You Broke It, You Bought It

California gambling regulations a system in serious need of repair

A promised crackdown on illegal games in California card rooms and a state-mandated audit of spending by the Gambling Control Commission (GCC) and Bureau of Gambling Control (BGC) foreshadow long-awaited scrutiny of the state’s politicized regulatory system.

BGC Director Stephanie Shimazu, in a September memo, said she “plans to rescind game rules” for blackjack and other banked table games prohibited by state law, pledging to resolve a six-year dispute between American Indian tribes and the card rooms.

Meanwhile, the Joint Legislative Audit Committee is seeking a financial review of spending by the GCC and BGC to determine whether funds are being used for “improper purposes.” The audit will target a backlog of some 1,700 applicants for gambling licenses and work permits.

The California Nations Indian Gaming Association (CNIGA), a group of 38 gaming and non-gaming tribes, is also seeking a legislative audit of a Special Distribution Fund used to mitigate impacts of tribal government casinos, including problem gambling and regulatory costs.

“We want transparency,” says CNIGA attorney Stephen Hart. “We want to know that the monies are being well spent to regulate gaming and not for other purposes.”

Two lawsuits by the tribes may also prove to be a condemnation of the state’s regulatory system.

The first is a pending lawsuit against the card rooms for allegedly operating illegal games, despite BGC oversight. The second is threatened tribal litigation against the state for violating exclusivity provisions in the tribal-state regulatory agreements, or compacts.

“That could be dangerous for all parties,” warns a tribal attorney who requested anonymity. “You don’t want to put gaming policy decisions in the hands of a judge.”

The crackdown on illegal games, audits and litigation may lift the veil off what many industry experts believe to be a dysfunctional regulatory system responsible for adjudicating and policing the bulk of the nation’s largest and most diversified statewide gambling industry.

 

Big Gaming Business

Tribal casinos, card rooms, a lottery and parimutuel racing in the Golden State generate roughly $13 billion annually in gross gaming revenues. Nevada casinos won $11.2 billion in 2016, according to the American Gaming Association.

Many states have bifurcated gambling regulatory systems. But California has the only politically bifurcated gambling regulatory structure in the country with adjudicatory and enforcement agencies under the authority of two constitutionally elected officials.

Policy, licensing and regulations are functions of the GCC, an agency under the authority of outgoing Governor Jerry Brown.

Investigations, compliance, game rules and enforcement are assigned to the BGC, a bureau of the Department of Justice under Attorney General Xavier Becerra.

The two agencies, established with passage of the Gambling Control Act of 1997, are directly responsible for regulating 74 card rooms while providing limited oversight of 63 licensed tribal casinos. Federal law gives tribal governments primacy over the regulation of their casinos.

Racetracks and the lottery are regulated separately.

The GCC/BGC system has been criticized for subjecting regulatory issues to political pressure.

“The mistake was made to create a bifurcated regulatory structure,” says a former high-ranking state official who helped draft the Gambling Control Act.

“Where you have two constitutional officers—one the governor and one the attorney general—who use their offices for political purposes, the regulatory environment becomes too politicized,” says the onetime state official, who requested anonymity.

“I think it’s time to unwind things and redo it.”

Former GCC Chairman Richard Lopes, upon his retirement in 2015, also voiced criticism of the bifurcated system.

“If you get an attorney general and governor with different views on how gambling should be regulated, it does make things somewhat difficult,” Lopes told delegates at an International Masters of Gaming Law (IMGL) conference in San Diego.

“Having the two structures is somewhat awkward,” Lopes said, with investigatory information between the two agencies often filtered through attorneys and mid-level bureaucrats.

“I think it’s difficult to meander through this and come up with good decisions,” he said.

The GCC and BGC have come under criticism for failing to adequately regulate and police the card rooms, which since 2011 have been the target of at least eight federal raids for money-laundering, loan-sharking and other violations of the Bank Secrecy Act.

“It’s the worst regulated segment of the legal gambling industry,” says former GCC commissioner Richard Schuetz, noting that the state’s card clubs have been the subject of more federal raids than the nearly 1,000 American Indian and commercial casinos nationwide.

Industry consultant George Joseph refers to the card rooms as “the Wild, Wild West.”

 

Breaking Rules

Meanwhile, GCC and BGC officials have tactically allowed card rooms competing with the well-regulated and lucrative tribal casinos to evolve from strict poker to player-banked versions of blackjack, pai gow poker and other card games normally found in Las Vegas casinos.

What are referred to as “California/Asian” games appear to violate criminal and business codes and a provision in the state constitution giving tribes exclusivity to offer banked and percentage games.

