The Illusion of Regulation in the Indian Gaming Industry
By Richard B. Schiff
The level of lobbying expenditures by Indian tribes in support of Indian gaming now rivals that of almost any other interest group. While it is often difficult to quantify the value received for dollars spent on a lobby effort, Indian gaming lobbyists have succeeded in preventing comprehensive federal oversight of the most lucrative part of the industry.
It can be said at the outset that there are more than 200 gaming tribes, and, as is often the case when discussing Indian legal issues, generalization is difficult because Indian nations’ histories and structures are so varied. It is true, therefore, that the overall regulation of a particular tribe’s gaming operation may be adequate without federal involvement because the tribe and/or the state has installed a robust regulatory regime. The purpose of this article is simply to footnote the assumption that there is a meaningful federal regulatory presence in the Indian gaming industry.
Indian gaming has evolved in a fashion that certainly cannot be described as a straight line. The regulatory structure that developed for the Indian gaming industry has its roots in the history of the relationship among states, tribes and the federal government, monumentally poor legislative drafting, the law of unintended consequences, and a couple of whimsical court decisions.
The Indian Gaming Regulatory Act (IGRA) became law in 1988. Congress had, until then, been dithering with the legislation and was spurred to action when the Supreme Court decided California v. Cabazon Band of Mission Indians. That decision held that state gambling prohibitions, in states that permitted (and regulated) any form of gambling, could not be enforced in Indian Country. Recognizing a potential regulatory void and responding to screams of outrage from the states, Congress rushed to enact the IGRA. Congress’ principal concern was manifest in the words of IGRA’s avowed purpose:
“[T]o provide a statutory basis for the regulation of gaming by an Indian tribe adequate to shield it from organized crime and other corrupting influences, to ensure that the Indian tribe is the primary beneficiary of the gaming operation, and to assure that gaming is conducted fairly and honestly by both the operator and players.”
Congress’ first demonstration of shortsightedness in the drafting of IGRA was to underestimate the Indian gaming industry. Congress believed it was writing legislation to deal with Indian bingo, which was then a $100 million per year business. The National Indian Gaming Commission (NIGC) reports that, in marked contrast to the industry Congress sought to regulate with IGRA, Indian gaming revenue was more than $5 billion by 1995 and that it is now in excess of $26 billion. Congress compounded its error by assigning the NIGC principally to the task of regulating bingo, i.e., Class II gaming, and assuming that the states would regulate the vastly more lucrative Class III (casino) gaming under the tribal-state compacts mandated in IGRA.
As luck would have it, though, Congress’ assumption about the relationship between states and tribes under IGRA was significantly undermined by the Supreme Court. In writing IGRA, Congress exercised its plenary authority over Indians to remove from the tribes the right to conduct and wholly regulate gaming on their land. This right, which would otherwise be seen as an attribute of sovereignty, was, as noted above, restricted out of Congressional concern about corrupting influences, etc. Congress’ plan was that states and tribes would conclude “compacts” under which a joint regulatory regime would be established. To ensure that states did not unreasonably withhold agreement to compacts or use the compact negotiation process to extract unreasonable concessions, Congress provided a mechanism whereby tribes could bring states into federal court and force a resolution. This Congressionally mandated trade-off of tribal sovereignty for a guaranteed compact fared poorly in the Supreme Court in the Seminole decision. Simply stated, notwithstanding the aspirations of IGRA’s drafters, the Court apparently found no Indian gaming exception in the 11th Amendment and struck down that portion of IGRA that granted tribes the right to sue states that unreasonably refused to enter into compacts. The unforeseen consequences cascaded.
Before following that river of disaster, though, it might be useful to look upstream at another problem the drafters built into IGRA: the structure and mission of the NIGC. The federal government has a trust responsibility to Indian tribes. One way to read IGRA is that Congress wanted the NIGC to be one of the agencies that was charged with the fiduciary duties that attend this trust responsibility. Thus Congress specified that two of the three commission members were to be members of Indian tribes, presumably because such individuals would be more attuned to voices in Indian Country. The chairman of the NIGC, in reviewing contracts between outside gaming management companies and a tribe, may not approve such a contract if “a trustee, exercising the skill and diligence that a trustee is commonly held to, would not approve the contract.” Furthermore, rather than simply fund the NIGC with tax dollars, Congress directed the tribes to support the NIGC with gaming revenue. It was therefore reasonable for the tribes to expect the NIGC to be working on their behalf when it came to gaming issues. Paradoxically, the NIGC also has a responsibility to pursue violations of law occurring at Indian casinos and to issue fines or closure orders for those violations, even when fines or closure might deprive tribal governments of the gaming revenue needed for critical infrastructure or social programs. In other words, the NIGC is bound by IGRA to maximize gaming revenues as a means of promoting tribal economic development and self sufficiency and to impose monetary punishments on tribes that are accused of IGRA violations. While it approaches the task good-naturedly, the NIGC’s ultimate responsibility remains ambiguous and defining its “customer” remains a difficult task. Is it a regulator responsible to Congress and the gaming public, or is it a fiduciary whose first responsibility is to the gaming tribes?
