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Brazil Bets on Bingo

Why gaming regulation in Brazil has never been closer

Brazil Bets on Bingo

After years of trying, lawmakers in the potential powerhouse market of Brazil finally appear ready to pass a gaming bill.

At the time this article went to press, Bill 270/2003 had just been passed by the lower house Committee on Constitution, Justice and Citizenship (CCJ), and adopted by a vote of 40-to-7.

Significant, given the nearly 6-to-1 for-to-against ratio, but even more so because the CCJ was the final committee through which the bill needed to pass before proceeding to a vote by the plenary of the Congress. If the bill passes through the lower house, as expected, it will be the first gaming proposal to have made it that far. Then only a favorable Senate vote would be required to pass
the bill.

What follows is a timeline of events which will highlight why bill 270/2003 marks several firsts in the turbulent history of Brazilian gaming, and how these translate into circumstances that will likely make you bullish on Brazil.

Bad Start
While the last seven years have proven tumultuous times for the industry, especially the period between 2003 and 2007, one must look further back to find how it came to be as such. The seeds were sown in the ’90s under a series of loose and ill-conceived policies which enabled the local courts to bypass the 1946 law banning all forms of gaming at their whim, but failed to establish a regulatory body or protocol for policing the industry. It was a recipe for disaster from the very beginning.

The lack of enforcement at the federal level meant that for every bingo that legitimately received the protection of the courts, two would pop up illegally. These illegitimate operations mushroomed as corrupt politicians and judges turned a blind eye in their districts, in some cases given a lack of policing resources, but often purporting to later solicit bribes from the illegal facilities.

In this way, bribes from illegal game runners for the protection of judges or influence of politicians became commonplace. What ultimately materialized was a mix of 1,500 legitimate and illegitimate operations housing 130,000 unregulated machines, and an industry inextricably linked to corruption and organized crime.

Brazil, of course, is not the first Latin American country to suffer the effects of vague or ill-formed gaming laws, though it is the largest. As a newly elected president in 2006, Peru’s Alan Garcia was faced with a similar task of controlling the sheer chaos that had developed following a far-from-comprehensive bill issued in 2002-under the previous administration of Alejandro Toledo-which indirectly allowed the open expansion of the industry without a working regulatory structure. The situation there was similarly exacerbated by a series of court injunctions issued by provincial judges (often via bribes) enabling slot halls to operate without concern for what little new legislative direction there was and, for the most part, without paying any gaming tax. The number of illegal game rooms in Peru in 2002 (215) mushroomed to 897 by the end of 2006, whereas proper applications were only pursued by a handful of operations.

While Garcia’s administration has met with much success reining in this situation in a very short time frame, it was only because of his ability to quickly get the control away from the courts and into the legislature that he was able to successfully carry out the process of legitimizing and regulating the industry.

Rewind to 2003. In Brazil, President Luiz Inacio “Lula” da Silva brought his center-left Partido Trabalhista (“Worker’s Party”) on a platform of anti-corruption and transparency in government. Part of that platform rested on the promise of fixing the gaming problem. Lula would not meet success with Garcia’s future ease or immediacy.

Catch 22
As it relates to gaming, the first two years of Lula’s term were defined by a series of brash and uncoordinated moves, politically savvy as they may have been.

Lula came out swinging, ready to knock corruption out of gaming-but not looking to knock gaming out of Brazil. The first proposal to regulate the country’s gaming sector was presented midway through the first year of his term. However, the initiative was abandoned fairly quickly when Waldomiro Diniz, then head of the State Lottery of Rio de Janeiro (part of state-owned bank CAIXA Economica Federal), was caught soliciting bribes from well-known illegal gambling boss and numbers-runner Carlos Ramos, and subsequently accused of extorting money from gaming businessmen to collect money for the PT.

The high-profile and very damaging political scandal tarnished the image of the recently elected president personally, and the anti-corruption image of the PT as a whole. Combined with a host of other issues, Lula’s approval rating took a nose-dive, and his position on casinos in Brazil took a 180.

Politically broken and looking to separate itself from scandal, the administration, in 2004, now stood ardently behind the immediate closure of all bingos and slots across Brazil through a medida provisória-which can be thought of as a presidential decree. A medida provisória holds immediate validity as law unless quickly overturned by the Senate. Following an explosive backlash from the worker’s unions, the Senate did not waste time using its veto power.

