Best Practices

The evolution of regulatory systems should be noted by iGaming participants, Part II

Before a jurisdiction can determine what practices to adopt related to a policy goal, a body of independent, evidence-based research must be available.

To solve Ebola, you would not send a bunch of casino dealers to a drug store to mix a bunch of drugs. But, that is how many governments approach gaming regulation. Instead of going to trained professionals like we would in solving a virus, governments often look to a regulatory body with no experience in gaming and limited experience in regulation to guess their way through what should be the “best practices.”

Regulatory failures have been many, and mostly based on voodoo law—where policymakers guess at what may work and may not. An example is one state that decided that loss limits would be effective in preventing problem gambling. It decided that casinos must issue script to limit the amount of gambling.

Each gambler could only buy $500 worth of script a day and then could exchange it for chips or tokens in the casino. The idea was that when they ran out of script they had to quit gambling. Instead of quitting, some bought script solely for resale and a black market in script developed.

In another case, a jurisdiction decided if they charged locals an admission fee to enter the casino, it would inhibit convenience gambling. It did not anticipate that locals who paid the admission fee gambled much longer—up to the full 24 hours per admission—to realize the full value of the entry cost.

Best practices go beyond social engineering concerns like problem gambling. Every aspect of gaming regulation has associated best practices.

Take internal controls, which are policies and procedures designed to prevent and detect errors or irregularities that may occur in the operation of a business. They assist a business to operate cost-efficiently. In a casino environment, internal controls are important due to the inherent risk associated with a business that involves voluminous cash transactions. Casino internal controls, however, should be practical, and cause only minimal interruption of operations. A casino that generates $50,000 in gaming device revenues should not have to spend $100,000 to install a sophisticated manned count room surveillance system.

What are best practices for casinos in adopting internal controls depending on its size, the games offered, number of locations, and other factors, can be subject to independent, evidence-based research. Here the experts may not be social scientists but industry-trained accountants.

Best practices are available for many areas of gaming regulations including anti-money laundering, licensing, regulatory and criminal enforcement, auditing, new game approval, gaming and related equipment technical standards and testing. Again, all are reliant on independent, evidence-based research from different schools of experts.

Best practices are equally for the benefit of the government and the regulated industry. The interconnectivity of the world’s gaming markets cannot be denied. Top international casino suppliers and casino operators are in multiple jurisdictions. Does it make sense that a casino company should have significantly different internal controls in one jurisdiction as opposed to other based on similar operations? Or, that a gaming equipment manufacturer should have to comply with 200 sets of dissimilar technical standards and testing requirements?

Another challenge is multi-jurisdictional compliance—where regulators in each country where they are licensed expect they will comply with the laws in every jurisdiction where they are doing business. Consistency in regulation and compliance expectations promoted by best practices will ensure better multi-jurisdictional compliance.

Costs are imposed on the industry by not adhering to best practices. Some best practices can be better standardized.

There are five decisions that government need make in deciding licensing. The first is breadth—which persons or companies that have involvement in the gaming industry must get licensed. The second is depth—who within the organization must get licensed. The third is level of investigation, such as cursory or in depth.

The fourth is criteria that the regulators will look at in deciding, such as honesty, criminal history, etc. The last is standards that apply to deciding whether someone is suitable.

The problem is that licensing can create an absolute barrier for companies to enter the market to sell product. A government’s licensing system can be dysfunctional if it is over-broad in who must be licensed, charges too much to obtain a license or creates too much uncertainty.

The consequences are that competition can be reduced, resulting in higher pricing and inhibition of innovation. For example, suppose one jurisdiction requires licensing of all shareholders owning greater than 5 percent of the stock of a publicly traded company but most other jurisdictions adhere to a 10 percent rule or greater for institutional investors. Gaming companies needing access to public markets may exceed 5 percent for institutional investors even if it means they must forego licensing opportunity in jurisdictions that have a 5 percent rule.   

What are the solutions? Gaming jurisdictions are not islands. They and the industry must work toward best practices. Common goals must be underlined with a commitment to empirical research into the impact and effectiveness of regulation. We need to encourage cooperative agreements between governments and regulatory agencies to facilitate best practices in all areas of gaming regulation.

While it is worthwhile that regulators convene for conferences and the industry identifies potential regulatory approvals, unless dedicated resources and independent vehicles exist for follow-through, it will remain nothing more than good ideas and lost opportunity.

Anthony Cabot is one of the premier legal experts in land-based and online gaming, and is a partner in Lewis & Roca in Las Vegas. He is also a partner in the iGaming North America Conference.