In Mexico all laws must be based on the Constitution of Mexico and cannot contravene it. The Constitution should also be considered the ultimate source of authority before entering into any public, private or social enterprise in the country.
As a clear example of Mexico’s constitutional hierarchy, commercial activities relating to postal service, telegraph and radiotelegraphy; petroleum, hydrocarbons, basic petrochemical and radioactive minerals; the generation of nuclear energy and electricity; and other activities explicitly established by laws enacted by Congress are “functions performed in an exclusive manner by the state (federal government).” These activities are constitutionally defined as “strategic areas.”
Other economic sectors, such as satellite communications and railways for example, are considered “priority areas” and are planned, conducted, coordinated and directed (governed) by the state.
Prohibition Antecedents in Gaming
Surprisingly, gaming is not limited by a “strategic” or “priority” constitutional definition; in fact, this economic activity is not forbidden or restricted in any manner by the Constitution. On the contrary, article 73-X grants to Congress the authority “… To legislate for the entire Republic on hydrocarbons, mining, motion picture, trade, betting games and lotteries, financial services and banking, nuclear and electric power …”
From a legal point of view, the unrestricted language in Mexico’s Constitution is very notable because there appear to be no insuperable boundaries for various forms of legitimate gaming activities.
Like most other nations around the globe, despite constitutional allowances and limitations, gaming has been an inherent part of Mexico’s history. But restrictions and prohibition have also been a constant theme in Mexico’s government — not only in recent decades, but from a cultural inheritance that began more than four centuries ago.
Pre-Hispanic civilizations in Mexico played games of chance because it was thought that they provided magical powers and spiritual enhancement. After the arrival of Spanish conquerors, however, mystical beliefs became mixed with traditional European leisure activities such as bull fighting, horse racing, ball games, bowling, dice, cards, etc. For centuries these activities and games of luck were enjoyed by all social classes but prohibitions started to emerge. According to historians, authorities considered luck games the cause of the “lack of unity and ruin of many notable families and fomented idleness among the people who practice them.” But despite prevailing laws, forbidden games were never effectively reduced. In 1769 the National Lottery was created (initially owned by Spanish Crown) to dilute “social vice” and support charity with the obvious purpose of increasing the tax collection while tacitly acknowledging the high popularity of games of chance.
In 1947, the Federal Law of Games and Drawings (Ley Federal de Juegos y Sorteos) was enacted. This 60-year-old legal body remains in effect today and is integrated by just 17 articles. In — literally — very few words, the law is an opaque, although somewhat rickety, classification of “allowed” and “prohibited” games.
The first article of the law gives notice of the prohibition of specific games of chance and games with bets throughout the national territory. The second article is a simple listing of games that “are not considered as prohibited”: Chess, Checkers (Juego de Damas) and similar games; dominoes; dice; bowling; Billiards; ball games in all forms and denominations; drawings; competitive racing by people, vehicles and animals; and all classes of sports.
Present Regulation
Since the promulgation of the existing law 60 years ago, candid debate has persisted between various political, social, economic and academic sectors. During this same period of time there have been multiple attempts to either amend or create a whole new gaming law that includes legislation on full-fledged casinos.
As a result of these polemics, on Sept. 17, 2004, new regulations to the Federal Law of Games and Drawings (Reglamento de la Ley Federal de Juegos y Sorteos) were introduced as a type of “secondary” but enforceable law decreed by President Vicente Fox and his administration.
According to information obtained from a source inside the Senate chambers, the main provisions pertaining to the regulations were actually an outgrowth of a frustrated legislative project in 2003 that attempted to make important amendments to the established 1947 law.
The 2003 project originally recognized: 1) the necessity of actualizing the law due to the “rapid evolution of gaming”; 2) the lack of effective regulation; 3) the inexistence of legal definitions of gaming terms; 4) the inefficiency in control and supervision of Bingos, sports books and others; and 5) the social and economic problems caused by the old legislation (unemployment, low revenue, investors’ skepticism, social cost, non-regulated currencies, clandestine games, etc.).
