Today, gaming is a truly global industry. Casino gaming, which was once a small-scale business confined to a limited number of jurisdictions, has blossomed into a multibillion-dollar enterprise with numerous competing markets. This not only means that gamblers get their pick of where they want to play; it also means that states, nations and special administrative regions compete with each other by offering regulatory regimes that best suit the growth of casinos.
Nevada, whose current regulatory regime is the longest-lived of the major gaming markets, may have some historical lessons for jurisdictions on the rise, particularly when it comes to the role of transparency in promoting the public—and investor—trust in the gaming industry.
New in Nevada
Nevada literally wrote the book on how casino gaming is regulated today. When the state re-legalized commercial gambling in 1931, there weren’t very many guidelines on how to regulate what were then known only as “gambling halls.” These small establishments had perhaps two or three gaming tables each and maybe a dozen mechanical slot machines.
With such a miniscule industry, there was minimal regulatory presence. The state itself had no involvement; city and county officials were tasked with assuring that those who applied for licenses were in compliance with the admittedly slender sheaf of operational requirements (practically the only rules were “don’t cheat the customer” and “don’t let juveniles gamble”), and they collected all license fees, only a portion of which were advanced to Carson City; the bulk were retained by local governments. There were no collections based on gross revenues—flat fees based on the number of games in operation were payable quarterly, in advance.
For a fledgling industry generating modest revenues, this system worked well enough, but everything changed with the development of larger-scale casino resorts on the Las Vegas Strip, as well as the state’s growing recognition that gaming revenues could handily fill the state’s tax coffers. Even with just two resorts open on the Strip (the El Rancho Vegas and the Last Frontier), the legislature in 1945 decided to assess a tax on gross gaming revenues for the first time—a whopping 1 percent of all revenues over $3,000. Four years later, the legislature eliminated the $3,000 threshold and raised the rate to 2 percent. Since then, it has steadily inched up to its current 6.75 percent level.
The Tax Commission was charged with both collecting the levy and ensuring that casinos were forwarding the correct share of their revenues—no small consideration in an era when financial controls were minimal and skimming was practiced abundantly. Simply put, the commission was stretched thin. A series of scandals in the early 1950s, combined with the threat of a federal crackdown on the gaming industry that it perceived as infiltrated by—and actively enriching—organized crime, led the legislature to create the Gaming Control Board in 1955.
The Gaming Control Board was meant to “eliminate the undesirables” from Nevada’s gaming industry and to provide regulations for the operation of the business. Empowered to restrict the privilege of owning a casino license to those who passed muster, the Gaming Control Board was able to set standards for the industry, keeping out more notorious organized crime affiliates. Starting in 1960, the GCB issued the List of Excluded Persons (Black Book), which further reinforced the commitment to keeping Nevada gaming respectable: casinos could not let any of the 11 mob-linked names on that list into their establishments, even as paying customers.
One of the Gaming Control Board’s first tasks was to increase the public’s knowledge of the size and scope of the gaming industry. Starting in 1955, the board began publishing its Quarterly Report, which included information on the number of operators, games, and taxes paid, broken down by county. This gave even those who weren’t involved directly with the industry an idea of just how big it was.
As the industry grew, Nevada gaming regulators embraced greater transparency. Initially, they were forestalling federal action against casinos: by making clear to everyone just how casinos were supposed to operate, and just who was allowed to staff and patronize them, the Gaming Control Board was making it clear that it was already working hard to keep criminal elements out.
But as the industry grew, the ballooning size and cost of new resorts made it clear that casinos would have to attract mainstream finance to remain competitive. And this is where state concerns converged with those of potential investors in the gaming industry.
In the 1960s, the Gaming Control Board began to increase its oversight of casino financial performance. While the industry was at a crossroads, the state itself was also an interested party. In 1966, the legislature commissioned accounting firm Lybrand, Ross Brothers and Montgomery to study the state’s tax structure; almost half of the final report dealt with gaming. Attempting to optimize the tax revenue it could receive from its major industry, the state needed to know more about just how profitable it was.
One of the Lybrand report’s recommendations was to regularize financial reporting for casinos, particularly uniform accounting charts and standardized financial reporting forms. Until 1966, the Gaming Control Board was chiefly interested in collecting gaming taxes; now it was to get a better understanding of the revenue streams that created those taxes.
So in 1967, the legislature authorized the creation of the Economic Research Section of the Gaming Control Board, which was charged with collecting and analyzing statistical data. This data’s purpose was “either to measure the efficiency or economics of individual operations, or to appraise economic conditions that have a bearing on the industry.”
The primary rationale behind getting a state agency so involved in reviewing the financial performance of private industry was to ensure that the state was getting its proper share of tax revenues and to further guarantee that the legislature was fully aware of the growth possibilities for Nevada gaming. When the Economic Research section started issuing the Nevada Gaming Abstract in 1972, it was chiefly designed to inform legislators, but it would soon become a valuable tool for outside analysts as well. Those who had no history in gaming but knew how to read a balance sheet could now receive data on how the industry as a whole was performing and use that information to appraise various investment opportunities.
