NYRA Watch: State Lawmakers Call for End to Reorganization Board

By The Editorial Team

Here at the blog, we aim to continuously keep you apprised of what is coming next in both the racing and gaming industries.  With three casino applicants recommended and awaiting licensure, we will be turning a portion of our attention to the next big issue—the future of the New York Racing Association (NYRA) and racing in New York state.  We will continue to cover the latest news and provide commentary on all things NYRA as the Reorganization Board embarks on what is expected to be a new chapter. Want to follow along?  Subscribe to the blog by entering your email on the right hand side of our home page to receive notifications of new blog posts by email.  Alternatively, if following us on Twitter, search the hashtag #NYRAwatch for the latest news and commentary.

As first reported by the Albany Times Union, a number of New York State Senators and Assemblymembers signed a letter this week (below) calling for Governor Andrew Cuomo to “move as quickly as possible to transition [the NYRA Reorganization Board] back to a nonprofit racing association.”  As readers of this blog will recall, in 2012 the previously private, not-for-profit NYRA was replaced by a publicly-controlled NYRA Reorganization Board consisting of appointees of the governor and legislative leaders (prior coverage: “Governor Cuomo Signs Legislation to Establish NYRA Reorganization Board”).  The legislation creating the Reorganization Board only called for its term to last three years. This past spring, as part of state budget negotiations the term was extended to four years (prior coverage: “NYRA’s Privatization Addressed in New York State Budget”).

This week’s letter calling on the governor to transition NYRA back to a private, not-for-profit racing organization cites concerns that the temporary reorganization board does not have the ability to make necessary long-term decisions essential for continued success in the racing industry. In particular, the letter raises concerns over the potential negative impact on the Saratoga Race Course, which opened its 40-day meet last Friday (July 24, 2015).  Notably, the letter was signed by both chairs of the legislative committees overseeing racing in New York state—Senator John Bonacic and Assemblymember Gary Pretlow.  What lies ahead for NYRA and racing in New York state is unknown.  The only thing you can bet on is that we will be here following the latest advancements and keeping you apprised of the issues of the day.

NYRA Letter to Gov. Cuomo

What’s Next for American Pharoah?

By Karl J. Sleight (@ksleight_hb)

American Pharoah’s performance in the Belmont Stakes cemented his place in the pantheon of American racing history alongside immortals like War Admiral, Citation, Secretariat, Seattle Slew and Affirmed. The feat was 37 years in the waiting and no one knows whether it will be another 37 years before we see his likes again. Or, are we about to enter another golden age of racing, like the 1970s when there were three Triple Crown winners. Time will tell, but the immediate question for many is: What’s next for American Pharoah?

First things first. It will take a few days to see how American Pharaoh came out of the race. Things like energy level and regaining his normal eating habits are telltale signs of what this race meant to American Pharoah physically. Assuming there are no issues there, published reports indicate that before the Belmont Stakes AP’s owners, the Zayat family, struck a deal with Coolmore Ashford Stud the Ireland-based breeding operation that operates an arm in Kentucky. The reports indicate that the Zayat family has retained control over American Pharoah’s racing career through 2015, and thereafter he will become a stallion at Coolmore. Cutting the deal before the Belmont was another big bet by both Coolmore and the Zayat family. AP’s value if he had not won the Triple Crown would certainly be less, but now as the only living Triple Crown winner in several generations of equine history to spread his genes and imprint the breed takes it to another level.

Although the details of the breeding rights deal were not released, the business pressures that now exist will be significant because of the natural concerns and risk that exist with horse racing. To give a sense of these elements, if American Pharoah continues on the logical path, the soonest we might see him race is in August possibly at Saratoga (Jim Dandy/Travers), Monmouth (Haskell) or Del Mar (Pacific Classic). Thereafter, there could be a race against older horses, and then the logical final race of American Pharoah’s career would be the Breeders’ Cup Classic on October 31 at Keeneland in Lexington, Kentucky. If American Pharoah won all of these races, he would add approximately $3-4 million to his earnings.

By contrast, once American Pharoah enters stud he is far more profitable. Each opportunity to breed to American Pharaoh will conservatively be priced at $150,000. The rules of thoroughbred racing do not allow artificial insemination, so these are live “covers” thus limiting the annual breeding opportunities, conservatively to 150. This does not take into consideration shipping AP to the Southern Hemisphere where the breeding calendar (opposite of the Northern Hemisphere calendar) allows for even more opportunities. The conservative math comes out to $22.5 million per year in gross revenue. Assuming he has a breeding career that (again conservatively) lasts 15 years, that’s $337.5 million in gross revenue. Variables including the success of his offspring on the track will affect this, but since the best mares in the world will be coming for a “date” with American Pharoah, the chances of his progeny having success on the race track are very good. With that, his value will increase and a stud fee matching that of legendary stallion Storm Cat ($500,000 per cover) is clearly within reach, as is the opportunity to generate career gross revenue of over a billion dollars.