As it turned out, the old law was never amended or substituted by the Senate proposal; however, the new regulation decree, designed by Vicente Fox to improve gaming market necessities, was to some degree covered by his 2004 Reglamento.
In practice today, the 2004 regulations are still hampered by regulatory holes, discretionary interpretation by government authorities, and a lack of a viable industry technical standards group.
Notwithstanding the shortcomings, the new regulations do bring some much-needed clarification to the rules of the game within the industry. These enhancements include:
• Classification of the types of games allowed
• Description of prohibited games
• Advertising limitations
• Currency and credit restrictions
• A mechanism for the creation of a regulating gaming commission (defined by the regulations as a “Consulting Board of Games and Drawings”)
• The establishment of an official database containing actualized information about the legal situation of permit holders, the number and place of locations, the types of games and drawings offered, and finance reports, etc.
• Rules for obtaining a gaming “permit” (the proper legal name for a license or concession)
• Licensees’ and operators’ obligations
• Restrictions regarding the locations of establishments
• Limits on the duration of permits and their ability to be renewed
• Betting rules for sports books, the Internet, phones and other electronic devices
• The institution of rules for inspections, sanctions and fining proceedings
Political Factors
Despite the old law and new regulations, the reality is that political influence and favoritism are still primary factors in obtaining, regulating and operating gambling permits in Mexico.
Mexican Government Gaming Authorities:
• The Ministry of the Interior (Secretaría de Gobernación) is in charge of the “administrative interpretation” and application of the law and its regulations, as well as the examination of all activities related to gambling with bets and drawings.
• The General Office of Games and Drawings (Dirección General Adjunta de Juegos y Sorteos) is responsible for the attention, procedure, resolution and supervision of the law, compliance in any gaming matter, the issuance and termination of permits, and the imposition of sanctions.
• The Government Department (Unidad de Gobierno) is empowered to attend and resolve gaming affairs when the Ministry of the Interior is acting with the collaboration of other authorities, as well as to take actions against illicit gaming.
• The Legal Matters Department (Unidad de Asuntos Jurídicos) is entitled to collaborate with the General Office of Games and Drawings and the Government Department for the filing and resolution of administrative sanctions.
• Federal and local police departments, when they are required to, collaborate with the Ministry of the Interior in matters of enforcement.
Early this year, there were renewed calls for Congress to consider an entirely new gaming law. Political parties such as PRI (Partido Revolucionario Institucional) and PRD (Partido de la Revolución Democrática) have been very public and insistent in stating their goal of abrogating the old law and its regulations.
According to the opinion of legislative experts, what this really means is that the PRI and PRD — both opposition parties to Pres. Felipe Calderón’s Partido Acción Nacional, or PAN — might soon restart legislative discussions to reconsider the legalization of casinos and increase the diversity of allowed games as well as the depth of regulation.
The suggestion that new casino legislation is once again being considered by the Mexican Congress will no doubt evoke skepticism from many. The difference this time around is that the demonstrated economic potential and the current market growth have already become powerful factors likely to be felt in the 2012 presidential elections, as gaming is becoming readily accepted by the public.
The large, corporate and family-based enterprises that control the bulk of gaming in Mexico, although powerful in their own rights, are still not organized or unified as an industry; the same applies to the medium- and small-sized permit holders. In fact, today there is no industry technical standards group or unified industry lobbying organization to speak out for or against initiatives such as the recently proposed and onerous 20 percent gaming tax.
Televisa’s Play City reduced its growing plans dramatically during 2006 because of the presidential elections held in the same year. One of the candidates, Andrés Manuel López Obrador and his PRD party, along with other important political factions, were not happy with the major gaming permit that was granted to the huge broadcasting enterprise. The argument that it was a “pre-paid” political favor from Santiago Creel, a presidential pre-candidate of PAN who consistently supported the legality of the Televisa permit while he served as the Minister of the Interior during the Fox Administration.
