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Illegal Games Boom

Unregulated “skill games” get a lifeline thanks to the Covid-19 crisis

Illegal Games Boom

Back in February, the American Gaming Association and the Association of Gaming Equipment Manufacturers joined to launch a campaign against the spread of unlicensed, unregulated “skill games” that the gaming industry, lawmakers and law enforcement officials have all considered to be essentially unlicensed, untaxed and illegal slot machines.

The machines, which pay cash awards that their manufacturers and proponents say are earned through skill, consider methods like seeing one result and deciding whether to wager again as a skill, in one example. Developed by a few well-financed manufacturers, they are placed in locations as diverse as convenience stores, laundromats, truck stops and gas stations, and have been multiplying for the past few years. Estimates of up to 20,000 machines across Pennsylvania are not unusual for the states where these have appeared.

Following the initiative begun by the AGA and AGEM, opponents of the unregulated gaming machines had been gaining ground, with law enforcement seizing machines in several states, and with manufacturers such as Georgia-based Pace-O-Matic (POM), which distributes games to several states, and Missouri’s Torch Electronics embroiled in court battles over the legality of their games.

One court decision in Pennsylvania held that POM machines were in fact illegal slot machines, but since they were not operated by a licensee, they did not fall within the jurisdiction of the state Gaming Control Board. It was a loophole seized upon by suppliers of the games, which continued to spread.

Meanwhile, lobbyists gathered in state legislatures representing several stakeholders—the gaming industry in attempting to ban the machines, machine suppliers who say they welcome regulation for what they consider legal games, and even machine operators, who, along with the suppliers, have gotten used to big earnings on the untaxed machines.

There are over 7,000 unregulated Queen of Virginia gaming machines in bars and restaurants across that state

It was in state capitals that the movement to eliminate the machines seemed to gather steam, with Virginia lawmakers voting in March to ban the games there, where POM machines are branded “Queen of Virginia.” In Missouri, where 14,000 unregulated games operate, Torch Electronics was facing a criminal trial for illegal gambling, with a hearing date scheduled for April 23. In Wyoming, a state Senate bill to regulate and tax the machines died in committee.

Then, the coronavirus hit, and state economies reeled as businesses of all types shut down. As the crisis continued, state officials had to deal with many of the unregulated games continuing to operate while legitimate casinos, along with other businesses, remained idle. Court cases were delayed along with everything else.

Covid Reprieve

As states faced a financial crisis with little tax revenue and massive unemployment, some decided to throw the unregulated games a lifeline.

In Virginia, Governor Ralph Northam initially proposed legalizing the games under a bill that allowed casino gaming but banned skill games. As a compromise, Northam sent the bill back to the Senate with an amendment that would allow the games to continue to operate for one year, with a tax of $1,200 per month, per machine paid to the state. The amendment and casino legislation cleared, by wide margins in both chambers of the legislature.

Of more than $100 million in potential revenue from 7,000-plus machines, 84 percent will go to a statewide Covid-19 Relief Fund. Of the remainder, 12 percent will go to host cities and counties, and 2 percent each to a problem gambling fund and to the Virginia liquor control agency.

As of now, after one year, the Queen of Virginia games will become illegal. Pace-O-Matic officials and their representatives are lobbying for a permanent regulated-and-taxed status for the games.

Wyoming has moved this type of game closer to that status than anywhere. A bill sponsored by state Senate Vice President Ogden Driskill was signed into law that will have the effect of regulating and taxing the so-called skill games for 14 months. (Driskill was the only committee member to vote in favor of the prior bill to tax the games.) However, the Wyoming law goes further, creating a Wyoming Gaming Commission to oversee all commercial gaming in the state, including parimutuel racing.

The law stipulates that POM games and others like them must be licensed and certified by a state-sponsored testing lab, and obtain a state sticker. “Under this law, any game that doesn’t have a sticker on it from the commission is automatically illegal,” Driskill says.

The law stipulates that certification, and the sticker, will be granted only to machines that meet specific criteria. “The law dictates every parameter of the machine,” Driskill says. “How the reporting works, what games they can have, how they can have them, and so forth. It’s all under the purview of the Gaming Commission now.

“There is no back-door route in Wyoming anymore. You’re going to have to go through the process to get it done.”

For purported skill game manufacturers—there currently are three, including POM, which brands its games “Cowboy Skill” in Wyoming—the reprieve is temporary. “They are only legal for 14 months,” says Driskill. “Then, if no legislation is passed for skill games, they will be illegal in the state of Wyoming.”

Driskill estimates the opinions among Wyoming lawmakers to be split on the issue. “The Gaming Commission bill was a very difficult bill to pass,” he says. “This was the fourth time it ran. I would suspect a skill-game bill would be the same. It depends on who the characters are that set it up, how they present it, and exactly what they are trying to make legal, to decide whether they’re successful or not.”