Back to the business pressures. American Pharoah is the messiah that the racing world has wanted for 37 years. The hope is that a horse capturing the Triple Crown would reignite interest in horse racing, broaden the fan base, and encourage people of means to become owners and participate in the “Sport of Kings.” To see the 90,000 fans at Belmont cheering on Saturday, there may be some degree of logic to that. The statements by Mr. Zayat immediately after the race that he fully intends to race AP for the remainder of 2015, and not immediately retire him to stallion duty has to make everyone in horse racing truly grateful. With the kind of money that is waiting for Coolmore beginning with the 2016 breeding season, lots of folks will be holding their breath and even the most minor hiccup in American Pharoah’s training regime could upset the stated intent to race for the remainder of the year.

Let’s hope for smooth sailing and a few more races to see one of the greatest athletes in American racing history do what he clearly was born to do. As for his next race, if the Zayat family is looking for challenges left to conquer, the historic Saratoga Race Course would seem to offer the most. Both Man O’ War and Secretariat lost at Saratoga. Will we ever find out how American Pharoah would fair at Saratoga? It’s now up to the Zayat family. Stay tuned.

Harris Beach Racing Blog Predicted Triple Crown – In January!

By The Editorial Team

One of our favorite blog posts is our “The Year in Preview” edition, which we post at the beginning of each calendar year. The annual post identifies the big issues for the coming year in racing and gaming and gives our readers a sense of how we think they will play out. The issues we take a hard look at are a mix of legal, policy and political, with a little fun sprinkled in. In our inaugural edition in 2013, we waded into the creation of the new Gaming Commission, budget issues impacting racing and gaming, as well as the constitutional amendment to allow commercial casinos. In 2014, we forecasted the year long time line of events in the casino selection process.

Armed with a sense of fearlessness from our previous experience, frankly, we outdid ourselves for 2015. We are still waiting to see if many of our other predictions for this year come true, but we know for better or worse one of them we be settled late in the afternoon this Saturday. Here’s is the conclusion of our blog entitled “2015: The Year in Preview.”]

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.

– 2015: The Year in Preview, January 5, 2015

Like millions of people around the world, we’ll be rooting for American Pharoah to make our prediction come true. After overcoming a far outside post in the Kentucky Derby, the rail post in the Preakness, and most importantly the deepest group of 3 year olds in the last 15 years, if he is successful in “The Test of the Champion” he will be a true champion and deserving of joining the likes of War Admiral, Citation, Secretariat, Seattle Slew and Affirmed as an American racing legend.

Good luck to his connection, and Go Pharoah !


FinCEN’s Casino Crackdown Hits Vegas’ Poker Tables

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

Money talks in Las Vegas, but cash always seems to speak a little louder. Whether it’s giving  a nice tip to your server even though your drink was free, one to your blackjack dealer for “giving” you a winning hand even if the cards were entirely random, or a maitre d’ for helping you find a better table, regular visitors to Vegas find that showing a little gratitude can go a long way.

Cash commonly has been used at poker tables to keep games “in play” when chips run out. Though permissible casino floor games are officially played with chips, veteran players have learned that it’s never hard to add additional currency to a pot, especially if you’re doing particularly well and don’t want to take a break to change your chips. Dealers, pit bosses and security officials all seem agreeable with this tradition – regularly declaring “cash plays” whenever a player pulled out a bill.

Starting this spring, however, most major Strip casinos have silenced this voice in poker rooms, and now require that all poker games be played entirely with chips.

In March, MGM Resorts announced that, starting April 1, cash will no longer be playable at its nine poker rooms. It joined Aria and Bellagio in making this switch, and within a month, all of the Station Casinos, Wynn, Venetian and Caesars Palace followed suit. None of them made official proclamations about the switch – guests simply encountered the change, and it was also reported on by local gaming media.

However, the move wasn’t entirely unexpected due to increasing scrutiny being given the gaming industry by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), and extra attention to anti-money laundering (AML) initiatives. FinCEN has been increasingly aggressive in encouraging casinos to account for every transaction, and for sizeable winners to complete paperwork before being presented with their winnings.  (Most recently, FinCEN issued uncommon “Geographical Targeting Orders” affecting businesses in certain zip code zones of Los Angeles and Miami it deemed particularly vulnerable to money laundering activity through the regular use of cash by customers for “large-ticket” purchases.  Businesses operating in the designated geographical locations now must report cash transactions to the government in greater detail, and at lower threshold amounts, than AML regulations ordinarily require.)