Rendered impotent on the issue, the administration played the only card it had left: it went back to the Congress. Legal. Illegal. The administration no longer had an opinion. It just wanted a definition of the industry’s status. Fast.

However, Lula had demonstrated through recent events that gaming was a lose-lose issue. With the potential for scandal lurking around every corner, supporting the legalization of gaming was career suicide; but coming out against it clearly did not keep you in the voters’ good graces. The issue was tossed around the house like a hot potato. For three years there were cries from the administration, the industry, the workers and their unions to provide clarity. Over 70 proposals surfaced in the Congress and Senate, many of which had given false hope of an international growth opportunity in the past. But, the Congress lacked the resolve to move it along. There was just no motivation to take the risk.

Shock Therapy
Fast forward to 2007. The industry in Brazil showed peak size and was more entrenched in corruption than ever, the shocking depth of which was revealed by a series of high-profile federal police stings that year.

“Operation Hurricane” was the largest and most invasive of these. In its wake, hundreds of halls were forced to immediately shut down and tens of thousands of machines were confiscated by local and state authorities, and subsequently destroyed. Corrupt members of the judicial and legislative branches were also purged from the system.

Lula seized the opportunity to again ask Congress for a definition on the gaming matter, delicately noting, “While the issue is not defined, bingos will continue having a legal part and a clandestine one. This creates an immutable industry around the appeals for court protection.” Congress did not come through.

Three months later, 79 government officials were implicated in activities with the slots mafia in another high-profile sting, “Operation Check Mate.” Among those implicated were the brother and godfather of the president.

Lula beseeched the Congress once more, with an elevated demeanor: “The activity must be regulated or banned, but it must not continue like this, because we will never achieve transparency the way it is right now!” Congress did not come through.

In the end, it was Brazil’s Supreme Court that stepped to the plate. In a grand attempt to separate the parasite of corruption from its host, the court issued a decision stating that only the federal government has capacity to decide if the gambling activity is legal or not, thus stripping the local courts of any further involvement with the gaming issue, and destroying the underlying policies that incentivized the corrupt behavior.

In retrospect, the one-two-three punch which removed the courts from control, the illegal facilities from the market, and the corrupt officials from the playing field, as in Peru, provided the change of scenery needed by the administration to initiate a meaningful dialogue on the gaming situation. The immediate set of outcomes, however, did not translate into an instant win for the administration.

Despite the fact that 600 gaming facilities remained open at the time with a black hole where a comprehensive policy of how to deal with them should have been, the issue weighing down the administration was the collateral damage that accompanied the closure of the 900 illicit facilities.

A large sum of the sector’s estimated 300,000-plus employees were displaced practically overnight. These workers had historically been the loudest proponent for the administration to find some resolve and get gaming in order rather than just sweep it under the rug. Their rallies in support of this were always large, and once, in the capital, numbered in the tens of thousands. The workers, being the voting base of the “worker’s party,” did not go unheard.

Lula Steps Up
In March 2008, José Múcio Monteiro, minister of institutional relations, was authorized by the president to consolidate the 70-some proposals floating around into a master proposal via a series of debates in the political council of the federal government. The goal was to work through the issue comprehensively prior to its being presented to the Congress.

The administration’s speed and focus in addressing this matter in the aftermath of the events of 2007 enabled the Congress to do its job without fear. As a result, the candid dialogue on gaming sounds like any you have heard in proposed U.S. gaming jurisdictions, with proponents touting benefits a regulated industry would bring to tourism, state coffers, the health debate, and job creation; and the more cautious addressing the realities of challenges posed from issues such as money laundering and the logistics of federal oversight. That, in itself, is a vast change from anything that has occurred in Brazil since gaming’s inception in the country.

The result of that 12-month debate was a version of the current bill that was sent to the president of the Congress, who then chose the relevant commissions that would scrutinize its content. As this article went to press, a working version of Bill 270/2003 was bound for final review and a vote in a plenary session of the Congress.

Key highlights of the present form of the bill call for a limit of one bingo hall per 100,000 inhabitants (approximately adding 1,400 more halls) with no more than a 50 percent ratio of slots to bingo seats at any one hall. The minimum payout for bingo and machines would be set at 70 percent of the drop, and gaming taxes are established at 17 percent of the hold. The federal government will receive 30 percent of the tax collection and the states will receive the rest, after the discount of the 15 percent for health programs, 1 percent for the Culture Fund, 1 percent for the Sports Fund, and 1 percent for the Public Safety Fund.

