Casino Enterprise Management

Last October, the United States Court of Appeals for the District of Columbia Circuit affirmed the August 2005 ruling of Colorado River Indian Tribes v. NIGC (popularly known as the CRIT decision) that the National Indian Gaming Commission (NIGC) had no power to impose operational standards on Class III gaming. Specifically, the courts found no statutory authority under the Indian Gaming Regulatory Act (IGRA) that would allow the NIGC to promulgate or enforce regulations containing minimum internal control standards (MICS).

Much ink spilled over the impact of this decision, which has been hailed as a resounding vindication of tribal sovereignty, and condemned as a fatal blow to federal oversight of tribal gaming.

Aside from the back slapping and hand wringing, what exactly is the practical import of this ruling? Reportedly, the NIGC has cancelled some audits, and some tribes have politely told the NIGC to stay away.

The perceived fallout has perhaps been more significant. In the past, the response to critics of tribal gaming emphasized three tiers of regulation: tribal gaming agencies, state compact provisions, and NIGC oversight.

Now, many commentators are asserting that the NIGC is, at best, a paper tiger.

Narrowly read, the decision only prohibits the NIGC from mandating adoption of its MICS by tribes with Class III gaming and from conducting audits to enforce them. More broadly, the decision may call into question other NIGC regulatory initiatives. The decision may well prompt congressional action to shore up NIGC authority under IGRA.

On a more practical level, we believe that the decision offers tribes—and more particularly tribal gaming agencies—a golden opportunity to enhance their status as primary regulators of Class III gaming and to demonstrate a commitment to sound regulation.

First and foremost, there should be no need for an oversight body such as the NIGC to mandate internal control standards. Every tribal gaming agency should adopt industry standard MICS, even if their state compact does not require them to do so. Internal controls are as basic to casino regulation as security and surveillance. The idea of running a casino without good internal controls would be like driving a car without brakes.

Adoption of MICS, of course, is largely meaningless without effective inspection, monitoring, and enforcement programs. Nevada regulators first established in the early 1980s that deviations from required internal controls could subject a casino to a disciplinary action and related sanctions. Since that time, all gaming regulators view internal control violations as serious matters.

The primary reason that internal controls are so important is that they are the first line of defense in protecting a casino’s assets. When conscientiously followed, they will prevent the vast majority of internal and external attacks on a casino’s assets. A disregard or evasion, whether intentional or inadvertent, of any aspect of a well designed and effectively implemented set of internal controls, will necessarily alert casino management to a potential compromise of casino assets and direct their attention to the possible breach.

These are the twin pillars of the internal control structure—­­prevention and detection.

Enforceable internal controls are thus vital to the integrity of any gaming operation, including tribal gaming. Asset protection arguably assumes even greater importance in the tribal gaming sector, since the direct stakeholders are tribal members themselves, rather than the shareholders of large, impersonal corporations.

Given the inherent self-interest in asset protection, it seems obvious that neither a tribe nor its gaming agency should need an outside government bureaucracy to tell it to conscientiously monitor and enforce MICS.   

But, the critics would argue, even if a tribe does voluntarily adopt its own MICS and implements programs to ensure compliance, an outside body like the NIGC or the state, pursuant to compact provisions, still needs to verify these facts. As Sen. John McCain recently put it, “I do not believe that self-regulation without oversight is real regulation.”

Sen. McCain and others (in some instances those within the tribal gaming community itself) appear to lack confidence in the will or ability of tribal governments to regulate their own casinos. Yet we permit state governments to regulate casinos within their jurisdictions without external validation.

One wonders how Nevada or New Jersey officials would react to proposals that a federal agency inspect and corroborate their compliance programs.

Even states that are very new to gaming, such as Pennsylvania, are trusted to develop regulatory programs without mandatory external validation.

It could be argued that states, unlike tribes, are not the actual owners of the casinos they regulate. If anything, however, having a direct stake in the enterprise would seem to increase the interest in effective regulation. Additionally, there are parallels to other
gaming jurisdictions, such as Ontario, Canada, where the government is the owner of the casino and also regulates it through an agency of the government.

Given the inherent self-interest in asset protection, it seems obvious that neither a tribe nor its gaming agency should need an outside government bureaucracy to tell it to conscientiously monitor and enforce MICS.  

From our somewhat unique perspective as former state regulators now serving as tribal gaming commissioners, tribes are perfectly capable of sound regulation and, as noted above, have an incentive at least as strong as the state’s to engage in proper asset protection.

 Our firsthand experience is that many tribal gaming commissions are well trained, active, involved, professional, and knowledgeable in the regulation of gaming entities. There is also a general understanding of, and appreciation for, the importance of internal controls. Many tribes have entered into compacts with states that contain provision requiring MICS, and which also provide various forms of state agency oversight.

Even in the absence of compact requirements, many tribes have adopted industry standard MICS and routinely audit compliance.

We do believe, however, that tribes can go further to blunt the critics and reassure the gaming public. The approach is twofold. First, in addition to adopting MICS, tribal gaming agencies could promulgate rules that require external audits of internal controls on at least an annual basis. Second, the gaming agency could voluntarily invite either or both the NIGC and state compact agencies to review their monitoring and enforcement programs. 

The above voluntary approach would provide external validation without infringing tribal sovereignty. In this regard, it is important to note that we are not suggesting that the external agencies possess “enforcement or regulatory” authority associated with such inspections or reviews.

This authority should remain appropriately placed in the duly appointed tribal gaming commissions, absent negotiated compact provisions addressing the matter. The vehicle of external review would merely provide valuable feedback for tribal gaming agencies on the efficacy of their compliance programs. If defects or flaws were identified in this process, tribal regulators could then take corrective action and even invite re-inspection. 

Any approach that provides a reasonable validation of tribal regulatory programs can be a most valuable public relations tool. It will not only silence the critics that complain about lack of oversight, but will strengthen public confidence in tribal gaming.

Aside from perceived issues, confirmation that controls are in place to adequately safeguard tribal assets is simply the right thing to do. Nearly 90 percent of the estimated $20 billion dollars of revenue generated by tribal gaming comes from Class III operations. Regardless of the ultimate outcome of the Colorado River case, or any legislative response, these tribal casinos need and deserve effective, industry standard, regulation.

Pat Leen, co-owner of Gaming Regulatory Consultants, was an initial member of the Michigan Gaming Control Board (MGCB). You may contact Pat at (5170 256-8619 or pleen[at]grcgaming.com.

Tom Nelson, co-owner of Gaming Regulatory Consultants, was the first Director of Licensing and Enforcement for the MGCB and served for 22 years as Michigan's Assistant Attorney General. you may contact Tom at (719) 440-6611 or tnelson[at]grcgaming.com.