While casino owners may quietly grumble about the increased regulation and gradual shift from the city’s traditional “anything goes” reputation, they also seem willing to be seen as complying with still-evolving gaming laws.

Poker in poker rooms especially has stood out as a table game with slightly more lax views on playing with cash vs. chips. Players adding $100 bills to their bets were not uncommon. It certainly sweetened the pot and was a simple work-around for tables with a maximum amount of chips per bet.

But it also created security concerns – besides the potential risk of players not reporting any cash winnings, it also increased the potential for theft or accidents – it’s easy to identify which player may have dropped the blue chip, but harder to reclaim a missing $100 bill.

Players will likely adjust to the new chips-only rule adequately. They may remember to change extra money before a big tournament, or casinos may hire extra runners to change money when needed. What’s less known is how this change will impact the World Series of Poker, traditionally held at Caesars Palace. The role of currency for supplemental bets seemed like part of that event’s format.

NTRA Issues Statement on Federal Legislation Filed to Repeal the Interstate Horseracing Act

By The Editorial Team

The National Thoroughbred Racing Association issued a statement today (May 1, 2015) saying  the proposed legislation by Senator Tom Udall and Representative Joe Pitts to repeal the Interstate Horseracing Act of 1978 “is a shameless publicity stunt that mischaracterizes one of the nation’s most highly regulated sports.”

The NTRA said it “strongly opposes this most recent attack on horseracing by Sen. Udall and Rep. Pitts, who have introduced federal legislation that threatens to destroy the economic viability of the $26 billion horseracing industry and the 380,000 jobs it supports nationwide.”

New Legislation Introduced to “Restore Integrity”

By The Editorial Team

Senator Tom Udall and Representative Joe Pitts introduced legislation yesterday (April 30, 2015) to eliminate most wagering on horseracing, encouraging the sport to end doping and crack down on cheaters.  In a press release, Udall and Pitts said “horseracing is the only sport specially permitted by federal law to offer online gambling and interstate betting, yet widespread corruption has stained the industry.”

Udall and Pitts noted that almost every horse is given race-day medication — banned in other countries — and no uniform medication rules or doping penalties exist. They cited a New York Times story from 2012, that pointed out “doping undermines the safety and viability of the sport, and 24 horses die each week from racing injuries — an alarming fatality rate likely caused by the misuse of permitted medication and abuse of illegal drugs.”

The proposed legislation is certainly an industry “attention getter” with the Kentucky Derby set for tomorrow. And in light of that, Udall noted: “Out of sight of the spectators in the grandstand, 19 of the 20 horses competing in this year’s Kentucky Derby will be injected shortly before post time…We must stop the abuse and restore integrity to this once-dignified sport.”

“Horseracing is the Sport of Kings. Unfortunately, however, it’s plagued by too many unscrupulous trainers, owners, veterinarians and other race track officials who race sickened or injured horses, pumping them full of painkillers or other performance enhancing drugs in order to try to win at all costs,” Pitts said.

The bills are named after racehorses who were given drugs to race and were euthanized on the track. Udall named the Senate bill after Teller All Gone, a 2-year-old Quarter horse who fell after the wire at a race in New Mexico. Pitts named the House bill after Coronado Heights, a 4-year-old Thoroughbred who died racing after receiving a diagnosis of early degenerative joint disease.

On Vetting Junket Operators and Junket Patrons

By Allen Molnar, Karl Sleight (@KSleight_HB) and Christopher W. Hinckley (@Chinckley_HB)

If Past Is Prologue: What Casinos May Expect From FinCEN

“Drilling Down” to determine the real parties-in-interest, and their source of funds, has become a primary concern of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) in its efforts to combat money laundering. Mandatory due diligence requirements for racing/gaming operations reportedly are being developed by the agency, but, based on final regulations recently issued for traditional financial institutions, the direction of FinCEN’s eventual casino rules even now can be reliably anticipated. 

The authors here shall briefly review how FinCEN developed “third party” due diligence requirements for traditional banks, will note how differences between the operations of banks and casinos will require rules specifically tailored for the gaming industry, and shall consider how FinCEN’s prospective rules for casinos may affect their interaction with junket operators and junket patrons.