This ambiguity was manifest in the NIGC’s actions following the 1996 Seminole decision described above. Because it is a violation of IGRA for a tribe that lacks a compact to engage in Class III gaming, the NIGC in its role as enforcer must often determine whether or not a particular game is Class II or Class III. When the Supreme Court held that tribes could not sue to compel compacts, even in states like Florida that stonewalled on compacts while allowing widespread commercial Class III gaming, one significant unintended consequence was that the NIGC took the position of lead blocker in the tribes’ end run. The NIGC, though attempting to be faithful to the law, nonetheless fostered development of a jurisprudence for game classification that allowed a number of devices that looked like slot machines to qualify as Class II bingo machines. This allowed machine gaming to occur on Indian land without a tribal-state compact, often to the dismay of the affected states and even the federal bureaucracy. Until the judiciary intervened, the Department of Justice, in what can only be described as poor governance, refused to accept the NIGC’s expert advice and began taking action against tribes for using machines that the NIGC had approved for Class II play. When Florida sought to stop play of these juridical Class II machines and some that might have crossed the line into Class III, it ran into the “turnabout is fair play” doctrine and had its suit dismissed on sovereign immunity grounds. With the approval of the courts, Class II gaming thus became machine gaming, providing a far greater cash flow than could ever be the case with paper bingo cards, courtesy of the NIGC. Even so, the real money, approximately 90 percent of total Indian gaming revenue, remains in Class III games.
As all gaming professionals know, internal control systems are essential for protecting the cash that flows through the casino and for ensuring the integrity of the games. Recognizing this, the NIGC, working with tribal representatives, developed and issued Minimum Internal Control Standards (MICS) for tribal gaming operations. The NIGC required all gaming tribes to implement internal control systems that were at least as stringent as the MICS. The MICS went into great, sometimes excruciating, detail, addressing everything from the movement of cash to and from gaming tables to the security of slot machine circuit boards. While the MICS were, as a matter of law, a regulation of the NIGC that could be enforced by the issuance of fines or closure order, it was made clear at the outset that formal enforcement action was not the first choice mechanism for ensuring compliance. After promulgating the MICS, NIGC personnel became actively involved in providing MICS training for tribal gaming employees and visiting tribal gaming operations to assist them in MICS implementation.
Much of the tribal gaming industry was unhappy with the MICS. The regulations were viewed as burdensome and as intruding on tribal sovereignty. Most ominously, questions were raised from the outset about the NIGC’s authority to enforce the MICS. The problem for the NIGC was that it had identified a need to have strong internal controls in tribal gaming operations, and while the requirement for such controls existed for Class II and Class III, the need was most desperate when it came to the more lucrative Class III gaming. The NIGC had little choice but to proceed with the MICS, despite potential legal objections, because without them it would have a hard time effectuating IGRA’s goals, i.e., ensuring that tribal gaming operations were free from corruption and that the tribe was the primary beneficiary of its gaming enterprise.
Clearly Congress’ plan for regulation of Class III gaming was a carefully orchestrated exercise in wishful thinking. Simply stated, the NIGC would have “a regulatory role for Class II gaming and an oversight role for Class III…” while for Class III, “[IGRA] authorizes tribal governments and State governments to enter into tribal-state compacts to address regulatory and jurisdictional issues.”
The Supreme Court’s decision in the Seminole case, discussed earlier, which severely upset the aspirational tribal-state balance of power in IGRA, resulted in a jurisprudence for tribal-state compacts that differs markedly from that which appears in IGRA. Since Congress took away the tribes’ sovereign right to engage in Class III gaming, and the states were no longer under a legal compulsion to enter compacts, the tribes resorted to bribery to get compacts. IGRA’s terms limit compact payments to states to amounts necessary to offset state regulatory costs, and the statute prohibits any other tax, fee, charge or assessment. Nonetheless, the Secretary of the Interior has routinely allowed compacts that, as a compact incentive, allocate a significant share of tribal gaming revenue to states. Mostly such payments have been cast as consideration for “exclusivity”—that is, in exchange for a share of tribal gaming revenue, the state agrees to let the tribe have exclusive rights to some form of gaming. Access to exclusivity payments has, in fact, succeeded in motivating states to agree to compacts notwithstanding the lack of judicial compulsion. Thus the Secretary of the Interior, like the NIGC, began blocking for the tribes on an end run around the judicially imposed obstacle to the functioning of IGRA as written, and has routinely allowed such compacts, not necessarily out of a deeply held belief in their legality, but, rather, out of simple pragmatism. What has also happened is that, because the Secretary of the Interior has implicitly compromised on enforcing the content requirements for compacts under IGRA in relation to revenue-sharing, there has been no insistence from the Department of the Interior that states fulfill the regulatory role in regard to Class III gaming that IGRA’s authors envisioned.