The opposition and legal motions ended in a controversy filed before the Supreme Court of Justice by the Federal Chamber of Deputies in late 2004 that challenged the legality of the 2004 regulations, including all permits granted under it.
Today, paradoxically, despite the fact that PAN candidate Felipe Calderón won the election, the regulations were validated by the Supreme Court. More ironically, Creel, now a senator, has recently begun advocating a new gambling tax. There are understandable opinions by pundits who believe that this is a form of personal revenge by Creel against Televisa for not supporting his candidacy in the presidential elections.
According to experts and political observers, the probability of the Mexican Congress approving the new tax is considerably high at this time.
Legal Games
As previously stated, basically any type of game that it is not expressly included in Article 2 of the long-standing 1947 law or clarified in the 2004 regulations is prohibited. In fact, this may partially explain why full-blown casinos are not formally regulated or allowed under current Mexican law even though there appear to be some exceptions introduced by the latest regulations.
The mini-casino format, including sports books and electronic and traditional Bingo locations currently opening all over Mexican territory by official permit holders, feature forms of gaming traditionally allowed under the law and its regulations but include contemporary interpretations as well.
Interestingly, the Class II-style gaming devices now proliferating the country are not required to meet any specific technical standards or specifications. There are also no organizations, such as GLI or even government-sponsored labs, to officially review, test and/or approve equipment, software or systems for fairness and compliance. One explanation for this omission may be that the regulations specifically reserve that exclusive function to the Ministry of the Interior, which currently has no expertise or resources to perform those essential functions. (See Sidebar)
Despite these gaps and ambiguities, as well as a relatively specific and seemingly contradictory prohibition against the use of slot machines, the accepted practice at this point is that any mechanical and/or electronic gaming device that works on the basis of a “draw of numbers” or “raffle of symbols” is considered legal by the gaming authorities so long as the games/the machines/the devices comply with all of the following requirements established in the 2004 Regulations:
• To operate with central software that registers and counts the totality of the transactions generated due to betting
• To perform with a monitoring system via a secure telecommunications interconnection link
• Players are required to hold a card, or ticket in an electronice registry, by a prior selection for a combination of numbers or symbols to be drawn
• The winning procedure by which a number, combination of numbers, symbol or symbols is/are randomly determined is approved by the Ministry of the Interior
Remote betting centers or books must include “betting terminals or machines” that allow betting on horse races, sporting competitions, or any other games or drawings occurring abroad or on national territory and broadcast in real-time video and audio; they have no relevant restricting regulations other than to be authorized by the Ministry of the Interior.
Internet, telephone and other electronic bets on all types of games permitted by law (including raffles) can be made or received if they are in compliance with the following requirements:
• Maintain an internal control system for all transactions
• Maintain a written description of the procedures and rules that guarantee the integrity of the betting system
• Register account numbers for players, including their identity; the date, time, number and amount of the transaction; and the requested wagers
• Previous approval of the bet-capturing mechanism has been granted by the Ministry of the Interior
In addition to the gaming activities described here, there are other regulated types of traditional games that are typically associated with seasonal, regional, state-controlled and special events. For example, drawings related with commercialization systems, political parties’ drawings for self-financing purposes, cockfighting and horse races at regional fairs (ferias) and Mexican traditional lotteries, among others. (See Sidebar)
Sidebar
On Jan. 22, 2007, the Supreme Court of Justice upheld the legality of the regulations of the 2004 Federal Gaming and Drawings Law. After an interesting deliberation to determine its constitutionality, the Magistrate Judges (called Ministros) concluded along with other points, that:
• The regulations and permits already issued (or that may be granted in the future) are 100 percent legal and not in violation of the Constitution.
• The 1947 law includes a general prohibition against games with wagers.
