    Renewals are unnecessary due to regulators’ ongoing investigation and companies’ duty to report changes on the application. Longer or no renewal deadlines would provide relief to owners.
  2. Extend the Use of Uniform License Applications
    This reduces cost of doing business and speeds up license approvals.
  3. Allow Waiver from Licensing or Registration Requirements for Those Institutional Investors Holding Less Than a 25 Percent Ownership of a Licensee
    Since most institutional investors are not a concern to regulators, this ultimately improves the opportunity for licensees to access capital investment.
  4. Extend the Use of “Shelf Approvals” for Debt Transactions and Public Offerings
    Allows better credit opportunities based on timing.
  5. Require No More Than Registration of Outside Directors
    Increases pool of talent for gaming companies.
  6. Eliminate Unnecessary Regulatory Filings
    Reduces compliance costs.
  7. Update Licensing Procedures and Practices
    Reduces costs and burdens for regulators and license applicants.
  8. Eliminate Prescribed Minimum Internal Control Standards (MICS)
    Costly and burdensome current practices may also be obsolete.
  9. Eliminate Prior-Notice or Pre-Approval of the Shipment of Electronic Gaming Machines
    Costly procedures are not justified; could be replaced by simple delivery logs.
  10. Reduce the Number of Pre-Approvals for Electronic Gaming Machines
    Reduction of costs and ease of esthetic modifications by manufacturers.

New York’s Regulatory Practice White Paper – Suggested Reforms

In response to problems caused by outdated regulations and the differing requirements of a large number of jurisdictions that rule casino operations, gaming machine manufacturing and shipping, the New York State Gaming Commission has suggested several regulatory reforms and earlier this year published its own Regulatory Practice White Paper recognizing several of the AGA suggested reforms.

Reforms suggested in the Commission’s White Paper include:

  • Term of License Renewal – Proposed to be no less than 10 years.
  • Standardization of Applications - Additional efforts to reduce costs of doing business in New York state.
  • Compatibility of Service Industry Licenses – Reduce duplication through a single occupational license applicable for working in multiple industries.
  • Institutional Investor Waivers – Many institutional investors in the gaming industry are passive, owning less than a controlling interest.
  • Pre-Approval for Debt Transactions – Allows licensee to take advantage of best credit opportunities that may arise at a future time.

Win in New York State

The gaming industry is important to New York and other states, as it creates tax revenues and thousands of high-paying jobs. Regulations also govern this marketplace in the areas of investments, ownership and costs, all of which help casino industries to continue growing. Changes in regulations are designed to free up resources and eliminate processes that are very expensive, but no longer needed.

The need for regulatory reform is ongoing, and New York obviously wants to be a leader in helping casino industry participants continue to enjoy a thriving and profitable industry. Success for business owners also means success for employees and patrons, as well as generating excellent returns to New York in the form of taxes. Keeping current business and drawing in new business to the state is a win-win for everyone.

New York has already shown movement on most of the AGA’s suggested reforms, but still needs to deal with shipping and approvals concerns, specifically mentioned in points 9 and 10. Shipping regulations currently generate tens of thousands of filings from hundreds of jurisdictions. Suggested shipping reforms will greatly reduce this glut of expensive, unnecessary and redundant paperwork.

A follow-up blog, Regulatory Reform – Part II will address AGA’s suggestions on the topic of shipping reforms.

FinCEN’s Casino Crackdown: Part II

FinCEN Statement on Third-Party Sports Betting May Indicate Direction of Anti-Money Laundering Regulations for Gaming

By Christopher W. Hinckley  (@CHinckley_HB)  and Allen E. Molnar

Detailed inquiry on a gaming customer’s ultimate principals — rather than just on the identity of that customer alone —- is the focus of a letter to the American Gaming Association from FinCEN, the U.S. Treasury Department’s Financial Crimes Enforcement Network, one of the federal agencies responsible for enforcement of anti-money laundering (AML) laws.

The agency’s December 24, 2014 letter from Associate Director of Policy Jamal El-Hindi (just released for public review and appearing below) responds to the AGA’s concerns over a news article discussing prospective regulatory guidance on ‘third-party sports betting,’ that is, where those having ultimate interest in gaming activity use intermediaries to place bets on their otherwise undisclosed behalf.  Specific regulatory requirements for conducting due diligence on the ultimate ‘beneficial owners’ of funds involved in reportable transactions under the Bank Secrecy Act (BSA) or AML procedures have not yet been issued for casinos and gaming interests but have been under consideration for some time (with similar compliance mandates for banks, brokerage houses and other conventional financial operations having been finalized last year).  However, FinCEN’s letter notes that a gaming interest’s failure to make adequate inquiry about a customer’s ultimate principals may be considered a present violation of reporting and recordkeeping obligations under the Bank Secrecy Act, as currently applicable to the industry.