The law is set up to encourage long-term regulation and taxation of the games. It essentially requires manufacturers and operators of “skill games” to play by the same rules as suppliers and route operators in regulated VLT jurisdictions. “There are three levels of licensing,” Driskill explains. “The machine manufacturer has to be licensed, the route (operator) has to be licensed, and the establishment has to be licensed.

“And there’s a lot of backbone to the law. The penalties are very severe—it’s $10,000 per offense, for each location, each machine, for anyone who breaks the law. There’s very strong encouragement not to try to game the system.”

Driskill says upwards of 1,000 games from the three suppliers have already made it through the licensing process.

The 14-month law, of course, sets up a year of lobbying in the Wyoming legislature. Driskill says the Covid-19 crisis has boosted the chances of a new skill-game bill clearing the legislature.

“Before the Covid crisis, even with the budget crunch, I thought they’d have a pretty hard time passing the law. But the way I set the law up, local governments get all the returns from it. I’m guessing we’re going to have cities helping to lobby for the bill at this point.”

The relief to strapped local budgets will be substantial. Under the 14-month law, which authorizes up to four machines per location, operators will pay a fee of $2,500 per machine, per month to the state, in addition to a 20 percent tax paid weekly on the previous week’s proceedings. When contributions pass $1 million, the 20 percent tax will be divided between the state and local governments, with 45 percent going to local governments and the school foundation and 10 percent to fund the Gaming Commission.

Another Wyoming stakeholder likely to be watching debate closely are the state’s Native American tribes, which operate four casinos under compact, offering both Class III and Class II games.

According to Driskill, tribes formed some of the strongest opposition initially, but in the latest case, they fully supported the legislation.

“They backed it fully,” he says. “I put a tribal member on the commission, and they were exceptionally supportive. Once they understood that what we were doing was not a major expansion of gambling but only to get a handle on what was already out there, they supported letting the people decide what they want to see as far as gaming in Wyoming.”

The VLT Lobby

The other force likely to be lobbying for inclusion in any new Wyoming gaming legislation is the VLT industry, represented by the distributed-gaming route operators that currently supply games to markets such as Montana and Illinois, in addition to running gaming routes in Nevada. One such company involved in the Wyoming process is Golden Entertainment, one of the largest route operators in the U.S. with gaming routes in Nevada and Montana.

Golden also is a casino operator, having acquired the Rocky Gap Casino Resort in western Maryland, as well as three Las Vegas casinos, including the Stratosphere, two in Pahrump, Nevada, one in Laughlin, Nevada and one in Colorado.

Golden Entertainment has been involved in lobbying against unregulated gaming machines in several states, in addition to lobbying to expand its VLT footprint into new jurisdictions. “I’m out there in every emerging jurisdiction meeting with legislatures,” says Sean Higgins, executive vice president of government affairs for Golden Entertainment. Higgins says he was involved in the legislative campaigns both in Wyoming and Virginia, where the company’s lobbyists thought they had succeeded.

“I hired the set of lobbyists (in Virginia) who actually got the skill-games ban passed,” Higgins says, “before the governor got cute—since he was a skill games fan, I guess—and put in this one-year extension to help pay for Covid.”

In Virginia, Higgins says, Golden’s purpose was “to get distributed gaming with VGTs approved, or at least to get a ban on skill games approved so we could take the next year and educate the legislators and others in the state about VGTs.”

Golden Entertainment lobbyists are now working in states like Wyoming toward a new law next year, and in other states like Pennsylvania, where a skill-game ban stalled in the legislature as the Covid-19 crisis took over. In Pennsylvania, Golden also has lobbied to pass a bill to legalize VGTs in bars and taverns—left out of the 2017 gaming expansion law there, which approved them in truck stops only.

“We’re trying to pass either VGT or VLT legislation; we’re obviously trying to create regulated markets,” says Higgins, who notes that even the law in Wyoming—where Golden was active in seeking a ban—does not clear up the problem. “The skill-game operators are trying to do whatever they can to get themselves ‘regulated,’ so to speak. They were successful, on a temporary basis, in Wyoming this year. If you read the legislation there, they can operate the skill games that were in place when the legislation passed, but next year, the legislature has to go back and take a look at all gaming.”

As the games’ manufacturers secure licensing in Wyoming, Higgins says he feels the law is still providing a “back door” to authorize games that would be illegal in most jurisdictions, even with the testing requirement.

