How Tough is Tough?

Why the Nevada regulatory system continues to be the gold standard in the gaming industry

Nevada has the reputation of having the pre-eminent gaming authority in the United States. The Nevada Gaming

Control Board (the board) and Nevada Gaming Commission (the commission) are often referred to, and refer to themselves as, the “gold standard” in gaming regulation.

While there are many gaming jurisdictions that have a very intense investigative process, Nevada’s self-proclaimed moniker was honestly earned beginning in the years when rooting organized crime affiliates from the gaming industry became a priority in order to stave off federal intervention or debilitating taxation.

However, the “tough, but fair” regulatory mantra, first used against applicants who were denied for having “unsuitable antecedents” (the alleged mobsters), continues into the modern era. While the cold-blooded exploits of these colorful characters of the bygone era are nothing more than memorabilia to be viewed as an exposition at the Mob Museum, for former regulators like myself, it seemed quite like a life-or-death situation.

 

Laying the Groundwork

The industry today has become so much more compliant, corporate and mundane, so would it be rational to expect that gaming regulation doesn’t need to be so “tough?” We haven’t seen a Frank “Lefty” Rosenthal-type character seeking reversal of a commission decision for almost 30 years.

In those early days, applicants did not easily accept their fate, which resulted in the “testing” of virtually every statute and regulation. It was then that the 9th Circuit Court of Appeals adopted the position that “gaming” was a matter reserved to the states under the 10th Amendment, which ruling was recently referenced in reaching the conclusion that federal prohibitions on sports wagering were an unconstitutional commandeering of state regulation.

Most major modern-day complaints against licensees have involved settlements for violations of anti-money laundering regulations and the Federal Corrupt Practices Act (FCPA), which were investigated by the IRS, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and the federal Securities and Exchange Commission (SEC). As an example, FinCEN required one casino to return $47 million-plus to the Treasury and also pay a $9 million fine.

Thereafter, Nevada tagged on their complaint for “an unsuitable method of operation” costing the licensee an additional $2 million. Under similar circumstances where FinCEN took the lead, another licensee paid the federal government $8 million and then agreed to pay another $1.5 million to Nevada as its “fair share” for state violations.

Nevada had ceded primary authority over currency transaction reporting to the federal government in 2007, after the board and commission realized that their exemption from the Bank Secrecy Act meant a tremendous expenditure of funds and personnel in order to be compliant with an evolving concern that had national security implications.

Nevertheless, during its era, Nevada did levy a hefty fine of $5 million when the compliance officer at one Las Vegas resort property failed to submit over 15,000 Currency Transaction Reports (CTRs) over a two-year period. (He got a little behind!)

Regardless of their nature, complaints today seem to be uniformly discharged through settlement discussions between gaming counsel and the board. These consensual complaint resolutions usually appear toward the end of the commission agenda and can easily elude press exposure. Make no mistake, the reason we have seen a parade of negotiated settlements is because a complaint filed by the board is a very serious matter.

The commission has the discretion to condition, limit, suspend or even revoke a gaming license and may also issue monetary fines of not less than $25,000, or more than $250,000 for each violation (NRS 463.310) and are not generally reviewable by a court unless they are arbitrary and capricious or not supported by any evidence.

 

Those Racy Billboards

It has been some time since a “contested” complaint hearing was held before the commission. In fact, the last one may have been a matter that I was involved in many years ago, when one particular board member found it to be sufficient grounds for a complaint if a licensee failed to conduct advertising and public relations activities in accordance with “decency, dignity, good taste, honesty and inoffensiveness.”

The regulator used his views to begin a crusade against the “edgy” campaigns of a former Hard Rock Hotel owner, thinking it would be a good idea to file a complaint to “regulate” (see “censor”) the advertising content of the hotel’s double-entendre billboards.

During the National Finals Rodeo season, the large illuminated sign in front of the hotel displayed a young woman’s naked legs from the thighs down, with only a pair of silk panties dangling around her ankles. The caption read: “Get ready to buck all night!” Another billboard showed a dealer looking admiringly at a scantily clad woman who was sprawled across a blackjack table with cards and chips. The caption read, “There’s always a temptation to cheat!”