The content and tone of FinCEN’s December 24 response appears to confirm that federal agencies remain determined to develop detailed protocols that will affect practical operations of casinos, racetracks and other gaming venues, as noted in our January 7 blog  “FinCEN’s Casino Crackdown.”   In responding to the AGA’s specific inquiry regarding sports wagering, El-Hindi reiterates FinCEN’s broader message that casinos apply the risk-based approach to compliance including “reasonably designed AML programs to address among other risks, the risks associated with third-party betting. Owners and operators are well advised to familiarize themselves with efforts of the American Gaming Association to ensure that further governmental regulation is proportionately designed to the unique aspects of the industry.

About the authors: Christopher W. Hinckley, former general counsel to a state gaming commission, provides legal counsel to licensed gaming entities on matters related to compliance with regulatory, state and federal laws. Allen E. Molnar represents clients with issues related to multijurisdictional or international implications, such as compliance with requirements of anti-money laundering laws.

Gaming Commission Issues RFI for VLT Operating System

By Christopher W. Hinckley (@CHinckley_HB)

On December 17, 2014, the New York State Gaming Commission issued a Request for Information (RFI) inviting interested vendors to submit information regarding the operation of a central operating system to support the state’s video lottery terminals (VLTs). The RFI seeks information regarding the types of video lottery central systems available, level of detailed reporting available, types of games supported, and what proprietary or non-proprietary protocols are used. The content of the RFI is designed to assist the commission with the future development of a Request for Proposals (RFP). The commission operates the video lottery program and has the final authority over what game themes, payout percentages, and denominations are installed in each facility. The current provider of services for the central operating system is MGAM Systems, Inc.

The Lottery’s central system includes the hardware, software and network components supporting the VLT’s linked to central data center. The current system is based on the traditional central determination/finite pool design but the commission is prepared to consider a range of design options for a new central system, as long as the manner in which they operate is shown to be a lottery system. Per the RFI, the proposed system must conform to the legal definition of a lottery, which necessitates consideration (payment to play), chance as the determinative factor to win, prizes to winners, tickets (electronic or physical) and multiple players simultaneous involvement in the same game.

Responses to the RFI are due February 13, 2015.

 

FinCEN’s Casino Crackdown: Part I

Christopher W. Hinckley (@CHinckley_HB) and Allen E. Molnar

Overview
Will the casino industry soon become regulated like Wall Street banks and financial firms?  Perhaps.  For the past two years Jennifer Calvery, the Director of the Financial Crimes Enforcement Network (FinCEN) has made presentations to casino groups in Las Vegas. Calvery’s remarks, part educational – part warning, focused on the Bank Secrecy Act and its Anti-Money Laundering provisions as they relate to casinos as financial institutions. On both occasions she made clear that casinos, although different in many ways from Wall Street based financial institutions, will be held to the same rigorous enforcement standards. 

Initial Reaction from the Gaming Industry
The initial reaction from the casino industry was concern as Calvery’s comments were interpreted in some quarters as meaning that casinos would be required to examine customer backgrounds in order to discover the source of their gambling funds. Casino operators were worried that such practices could disrupt player activities by scaring away “high-rollers” who would view such inquiries as an invasion of privacy. Reacting to Calvery’s past statements of intent, casinos point out they are already one of the country’s most highly regulated industries with disproportionately large compliance departments and operate according to a culture of compliance mandating self-reporting of even the slightest offenses.

FinCEN Response
Calvery and FinCEN listened but reminded casinos that their adherence to date, however adroit, was not up to FinCEN’s AML standards, particularly in the area of knowing the source of patron funds. She announced plans to enact a new rule that would explicitly require casinos to vet the source of gambler’s funds. The rule, finalized last year in a form tailored to the operations of conventional financial institutions, has yet to be enacted for the unique needs of the gaming industry, but is expected to require casinos to obtain more information about certain customers in order to shed light on high-risk transactions such as international wire transfers and large cash deposits.

American Gaming Association Initiative
In a preemptive response, last month the American Gaming Association released Best Practices for Anti-Money Laundering Compliance, December 2014 to help casinos and Internet gambling sites comply with anti-money laundering laws. Most casinos employ a strict set of internal controls designed to track and control the flow of money, though past efforts were not focused on anti-money laundering provisions until now. The guide warns casinos to watch for gamblers who spend large amounts of money but gamble very little, patrons unwilling to offer personal information when asked, or players making bets that cancel each other out; e.g., betting red and black at roulette. Well known casino brands have found themselves the subject of money laundering probes in the past and the casino industry should expect FinCEN’s efforts to continue into 2015.  