“In Wyoming, we tried to stop the skill games,” Higgins says. “And really, there is very little regulation. You just have to pay a license fee, and lo and behold, you’re a distributed gaming operator for skill games in Wyoming. One of the things they did put in the bill was that you’d have to have a lab. But guess what? You can pick your own lab and give that lab’s name to the gaming commission. It’s like nothing I’ve ever seen or heard of before. So, we’re out here working to do a little education and hopefully roll that back in Wyoming as well.”

Meanwhile, the company continues its efforts along with the AGA and AGEM to stop the spread of unregulated games in markets like Pennsylvania.

“As we look at it, they’re trying to come in through the back door, with games which we say are illegal,” Higgins says. “They claim they have a loophole in the law, and here’s the thing—any time you have a loophole, you can try to exploit that loophole. And their loophole is, these are games of skill, not games of chance, and therefore, they do not fall under gaming, or gambling.

“And then they insert themselves into small jurisdictions. I’ll use Beaver County, Pennsylvania as an example. They get a small court—the county court in Beaver, which is the lowest court in the state—to agree that they’re a skill game. And then they wave that court decision around to everyone to justify what they do.

“And they make so much money, they can fight these court battles for years… They’re making money hand over fist, because they pay no taxes, as long as they can get away with it. As long as no one calls them illegal, or no court gives them a final adjudication that they’re illegal, and no legislature passes laws that say they’re illegal—which they haven’t done in Pennsylvania in years—they continue to operate. When you look at it, it’s an ingenuous business model.”

Budget Busters

Higgins says the budget crunch in the states resulting from Covid-19 will likely fuel efforts of unregulated-game manufacturers to secure legitimacy for the games. “The issue is that after operating for a number of years skewing the law—and arguing that they’re legal—they come to the legislature and say, just tax us a little bit, because we’re already here, and we can make the state money. That’s their M.O.”

Higgins foresees Golden’s lobbyists continuing efforts in Pennsylvania and Missouri.

“In Missouri, we’re in the same place,” he says. “There are several court cases pending, but none of them has seen final adjudication. So games of skill continue to proliferate there as well.”

He also sees an uphill battle in working with state legislatures in this year of severe budget shortfalls.

“The other problem becomes that you end up with legislators who have some sympathy for these skill game operators because much like in Pennsylvania, they’re manufactured there,” Higgins says. “And so you’ve got a senator and they’re manufactured in his home district. You’re going to have some sympathy there.”

Pace-O-Matic officials did not respond to requests to comment for this article, but Higgins says they have an advantage in the battle because of financial strength.

“In Virginia, if you look up Pace-O-Matic or Queen of Virginia, you’ll see a list as long as my forearm of lobbyists they have there,” he says. “Why? Because they make so much money they’ll do anything they can to keep their hand on that money. They do business as Pennsylvania Skill Games in that state. They call themselves Cowboy Skill in Wyoming. They’re Queen of Virginia in Virginia. They always claim they’re a local company.

“And they make so much money, we may hire one or two lobbyists where they have eight or 10 lobbyists, or more.

“We’re casino operators. This is a business that has been operating under the table, and even before there were skill games, there were gray-market games. What we want to do is bring it out in the light, make it legal and regulated, and put product out there in which the public can have faith that they are what they say they are. That’s our business model, and we’ll continue to push it.”

Meanwhile, AGA and AGEM will continue their efforts to battle the proliferation of unlicensed games.

“AGEM and the AGA announced in February our campaign to put a spotlight on the spread of unregulated gaming and initially focused on Pennsylvania, Missouri and Virginia because the legislatures in all three states have been active in considering how to get rid of the scourge of unregulated gaming growing in their states,” says Marcus Prater, executive director of AGEM.

“We sent the AGEM-AGA Unregulated Gaming Machine Fact Sheet to every legislator in each of those states and continue to monitor developments there. We also have a plan to inform legislators in Wyoming as they debate the future of gaming there, and will be keeping an eye out for unscrupulous machine companies pushing their unregulated games in states grappling with the pandemic and its aftermath.

“While we understand the difficulty of stamping out unregulated gaming across the board, it’s important to continue fighting against its spread. State legislators and law enforcement owe it to their citizens and the regulated casinos and lotteries in each of their states to combat unregulated gaming and the machine companies that don’t create any benefits except for themselves.”

Frank Legato is editor of Global Gaming Business magazine. He has been writing on gaming topics since 1984, when he launched and served as editor of Casino Gaming magazine. Legato, a nationally recognized expert on slot machines, has served as editor and reporter for a variety of gaming publications, including Public Gaming, IGWB, Casino Journal, Casino Player, Strictly Slots and Atlantic City Insider. He has an B.A. in journalism and an M.A. in communications from Duquesne University in Pittsburgh, PA. He is the author of the books, How To Win Millions Playing Slot Machines... Or Lose Trying, and Atlantic City: In Living Color.  

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