As the bill made it through the commissions of the lower house without dramatic controversy, we envision a rather quick passage by the Congress as a whole in the near future-this is the general consensus of those close to the situation. At that point, the Senate will remain the project’s only barrier.

There are those who believe it is the Senate that will prove to be the bill’s kryptonite. Such a person will almost certainly reference how a Senate-led proposal to ban all gaming-which arose around the same time Lula instructed his ministers to form a plan for regulation in 2008-signifies staunch opposition of the Senate to gaming regulation in general.

It is our belief that people making this argument misinterpret the significance of the event. In fact, this proposal was led by just one man, Jarbas Vasconcellos, who by some local analyst accounts was most interested in using the gaming issue as a medium to berate fellow party members and publicly redefine his own alliances as we enter into an election year.

Regardless of personal motivations or potential posturing, interest in this proposal (along with Vasconcellos’ voice on the matter) simply fizzled out very quickly-thus reflecting that the Senate is not likely to hold a preconceived negative bias on the issue; and perhaps it is even to the contrary.

Final Word
Federal police stings and major scandals between 2003 and 2007, while politically painful and show-stopping in terms of finding an approach to gaming regulation in Brazil, did a number of things to benefit the cause.

First, it brought the control away from the courts and into the government, a move that proved crucial to Peru in legitimating its industry.

Second, it purged a large number of illegitimate operators and corrupt government officials from the system. Finally, the overnight disappearance of hundreds of thousands of jobs generated anger in the voting base, amplifying their pro-regulation stance at a crucial time where public support was needed for the administration to become successfully proactive on the issue.

These three events collectively enabled, if not demanded the administration to take further action, the same action they aimed to take in 2003 that was quashed by scandal, fear, party politics and the poor approval rating that signified a hostile voting base.

Circumstances have changed significantly since that time, and the administration-presently enjoying an 84 percent approval rating with 70 percent of the public in support of a regulated gaming scenario-has been able to rally the Congress on a pro-regulation initiative that has not stopped gaining momentum since its inception in March 2008.

Furthermore, 2010 is an election year, and Lula made a platform promise in 2003 to fix gaming during his term. He has not yet accomplished this. Questions of legacy aside, it seems logical that it would be like striking gold for the PT to come fresh off of a big win as October elections rolled around. Successfully regulating gaming-specifically in a way that eliminates the necessity to resort to a highly controversial CSS tax to underwrite health spending-would be that gold mine.

But for as much support as the election year may bring, it could prove equally as detrimental. Major scandal implicating high-level officials-be it a gaming scandal or some other-has a habit of popping up at inopportune times for the administration, and could derail efforts. Lula, to some extent, has hedged this by refraining from addressing the issue directly and supporting the process thus far only through his ministers, but enough dirt can weigh anything down. That would be the opposition’s gold mine.

There are additional systemic risks lurking in the political spectrum for 2010. We’d need another article to break it all down, but analysts call this a defining year in Brazil’s multi-party political system. Party rifts and revised political identities/loyalties, especially within the ranks of those historically loyal to Lula’s Worker’s Party, could spell trouble as politically motivated defectors try to find a voice. Luckily, we have the experience of Vasconcellos to remind such people that the gaming issue may not be the most advantageous channel for such purposes.

Another wild card is the media, which to date has really yet to weigh in on the issue and is certainly one of the larger swaying forces in the country. Industry associations are calling legislation on the books as early as next March. This is not an impossible estimate by any means. Conservatively speaking, however, it will be wise to assess the media response in the coming weeks, as the bill gets ready to be put to vote in the general session of Congress. The level to which news reports accurately reflect the material issues being discussed on gaming regulation is likely to be a leading indicator as to the overall accuracy of that prediction.

While nothing is cast in stone at this juncture, certainly the future of gaming has never looked so near for Brazil.   

Dino Guiliano is principal and managing director of DGSA International Strategy Advisors in Costa Rica. DGSA and its regional affiliates provide strategic and tactical resources supporting the international growth initiatives of the world’s premier gaming and hospitality firms.

Daniel F. Sanson is a seasoned Brazilian lawyer and the CEO of BetConsult, a DGSA regional affiliate based outside of Sao Paulo, Brazil. BetConsult offers expert advice to foreign and domestic gaming clients on matters of corporate law and taxation in Brazil, and offers general corporate advisory services for foreign gaming firms looking to do business in Brazil and surrounding markets.

To receive free, timely updates and analysis on Brazil’s evolving regulatory situation, inquire at [email protected].

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