About the authors: Christopher W. Hinckley, former general counsel to a state gaming commission, provides legal counsel to licensed gaming entities on matters related to compliance with regulatory, state and federal laws. Allen E. Molnar represents clients with issues related to multijurisdictional or international implications, such as compliance with requirements of anti-money laundering laws.

2015: The Year in Preview

By Karl J. Sleight
@KSleight_HB

As we expected, 2014 was dominated by New York’s foray into the non-Native American private sector casino market for the first time in state history. In a compressed and efficient process the state named members to its siting board (February), released a request of applications to operate a casino (March), accepted responses from 16 bidders throughout the state (June), held public hearings (September), and made recommendations for three projects to receive licenses from the state (December). In the end, New York stood in strong contrast to its neighbors, such as Massachusetts, on how to run an effective casino site selection process. On the equine side of the equation, the New York Racing Association reported operating in the black for the first time in recent memory. The market for New York-bred horses was vibrant and continued to grow significantly. What will 2015 hold? Here are our thoughts.  

Casinos
In the world of New York casinos, the three “C’s” will mark this year: Character, Construction and Competition.

The three successful applicants that garnered the recommendation of the Gaming Facility Location Board (siting board) will all take the next steps in the regulatory process with the state Gaming Commission. A more granular character vetting process will unfold for leaders of projects in Sullivan, Schenectady and Seneca counties. All of these projects are led by well-known and respected developers. Expect the same kind of efficiencies here that marked the site selection process. Licenses should be granted by the commission after the vetting process is completed, which could be done by the end of the second quarter 2015. Once the licenses have been issued, the projects are on the clock to be operational within two years. Speed to market remains very important as New York is competing in a crowded Northeastern market, and Massachusetts and Northern New Jersey are expected to come online sooner rather than later. Speaking of New Jersey, the death spiral of Atlantic City will accelerate discussions of statewide expansion there, and the Garden State will have no choice but to open up areas of the state to gaming. Think Meadowlands.  

Construction will begin at the three sites and ramp up significantly during the second half of 2015. Trade union workers will be employed at all of the projects making for a very happy holiday for them at the conclusion of 2015.

Competitors will not sit still and let the newcomers siphon off customers to these new projects. Look for marketing blitzes and new attractions by existing casinos to try and maintain market share. This could be particularly intense in the Capital Region of New York, where the Saratoga Raceway and Casino (30 minutes away from the Schenectady project) is adding a hotel. The Oneida Indian Nation is less than two hours to the west and has floated the idea of a new outlet shopping center, and the robust $800 million MGM project in Springfield, Massachusetts will be getting under way with construction. Expect similar efforts in other regions of the state by the regional incumbents.

In the end, all three of the New York projects will chug ahead and will be far along as 2015 comes to a close and will be on target for opening in the first half of 2017. Logic and the private sector realities should win out on the issue of the state revisiting its decision to make three instead of four license recommendations in the upstate region, since a recommendation for the award of a fourth license could unravel what had been to date an efficient regulatory process and would create market uncertainty.

Racing
The New York racing and breeding scene will be highlighted by the scheduled April release of a statutorily mandated report by the New York Racing Association (NYRA) Reorganization Board of Directors, which will recommend next steps in the future operation of the NYRA franchise. On the heels of its November 2014 report that it is in the black and financially solvent, there will emerge a push to reprivatize NYRA and this issue will be front and center with the Reorganization Board scheduled to sunset in October 2015. This issue will evolve and may lead to the State Legislature and the governor tweaking the structure of the NYRA Board in terms of number of seats, duties and responsibilities in an effort to exert even more governmental control over the franchise. All of this in advance of the possible expansion of casinos in the New York City metropolitan market in the coming years. Prominent race track operators from outside of New York will appear on the scene to evaluate the landscape and position themselves for the possibility of the state selling off the NYRA franchise. Horsemen will wring their hands on the impact of all of this on winter racing at Aqueduct, but with no voting seats on the NYRA board will be left on the outside looking in, crossing both fingers and toes. New York thoroughbred breeders will be equally concerned about the developments. After a year of expanded breeding and sale of New York-bred weanlings and yearlings in the marketplace they will be watching these developments closely. The seeds for watershed change in New York racing and breeding for years to come could very well be planted in 2015.

Our boldest prediction for 2015 is that on June 6 at the Belmont Stakes, for the first time since Affirmed in 1978, the world will celebrate a Triple Crown winner.  This equine athlete will take the nation by storm and the name of the Triple Crown winner is ______________. Hey, c’mon, we’re bold, but we’re not that bold.

Cheers for a great 2015. Enjoy.