Never mind that I had advised the client that this could be a problem, which it was, since there had been a progression of other billboards that had also attracted the attention of county officials, such as the one with a topless showgirl holding dice over her breasts, with the caption, “We sell used dice!”

In the much-awaited public hearing, Commission Chairman Peter Bernhard, who is also a very astute lawyer, read our brief and quickly dismissed the “free speech” issues from the multi-count complaint. I wondered what might come next, but shortly thereafter, the owner, whose timing was always impeccable, sold the hotel at a large profit just months before the “Great Recession.”

 

Complete Complaints

Although the current disciplinary lineup has nothing quite as “racy” or compelling as my former client’s billboards, recent cases are still pithy, and instructive. Therefore, it might be useful to review some of the complaints settled in the past few years. We will not include routine tax refunds or redeterminations, although there is always some important information to be gleaned from them, as well.

1. It was alleged that a nonrestricted licensee, which had distributed “associated equipment” (not a gaming device, but equipment designed to assist in important ancillary functions of the device, such as the proper reporting of revenue), knew or should have known about a software defect, which in some cases overpaid, and in other situations, underpaid the patrons.

The board became aware of the defect, but rather than immediately pulling the system from the casino floor, allowed it to remain on the assurance from the licensee that it would immediately embark upon the software fix and in the meantime put manual procedures in place for the proper payment of the customers. However, as the board alleged in their complaint, the needed “corrections” took much longer than anticipated and the “manual pay adjustments” occurred only when the error was brought to their attention.

There were also other circumstances when the board believed that the licensee was not fully cooperating with the investigation. Without addressing the specific allegations, the respondent settled the complaint by agreeing to a fine of $1.5 million, and was required to place $25,000 in escrow to pay those patrons who were underpaid. Further, the president and chief executive officer had to resign his employment with the company and was prohibited from exercising any further control or authority.

2. A nonrestricted licensee was issued a complaint following an investigation and settlement with a federal agency regarding alleged misconduct occurring in a jurisdiction outside Nevada. After the licensee entered into a non-prosecution agreement with the federal agency, which also included the payment of a substantial fine, Nevada regulators determined that the violation of a federal law was also an “unsuitable method of operation” for the purposes of their Nevada gaming license (Commission Regulation 5.011(8)). While the licensee neither admitted nor denied the basis for the federal action and had agreed to take extensive remedial actions, for that alleged affront, the licensee willingly agreed to pay the commission a $2 million fine.

3. A complaint was filed against a nonrestricted licensee for allowing a visibly intoxicated patron to continue gambling at the casino and extending complimentary service of intoxicating beverages to a person visibly intoxicated (a violation of Commission Regulation 5.011(2) and (3)). It was alleged that between 11:38 a.m. and 5 p.m., the player was served 11 glasses of red wine. The complaint stated that the patron was “visibly intoxicated… spilling a drink, staggering from left to right, walking with an uneven gait, losing his balance, having trouble handling his cards and lacking the ability to stand straight.”

The complaint went on to say that by 5 p.m. the patron was demonstrating signs that he was “extremely intoxicated.” While the casino cut off the patron’s spigot at 5:30 p.m., the patron slammed into a lady playing a slot machine who reported the patron’s condition to casino security. Although security advised the casino to cut off the customer from further drinking, the patron returned at around 9 p.m. after dinner and was then served two additional glasses. The patron lost approximately $13,000 that day.

In mitigation, the casino alleged that the patron was a longtime customer, who enjoyed drinking while gambling, whose play on the day in question was “within the normal boundaries and parameters of play.” Nonetheless, the casino agreed to have its employees trained on alcohol awareness and responsible gaming policies and pay a $25,000 fine.

4. Some nonrestricted gaming licensees may not realize that an adopted minimum internal control standard (MICS) or an approved “compliance plan” has the same force and effect as a regulation adopted by the commission. A violation of these agreed-upon procedures can result in a disciplinary complaint, which is what occurred when the casino’s own marker procedures were not followed.