But the BGC for the last six years has failed to bring game regulations in compliance with state law and tribal exclusivity.

California Penal Code 330 prohibits banked and percentage games, yet card rooms openly advertise blackjack and other games banked by third-party proposition player firms, or TPPPs.

California Penal Code 330.11 states, “The player-dealer position must be continuously and systematically rotated” among players. The deal is seldom rotated in California/Asian games.

The GCC has struggled with regulating TPPPs, contracted by clubs to bankroll and deal the games.

The profitable use of TPPPs by card rooms conflicts with Business and Professions Code Section 19984, which states, “In no event shall a gambling enterprise or the house have any interest, whether direct or indirect, in funds wagered, lost, or won.”

Card room operators contend strict interpretation of laws and regulations dealing with table games could cripple their business. They argue policy. They don’t argue the law.

The clubs are politically allied with the municipalities, many of which rely on card rooms for 60 percent or more of their tax revenue.

The governor and attorney general are aware of the clout wielded by the prosperous tribal casinos and the struggling card room industry, which since 1997 has shrunk from 233 to 74 licensees. The number of tables has remained stable at about 1,800, partly due to a statewide moratorium.

Tribes generate $8.9 billion a year in gross revenues and employ more than 50,000 workers, according to various sources. Card rooms win about $1.2 billion a year, employ more than 23,000 workers and generate up to $300 million annually in federal, state and local taxes.

David Vialpando, chairman of the Santa Ysabel Tribal Gaming Commission and a former BGC supervisory agent, says enforcement agents generally refrain from letting politics interfere with their duties. But political issues flare up at the top of the regulatory food chain.

“Certainly at a higher level and certainly at the GCC those types of things are considered,” Vialpando says. “Basically, how can we allow the card room industry to prosper within the regulatory framework that the state has provided?”

Governor Jerry Brown, Attorney General Becerra and their top aides, including GCC Chairman Jim Evans and BGC Director Shimazu, refused requests for interviews.

Mainstream newspapers have ignored the issue, despite the fact the California gambling industry—including the lottery and racing—employs more than 100,000 people.

 

A Litany Of Problems

Regulatory system bias flared up in 2013, when it was disclosed former bureau Chief Rob Lytle issued an opinion that card rooms need not rotate the deal in banked games, an apparent violation of state law. Lytle issued the opinion less than a week before leaving the agency to work as a consultant for the card room industry.

The directive—which generated millions of dollars in card room revenue—was later rescinded. The GCC and BGC stripped Lytle of his licenses to own card rooms and work in the industry.

Brown appointees to the GCC commission have been criticized by gambling industry experts for being inexperienced in regulatory issues.

“The commission is totally made up of political appointees,” says Steve Stallings, chairman of California Nations Indian Gaming Association. “There are no professional regulators there.”

And the BGC, staffed largely by law enforcement officers, has, according to many observers, been hindered by union and civil service rules from accumulating persons experienced in regulatory compliance. Others say the rules are not an impediment.

Lopes, a former BGC supervisor, says agents with a law enforcement background needed training in gambling industry compliance.

“The culture has to change,” he says.

Academics, consultants and others familiar with gambling regulations agree, although some say the situation has improved.

The GCC commission and its staff have become more professional under Chairman Jim Evans and director Stacey Luna Baxter, observers say. And BGC agents have gained experience in regulatory compliance.

“We had issues. We all knew we had issues,” BGC special agent Tyler Burtis told a meeting of tribal gambling regulators earlier this year. “There was always talk that we were knuckle-dragging narcotics agents that don’t know about gambling. We’ve had a solid crew of people for several years now. They’ve all gone through training. We’ve come a long way.”

But the agencies continue to suffer from a lack of policy coordination and inadequate financial resources, staff and training. They also are subject to the political whims of the governor and attorney general.

“The regulators get pissed off. And it’s not their fault, by and large,” Schuetz says. “It’s the system. It’s badly led.”

“The regulatory system is not professional,” says an industry authority who requested anonymity. “It’s way too political. And there’s a real lack of clarity in what they’re trying to achieve.

“The lack of real regulatory controls over the card rooms has gone on for 20 years. It’s just a highly politicized process. There needs to be greater insulation from political pressure.

“The legislature should step in and clarify things. It’s a public policy issue.”

“The decision-making is being influenced by politics and municipalities dependent on the tax revenues,” says a tribal regulator who also requested anonymity. “There are people high up in state government who believe tribes make enough and the card rooms should be able to coexist.”

 

Crackdown on Banked Games

BGC Director Shimazu, in a September 25 memo, said her office “plans to rescind game rules approvals for games too similar to 21/blackjack that are prohibited by state law.