The Nevada Gaming Abstract started small—the authors admitted in its first edition that it was “only a start.” Initially, the Abstract featured primarily percentage values—for example, the percentage of total assets that were fixed assets, or the percentage of total revenues that were paid as wages. But over time the publication became more sophisticated, including dollar amounts for all figures and breaking down financial performance by department, with food, beverage and lodging subjected to the same analysis as gaming. Unlike the Quarterly Report, the Abstract broke down Nevada casinos into distinct reporting areas, such as Downtown Las Vegas and the Las Vegas Strip, rather than relying on county-wide aggregations; this made it much easier to handicap the performance of a single property against its peers, rather than the county average.
In 1984, the Gaming Control Board began issuing another regular source of financial data: the Gaming Revenue Report, which contained data on gaming only, broken down by reporting area and revenue thresholds; it might be possible to see the combined revenue figures for all casinos in Elko, for example, or all Las Vegas Strip casinos making more than $36 million. Today, the Revenue Report is an invaluable tool for a variety of analysts who attempt to determine from these monthly results in which direction the industry is headed.
The increased transparency in casino financial reporting, then, dovetailed nicely with the growing investment in Nevada by publicly traded corporations, and would greatly mitigate large-scale lending by banks and Wall Street firms in the 1980s and 1990s. By disclosing to the public just where the money went in the gaming industry, the Gaming Control Board was able to demystify the casino business.
Without standardized reporting, it is possible that the wave of investment that began to transform the gaming industry in the 1980s might not have happened.
Macau’s current regime of legal gaming dates to 2002. In that year, the Special Administrative Region opened up the casino gaming monopoly to a new set of concession-holders.
As in Nevada, this turn toward new investment was preceded by an outside analysis. In Macau’s case, it was a study by Arthur Anderson Worldwide that provided opinion and analysis for the SAR to consider. As a result, the Macau gaming industry was open to outsiders for the first time, with 21 bidders from around the world applying for gaming concessions. Ultimately three were chosen, though by allowing each license-holder a single sub-concession that number has grown to six.
Since 2002, the Gaming Inspection and Coordination Bureau has released a variety of statistical data that has greatly enhanced outside understanding of Macau’s maturation into the world’s biggest casino gaming market. Each concessionaire files an annual report that details its performance (regrettably, they are currently available only in Chinese and Portuguese), and each quarter the bureau releases statistics on all of the games of chance played in the enclave, from sports and parimutuel wagering to slot and table revenues.
This publicly available information has let the global gaming industry track the explosive growth of Macau and has helped investors make more informed decisions about which companies with exposure to this volatile market they want to invest in.
Setting Up in Singapore
The latest Asian gaming industry to blossom, that of Singapore, is relatively new but surprisingly robust. From the start, the Singapore government has made it clear that it wants a firm regulatory hand to guide the city-state’s two casinos. To that purpose, it created the Casino Regulatory Authority in 2006 for the purpose of ensuring that its casinos remained free of criminal influences, all games were conducted honestly, and that the “potential of a casino to cause harm to minors, vulnerable persons, and society at large” was contained. This last goal was never articulated in Nevada, which saw fit only to ensure the industry was free of corruption and offered honest games, and it represents a significant shift in the regulatory model.
But Singapore has not embraced the same levels of financial transparency as Nevada and Macau. At present, its only publication, an annual report, contains a balance sheet for the authority itself, with no information about the performance of the industry it regulates. There are neither monthly nor quarterly releases that let the public know how much money Singapore casinos are producing, with a much less certain sense of exactly how the industry is performing. We know that gaming in Singapore is producing a great deal of revenue; it would be even better to have official statistics that allowed the general public (and investment community) to monitor its growth over time.
It’s important to note that separate financial indicators are available for the Marina Bay Sands, whose parent, Las Vegas Sands, is required to file reports with the Securities and Exchange Commission, and Resorts World Sentosa, whose operator, Genting Singapore, also publishes annual reports. But these publications generally disclose only top-level data—total gaming revenues, for example—and lack the precision of state-sponsored financial statements, which break down revenues by game.
The result is an industry that is considerably more opaque than that of others, which may make it a bit daunting for outsiders to understand. That has the potential to inhibit outside involvement and investment in the industry—if the financial performance of the industry at large can’t be tracked with the same precision as in other jurisdictions, it considerably raises the difficulty level of assessing potential risks and rewards in investing.
Open and Honest
United States Supreme Court Justice Louis Brandeis said that “sunlight is the best disinfectant,” referring to the positive results that transparency can bring in both government and business. For the gaming industry, sunlight is also a boon for increased public understanding of the industry and outside investment.
Nevada gaming regulators grasped this principle long ago, and its comprehensive financial reports, freely available to the public, are a standard to which developing jurisdictions should aspire. The more people know about what’s really happening in the gaming industry, the better the opportunities for investment and informed public policy discussions—two things that are vital for the business to continue to thrive.