The Banking Precedent

Conducting due diligence on undisclosed principals or “beneficial owners” of legal entities (such as corporations and partnerships) seeking financial services was the single most problematic area for the banking industry to deal with when FinCEN announced proposed rulemaking on March 5, 2012. Questions left open by the agency’s announcement included (1) what amount of ownership would trigger, or be the threshold for, having to vet an individual owner; (2) how intrusive would the required due diligence questions be; and (3) would the results of such inquiry need to be memorialized in a file subject to regulatory review? Concerns also were raised about possibly having to identify all those having an interest in subaccounts maintained by a bank’s immediate institutional customer, such as a trust, and how would conflicts be resolved between any regulatory “need to know” and the privacy laws applicable to an undisclosed principal in her or his home jurisdiction. 

Following two and half years of industry feedback and agency response, final anti-money laundering (AML) rules for banks were issued August 4, 2014 and became effective in October of that year. On the much – debated questions about performing due diligence on the undisclosed principals of legal entity customers, FinCEN concluded:

  1. Anyone and everyone seeking to open an account for a “legal entity” must complete a prescribed form of certification containing the following information:
    1. Does the legal entity have one or more participants owning at least a 25 percent share?
    2. If so, the full name, permanent address and Social Security number must be given for each US person; if the 25 percent owner is a foreign citizen then the name, permanent address, passport number and country of issuance or (other similar identification number) must be given.
  1. In addition, similar information must be given for one designated person having significant managerial responsibility for the legal entity customer (even if that person is not an owner, or owns less than 25 percent).

Banks provided with this information must take the additional step of independently verifying that all persons identified on these certifications actually exist under the names and addresses given (a task which may include reference to any popular database).

The completed certifications and all related verifying information independently collected by banks – including a description of what methods were used to perform the verification – must  be retained for at least five years following closure of the customer’s account.  All such data is subject to regulatory inspection.

A “Tailored” Approach For Casino Operations

The way banks operate makes it effortless for them to determine when further AML due diligence is needed on otherwise undisclosed parties-in-interest. Any individual wishing to open an account or secure financial services on behalf of a “legal entity” necessarily self-discloses; just asking to start a corporate checking account or engage partnership payroll services automatically alerts bank personnel that FinCEN’s certification inquiry procedures need to be pursued.

Not so for casinos. In the normal course, gaming establishments interact only with their immediate patrons, individuals who literally may walk off the street onto a gambling floor and begin participating with the presentation of cash. The basic dynamic does not allow for completion of a certification or other realistic “onboarding” procedures such as are unremarkable second-nature experiences at traditional financial institutions. It is possible that FinCEN may propose capturing information on real-parties-in-interest or sources of a patron’s funds at various “attachment points” when an individual needs to consult with “the house,” such as in arranging wire transfers or collecting winnings over a reportable amount. That aspect of FinCEN’s current initiative in drafting AML rules for casinos is beyond the topics to be addressed here. However, there indeed is an ongoing facet of casino operations which already has been identified as a higher risk category warranting further regulatory oversight appropriate for discussion, and that is how gaming establishments interact with junket operators and junket patrons.

Junkets: Who are We Dealing With and Whose Money are They Playing With?

FinCEN already has considered the implications of junket operations, as well as direct forms of “third party betting,” and increasingly has voiced concern over their money laundering vulnerabilities. See, for example, FIN-2012-G004, “Frequently Asked Questions/Casino Recordkeeping, Reporting, and Compliance Program Requirements” (August 13, 2012);  FinCEN Letter to American Gaming Association Regarding Third-Party Betting (December 24, 2014).  Should FinCEN employ a methodology for developing mandatory casino rules similar to what it followed for conventional banks then it is likely the agency will collect and codify its prior guidance in a unified set of regulations while at the same time “tweaking” or supplementing such prior guidance with new requirements.

In particular, it can be expected that FinCEN will start by taking various pieces of guidance issued to casinos over prior years, each touching upon some different aspect of patron due diligence, and shall assemble them in a single regulatory set covering all scenarios in which enhanced due diligence of patrons or their representatives (junket operators) is warranted. See, FIN-2009-G004 FAQs/Casino Recordkeeping, Reporting and Compliance Program Requirements (September 30, 2009)(Questions 20, 22); FIN-2010-G001 Guidance on Obtaining and Retaining Beneficial Ownership Information (March 5, 2010); FIN-2012-G004 (noted above); FinCEN Letter (also noted above).