• Regardless of gaming prohibitions, the law contains exceptions and allows for wagers on certain types of games: table games and ball games; raffles; human, animal and vehicle races; and all sports activities in general.
• Offsite wagering centers that take remote wagers from horseracing tracks, dog tracks, Jai Alai frontons and all types of sports events are legitimate, as are special wagering events such as those at regional fairs.
• Local and remote Bingo that includes drawings of numbers and raffles of symbols are also considered legal.
Some critics say that the interpretation of the Supreme Court exceeded its own faculties; however, the decision of the Supreme Court is final and unchallengeable.
Foreign Investment
There is no doubt that gambling in Mexico has already achieved rapid-growth status. But despite its 60-year history with pari-mutuel wagering, drawings and raffles, and even with the recent and explosive introduction of Class II-style gaming machines, the industry is still in its infancy.
As a result, this emerging market environment makes foreign investment and experience not simply options, but necessities. Expertise, technological support and gambling enterprise education are needed and, in fact, are being actively sought by every company that holds a gaming permit anywhere in the Republic.
In Mexico, foreign investment is open to 96 percent of the markets and is regulated in the Law of Foreign Investment (Ley de Inversiones Extranjeras) as promulgated by Pres. Carlos Salinas on Dec. 27, 1993. This open-market policy was formalized under the 1994 NAFTA accords.
In the same manner, commercial activities that represent 80 percent of Mexico’s Producto Interno Bruto, or PIB (an economic term equivalent to Gross Domestic Product, or GDP), are 100 percent open to foreign investment.
Investment regulations for the developing Mexican gaming industry are not very different from Mexico’s general foreign investment regulations for other types of enterprises. There are some obligatory administrative proceedings and incorporation acts that require compliance with Mexican laws, but most of these are administrative or regulatory formalities as opposed to real restrictions. An example might be the inclusion in the acts of an incorporation of the Cláusula Calvo, a constitutional resignation of the foreigner to resort to the government of his country for the protection of his interests.
Realistic Expectations
Mexicans love to gamble, and in a nation with a population of 120 million, the commercial opportunities are infinite. But before further meaningful and responsible growth can take place, the gaming sector and the authorities must first find a way to more effectively manage and regulate the business in a fair and consistent manner.
Furthermore, while serious legislative discussion has not gained much traction over the past 20 years, the reality today is that gamblers, operators and the government have an increased appetite for gaming as well as for new sources of revenue. To astute operators and investors, the current dynamics underscore the necessity for professional, sophisticated modernization of both the market and the accompanying disciplines — and, accordingly, the opportunities.
The Mexican gaming market is a reality. Legally and commercially, it is open and eager for the experience of national and foreign investments. For companies in the United States, Canada, Spain and the United Kingdom, and other international companies willing to learn about the culture, the people and the governmental processes in Mexico, interesting commercial experiences will likely abound.
The upcoming articles in this series on gaming in Mexico will delve into important topics that will be useful in starting to understanding how “the system” really works. Future installments will also illuminate the gaming companies and suppliers that are already doing business in the country. In short, the series will continue to explore whether gaming in Mexico is being decoded ... or encoded.
Pres. Felipe Calderón promised to generate one million jobs each year during his term in office. Gaming in Mexico is a fast-growing market that certainly will contribute to the achievement of this economic goal, but the gaming sector and its authorities must first find a way to effectively manage and regulate the business.
Jose Luis Benavides is a practicing attorney and advocate representing some of the largest corporations in Mexico. He can be reached at jlbenavides[at]benavideslaw.com.mx.
John R. Long has been a product and market development consultant for major manufacturers and gaming companies since 1994. He has been extensively involved in several gaming projects in Mexico. Long can be reached at suncomjohn[at]aol.com.
Alfredo G. Lazcano is a litigator with many years of experience, including complex civil cases involving gaming interests as well as the government of Mexico and regulators. He can be reached at
(5255) 3187-0690 or als[at]lazcanosamano.com.
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