“We will notify card rooms and defer enforcement for a specified period of time to enable card rooms to prepare for this action,” she said.

Shimazu also pledged to promulgate regulations requiring rotation of the player-dealer position.

But tribes remain dissatisfied with Shimazu’s promises and were expected in November to take legal action against both the card rooms and the state.

“It’s a delaying tactic,” Stallings told CDC Reports. “At this point, we’re suing.”

Two Southern California tribes plan to sue nearby card rooms over the banked games, claiming they cost the tribal casinos roughly $200 million a year in lost revenue.

Two other tribes have implemented a 45-day “meet and confer” arbitration provision in the tribal-state compact, notification that they intend to file a lawsuit in federal court charging the state with violating the agreement.

The card rooms also lashed out at the BGC.

“The bureau’s announcement to revoke game approvals for various versions of blackjack on a statewide basis is unprecedented,” Austin Lee, executive director of Communities for California Cardrooms, told CDC Reports. “It would require card rooms to significantly adjust operations.”

 

Opening the Books

Tribes and state Assembly members Rob Bonta and David Chiu are separately seeking audits of the GCC and BGC, claiming there is evidence of misuse of regulatory funds.

The regulatory system is largely funded through the Gambling Control Fund (GCF) and the tribal Special Distribution Fund (SDF). Tribes fund the bulk of the regulatory system.

The BGC is budgeted at approximately $32 million a year and the GCC at roughly $8 million.

“Neither the commission nor the bureau or the Gambling Control Fund (GCF) has been independently reviewed to ensure the regulatory system is meeting its statutorily mandated goals,” Bonta told an August 8 meeting of the Joint Legislative Audit Committee.

“An audit is needed to help determine whether or not fees are being used appropriately and whether or not they need to be adjusted.”

Of particular concern to Bonta was a BGA backlog of 1,700 applicants for licensing, a process that by state law is to be completed in 180 days. The GCF nevertheless has a $59 million surplus. BGC says it has reduced the backlog from a high of 3,300 applicants.

Bonta, who heads the state’s Asian Pacific Islanders caucus, says he also has gotten complaints from his constituents that the GCC and BGC engaged in prejudicial behavior.

Commission and bureau officials deny the accusations.

While there is a $59 million budget surplus in the GCF, Department of Justice (DOJ) officials say the BGC is only allowed to spend what is allocated by the state legislature.

“The bureau is currently reviewing its allocations from both the GCF and the Special Distribution Fund to determine if the allocations for the current workload are adequate,” Shimazu and Sara Drake, attorney general in the DOJ’s Indian Gaming Law Section (IGLS), says in a letter to the audit committee.

“There are serious allegations being made, so I think it warrants the state auditor as independent reviewer to review what is going on,” committee Chairman Al Muratsuchi says, particularly since there has been no audit of the system in the 20-year history of the Gambling Control Act.

“It could be beneficial to the general public as well as the legislature to have a review of the commission and the bureau.”

State Auditor Elaine Howle said the audit would take six months to complete. She did not respond to a request for an interview relayed through spokeswoman Margarita Fernandez.

“While we dispute the need for an audit, obviously if an audit is approved we will cooperate fully with the auditor’s office to make sure her staff has everything it needs to complete the audit,” Shimazu told the committee.

“I’m not going to comment on the audit beyond saying that unfortunately there were several misrepresentations presented to the legislative audit committee that we’re confident the auditor will examine and dismiss,” Evans said in an email. “Where the auditor finds legitimate areas where we can improve, we welcome the input and examination.”

Meanwhile, the tribes are seeking a Legislative Analyst Office (LAO) audit of the SDF, which in the 2016-17 fiscal year appropriated $31.5 million to state agencies, including $20.5 million to the DOJ (primarily the BGC and IGLS) and $2.8 million to the GCC. Another $3.2 million was directed to problem gambling.

Tribes are concerned at what they believe is a lack of accounting of the expenditures. They are also concerned with the fact tribes contribute more to problem gambling than other segments of the state’s legal gambling. Tribes also finance state litigation with nearly $2 million going to the IGLS in 2016-17.

“There is a far-ranging set of issues here,” Stallings says.

“I would applaud an effort to do a systematic evaluation—with expert testimony—to develop a model for improving the dismal performance record of California regulators,” Schuetz says. “I would have a number of recommendations, everything from getting away from the bifurcated regulatory system to increased training and funding.

“I could think of at least a hundred things.”

Dave Palermo is an award-winning metropolitan newspaper reporter. He has written about American Indian governments for more than 20 years, working as an advocate for several tribes and tribal associations. He also has co-authored books on gambling and gambling law. He can be reached at dgpalermo1@gmail.com.