The upshot of such effort likely will find casinos required to follow practices already part of most self-designed risked-based compliance programs, with new twists, as noted below:

  1. Patron identification data will need to be collected as a matter of course on:
    1. Junket operators
    2. Junket patrons
  2. That data shall include at a minimum for individuals: full name, permanent address, Social Security number (for US persons) or passport information (number and country of issuance)(for non US persons)(“Personal Data”).
  3. For junket operators which are formally organized business associations: the same items as required of “legal entity” customers at banks (that is, Personal Data of owners holding at least a 25 percent interest, and of a designated person having significant managerial responsibility).
  4. Identifying data for junket patrons will be required in all instances, even where there is no financially-linked triggering event such as establishment of a front money account, wire transfer authorizations, implication of amounts equaling US$10,000 or more, etc. This is especially so that “Politically Exposed Persons” may be identified even when amounts associated with their gaming activity remain below reportable thresholds.  For a variety of reasons the identifying data for junket patrons may be collected in the first instance by junket operators, and then relayed to casinos with an appropriate certification. Placing the initial collection obligation on junket operators will help alleviate issues arising from the inability of casinos to employ popular search engines in attempting to independently verify the identity of persons from certain countries, such as China, where online facilities and their content may be heavily restricted or prohibited.
  5. The form of certification will mimic the prescribed document issued by FinCEN for banks in August 2014 (see the attached example), with internal references changed to make the item referable to junkets and their patrons rather than to “legal entity” customers.

 FinCEN proved itself open to industry comment during the development of mandatory AML protocols for traditional financial institutions, and there is no reason to believe it will not do so given the unique operating environment of casinos. Gaming interests are well advised to assess how likely changes to the due diligence procedures for junket operators and patrons may affect their businesses, and to promptly advise the agency of concerns, either through direct contact or through industry associations.

Christopher Hinckley presents at the American Bar Association’s Spring Meeting of the Business Law Section

By The Editorial Team

Harris Beach attorney and member of the Racing and Gaming Industry Team Christopher Hinckley sat on a panel along with gaming and financial experts to discuss the growth, status and potential of social gaming and virtual currencies during the American Bar Association’s Business Law Section Spring Meeting on April 17, 2015. Panelists included Gregory Giordano, partner at McDonald, Carano & Wilson; Karl Rutledge, partner at Lewis, Roca & Rothgerber; and Elijah Alper, partner at WilmerHale.  

The discussion focused on defining both social gaming and virtual currencies along with the reasons behind their rise in popularity and roles in both the gaming industry as well as the overall economy. The panelists discussed the popularity of social gaming, how it’s able to generate such significant revenues, and distinguished social gaming from gambling and explained why regulation of the activity appears unnecessary. The discussion of virtual currencies opened with how this new eco-system is able to function and the roles and definitions of its integral parts. The speakers next discussed its integration and uses by a number of large companies and ended by addressing virtual currency’s volatility, security and potential for the future.

About the Harris Beach panelists: 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.

Christopher Hinckley and Allen Molnar Presenting at the International Masters of Gaming Law Spring Conference

By The Editorial Team

Harris Beach attorney and member of the Racing and Gaming Industry Team Christopher Hinckley will lead a discussion of industry thought leaders on FinCEN’s Protocols for Casinos during the International Masters of Gaming Law Spring Conference on March 31.  Panelists include Allen Molnar, Harris Beach partner; Thomas N. Auriemma, member, Compliance Committee, Penn National Gaming; and Fredric Gushin, managing director, Spectrum Gaming.   

The topic will focus on how FinCEN has admonished casino operators to implement broader, in-depth “know your customer” rules in the agency’s stated effort to bring gaming operations more in line with anti-money laundering (AML) compliance standards required of more traditional financial institutions, such as banks. Now that regulatory officials have turned their attention to formulating mandatory AML protocols for casino operations, what will the rules look like and how will these prospective requirements affect casino interaction with patrons and other stakeholders?

About the Harris Beach panelists: 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, of the firm’s New York City office represents clients with issues related to multijurisdictional or international implications, such as compliance with requirements of anti-money laundering laws. 

NYRA’s Privatization Not Addressed in New York State Budget

By The Editorial Team 

Call it a late scratch or simply holding off for better racing conditions, but it does not appear the New York Racing Association’s (NYRA) privatization will be addressed in this year’s budget, due under state law by April 1.  As reported by the Wall Street Journal, the quasi-state agency tasked with reorganizing and temporarily overseeing Aqueduct Racetrack, Belmont Park and Saratoga Race Course is not being discussed as part of this year’s budget negotiations.  According to CEO and President Christopher Kay, the reorganization plan prepared by NYRA (previously discussed here at “NYRA Reorganization Plan to be Presented in mid-April”) is ready but has not yet been voted on by the board or presented to the state due to other priorities in the state budget.  As noted by the article, this is consistent with the governor’s budget plan, which proposed extending the current three year term of the reorganization board to four years. The state legislature is scheduled to adjourn for the year in June and the issue could return as part of discussions between the governor and the legislature later this spring.