While the casino owner disclaimed the allegation that he had instructed or directed any of his employees to ignore the paper trail required by the MICS, nonetheless the licensee agreed to settle the matter by the payment of a $215,000 fine and $35,000 in investigative costs.

5. Lest anyone think that disciplinary actions are reserved for the larger nonrestricted licensees, in this fifth example, a restricted licensee failed to file its key employee application within the 60 days as required by its license condition. The location also neglected to pay certain fees and taxes totaling $3,750, when due. The respondent admitted to the allegations and agreed to settle the case upon the payment of $6,000.

6. The licensed owner of 12 gas stations, each with a convenience store containing seven slot machines, entered into an asset sale with a buyer, reserving for itself the right to continue all store operations, including gaming, by paying the purchaser $1 per month in leaseback rent. The law requires that in order to operate slot machines at a restricted license location (15 or fewer gaming devices), the recipient of gaming revenue has to be either the “operator of the primary business” or a licensed slot machine operator.

Leasing the entire operating business back to the seller would have been sufficient to keep the gaming devices operating, were it not for the fact that the seller then entered into a management agreement with the buyer making him its “key employee” to operate the entire business, except the slots. The payment to the key employee was 100 percent of the non-gaming revenue.

In essence, the buyer became the operator of the primary business and the seller, who was not a licensed slot machine operator, continued to operate the slot machines without possessing a slot machine operator’s license. The board thought this was a subterfuge and filed a complaint. To correct the “oversight,” the seller immediately applied for a Nonrestricted Slot Operator’s license. However, during the interim period of the investigation, the machines were turned off and the seller was required to pay a $150,000 fine.

7. The board requires that transfers of interest, even in smaller restricted license locations, must have the prior approval of the board and commission (Regulations 8.020 and 15A.060), even if the transfer is to a currently licensed co-owner. That would be true even where a capital call which was ignored by one equity holder caused dilution of that person’s equity and caused a proportional increase in the ownership percentages of the other participating owners.

Additionally, when a portion of an owner’s equity is sold to a co-owner, the consideration paid by the buyer must be held in escrow until the requisite approvals had been obtained (Regulation 8.050). A small tavern in rural Nevada failed to heed those regulations and agreed to pay a $15,000 fine.

8. Finally, a local Las Vegas tavern, in an area of town where crime seemed rampant, was alleged to be a hangout for gang members. According to the complaint, there had been six gang-related shooting events either inside or directly outside the location. In total, it was alleged that between 2009 and 2015, the Las Vegas Metropolitan Police Department had 144 calls for service, 97 of which (57 percent) were labeled as “violent.”

The regulations require that a licensee must exercise discretion and sound judgment to prevent incidents which might reflect on the repute of the state and the gaming industry and a license may be revoked if the location is “too difficult to police.”

At the time of the shootings, the business did not have working surveillance equipment (but “was in the process of installing one”). In the latest episode, the complaint alleged there were four different shooters in various locations firing 60-70 rounds of ammunition. As the people were leaving, the one exterior camera that was working showed an unknown person, believed to be an employee, using a broom and dust pan to sweep up the parking lot outside the location.

Approximately 25 mostly spent shell casings and several live rounds were later discovered near a dumpster to the rear of the business. It was also noted that 911 was not called, nor did anyone document the incident. The county issued a 90-day suspension of their business license. However, the commission thought that penalty to be too lenient and required the complete surrender of the respondent’s gaming license.

The complaint actions for prior years are just as instructive and compelling. Suffice it to say, the answer to the rhetorical title to this piece, is that regulators in Nevada are “tough enough!”

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Jeff Silver is Of Counsel with the Las Vegas office of Dickinson Wright. His practice focuses on every aspect of gaming, liquor licensing and regulatory law, as well as planning and zoning matters, contractor licensing and transportation law. He is a former Clark County chief deputy district attorney and was the resident Las Vegas member of the Nevada State Gaming Control Board during the state’s tumultuous period of developing regulatory oversight.

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