 

 

 

Next Steps for NYS Casino Application Winners

By Karl J. Sleight
@KSleight _HB

Nearly nine months after the New York’s Gaming Facility Location Board (siting board) publicly released a request for applications to build casinos, the board announced the winners. The winners who will be recommended by the board to the state Gaming Commission for casino operating licenses are the Empire/EPR project in the Catskills (Region 1), the Gallesi/Rush Street project in Schenectady (Region 2), and the Lago Resort &  Casino in the Finger Lakes (Region 5).

Although the board could have recommended up to four projects for a casino license, the analysis of the current market coupled with the characteristics and components of the projects submitted led the board to make only three recommendations. The board released a written report discussing their analysis of the projects and their justification for selecting the winners and reasons for not selecting some of the projects.

The board also held a media press conference after the announcements, wherein the members provided additional insights into the decisions of the board.

The next stage of the process will include additional vetting of the three projects recommended by the board for licensure. Once that process and other statutory and regulatory items are completed, the projects will be positioned for licensing. Pursuant to the state’s gaming law, the projects are required to be operational within two years.

 

 

Report Highlights Gaming’s Economic Contributions in Maryland

By: Christopher W. Hinckley

@chinckley_HB

As reported by The Washington Post’s Annhys Shin, according to researchers from Oxford Economics, a forecasting firm based in Oxford, England; Maryland’s casino industry contributed $1.4 billion to the state economy and added nearly 8,000 jobs in 2013. And, while generating $359 million in profit, the industry provided the state with $543 million in tax revenue.

In 2013, four casinos opened in Maryland:  Hollywood Casino Perryville, Casino at Ocean Downs, Rocky Gap Casino Resort and Maryland Live. Maryland Live, a Cordish Companies casino property, is the state’s largest and most successful. These casinos collectively employed nearly 4,000 people, and indirectly supported thousands more.  The analysis did not include the $442 million Horseshoe Casino Baltimore, which opened in August 2014 and employs approximately 3,000. A sixth casino, the $925 million MGM National Harbor, is being built in close proximity to Washington and is scheduled to open in 2016.

Maryland numbers reveal it as a success story in the burgeoning casino development sector on the eastern seaboard. While Maryland’s gaming market grows in size and revenues, neighboring destinations once popular with East Coast gamblers have seen decreasing economics, including West Virginia and Delaware, with the most dire signs of the impact of fresh competition hitting Atlantic City, where four casinos will have closed by year’s end.

Additional facts from the report:

  • The average Maryland household would pay an additional $252 in taxes each year if not for the casinos.
  • Without the commercial casino industry, the unemployment rate in Maryland would rise from 6.3 percent to 7 percent.

Maryland is certainly strong out of the gate with projects that are definitely connecting with gaming customers. Whether older casino establishments in the region are able to recover and compete or not remains to be seen. How Maryland positions itself to stay at the front of the pack while Pennsylvania, New York and northern New Jersey plan to open new casinos appears to be the challenge for Maryland.  

Decision Day for NY Casinos Announced; Siting Board Recommendations Set for Dec. 17 at 2:00 p.m. in Albany

By The Editorial Team

The New York Gaming Facility Location Board announced it will meet on Wednesday, December 17 at 2:00 p.m. at the Empire State Plaza in Albany, NY. At the meeting the board will make its “Recommendations of Facility Applicants for Gaming Commission Licensure.” The meeting is open to the public. 

Effect of China’s Anti-Corruption Measures on Macau

By The Editorial Team

As reported by numerous media outlets last week, Macau reported a 19.6 percent (or $3.03 billion [U.S.]) year over year decrease in gross gambling revenue (GGR) for November.  Last month’s numbers follow a 23.2 percent year over year decrease reported in October, Macau’s largest single-month drop since 2004.  Such results have Macau prepared for its first-ever yearly decline in GGR.

Perhaps most interestingly, many financial analysts and reporters are pointing to the Chinese government’s recent increase in anti-corruption measures as a driver of this decrease.   More specifically, Stuart Leavenworth – a foreign correspondent for McClatchy — attributed a decrease in junket operations to a decrease in “corrupt government officials, trying to beat the odds with pilfered public money.”  Leavenworth cites additional concerns regarding Macau, including money laundering and casino companies’ heightened risk of exposure under the Foreign Corrupt Practices Act.

China’s anti-corruption efforts, however, are just one of many factors driving the decreases.  As noted by the Las Vegas Review-Journal, other factors such as “political unrest… in Hong Kong, economic concerns, and VISA restrictions” are also contributed to the recent decreases in GGR.

 As the global, national and regional gaming markets like the Northeast continue to evolve, these latest events underscore the highly regulated environment that gaming occupies. As the industry continues to wrestle with expansion and the prospects of market limitations, effective integrity measures will serve the dual purpose of inoculating companies from costly government investigations while maintaining brand reputation in an increasingly competitive sector.