As noted previously, the vision for IGRA was that state and tribal governments working together under a compact would develop a regulatory regime for Class III gaming. This has simply not been the case. Recognizing that each compact is sui generis, it is difficult to provide an across-the-board statement on this issue; however, approaching an Indian casino in Michigan and being confronted by a compact-mandated sign that says: “THIS FACILITY IS NOT REGULATED BY THE STATE OF MICHIGAN” will provide a good indication of the situation. For whatever reason, whether it was the environment of compromise that followed the Supreme Court’s Seminole decision, or simply the way the Secretary of the Interior viewed the role of the department, effective state regulatory involvement in tribal casinos is not a condition of compact approval. As a result, states are not uniformly involved in regulation of tribal casinos, and when they are, the extent of their involvement is at best variable.
To fill this void, the NIGC engaged actively in the regulation of Class III gaming and enforcement of its MICS for Class III casinos. As luck would have it, the case in which the NIGC’s authority to enforce the MICS in Class III gaming was tested arose in Arizona. That state, in fact, has under its compacts an effective mechanism for working with the tribal regulators to oversee the operations of tribal casinos. In Colorado Indian Tribes v. National Indian Gaming Commission (CRIT), NIGC field investigators were denied necessary access to determine the extent to which the tribe’s internal controls were in compliance with the MICS. The tribe argued that the NIGC lacked authority to mandate the MICS for Class III gaming and ultimately prevailed on that argument. The court found that IGRA does not give the NIGC a statutory basis for the regulation of Class III gaming. Although the result of this decision may not be problematic in Arizona, where the state’s regulatory program is relatively vigorous, in states like Michigan this means that Class III gaming is regulated solely by the tribe.
Tribal gaming regulation, like state regulation, is variable. Clearly IGRA anticipated that tribes would have a significant regulatory role, and the structure of the statute places tribal regulators on the front line of the effort by having tribes make decisions regarding employee suitability. IGRA, on the other hand, did not require that tribes have gaming commissions or that tribal regulators be in any way independent of either tribal government or the tribal gaming operation. While some tribes may spend heavily on regulation and go to great lengths to ensure their regulators are independent, only those few tribes that initiated gaming on or after Aug. 24, 2005, were given a model gaming ordinance that included an independent tribal gaming commission. The task of being a regulator is never easy, but imagine the pressures on tribal members assigned to regulate the tribe’s gaming operation. A decision that may divert casino revenues to regulatory compliance or result in closure and stop casino operations could spell disaster for the community. The decision could impact the ability of the tribal government to provide basic services, such as childcare or elder care, and if individual tribal members are living on per capita payments, those payments depend entirely on gaming revenues. Even a relatively routine action, such as refusing to license an individual, when made in the context of a small tribal community, may be problematic. While it is true that tribal regulators can be effective, such effectiveness cannot be assumed across the board, and the structure of IGRA makes it clear that its drafters never anticipated that tribes would be the sole regulators of their Class III casinos.
In some ways, even before CRIT, the federal regulatory role in Class III gaming was doomed from the outset. Like any federal agency, the NIGC and the Department of the Interior’s Bureau of Indian Affairs are subject to so-called “regulatory capture.” That is, they become sympathetic to the regulated community and, as a practical matter, part of that community, and compared with, for example, communications regulators, Indian gaming regulators are part of a closely knit unit. As noted above, the NIGC is required to have enrolled tribal members on the commission and the Bureau of Indian Affairs has an Indian hiring preference. While one’s status as tribal member does not ensure any particular thought process, such hiring preferences assume some higher degree of empathy and understanding than might be the case for a member of society at large. Of course it is common that regulators, whether tribal members or not, look toward the eventual sale of their government-acquired expertise and contacts in the private sectors. This is the revolving door between the regulators and the regulated community, a common feature of Indian gaming, which is uniformly blamed for undermining the ability of regulatory agencies to act definitively. When dealing with Indian affairs, even the minimal proscriptions on switching sides that apply to most federal regulators, are suspended for former feds who go to work for tribes. To top it off, the employees of the Department of the Interior and the NIGC recognize that, to some extent, their jobs require them to carry out the federal Indian trust responsibility. It wasn’t surprising, therefore, that when Congress failed to amend IGRA in the wake of the Supreme Court’s Seminole opinion, sympathetic federal agencies aided and abetted in the development of alternative mechanisms to allow the tribes to engage in more lucrative sorts of gaming than just paper bingo. Couple that problem with the shameful drafting that went into IGRA and, under the best of circumstances, federal regulation of Indian gaming would be suspect. Thanks to the CRIT decision, though, whatever federal regulation there might have been—and it was a velvet fist inside a velvet glove—is gone.
Certainly there are effective regulatory structures being operated by tribes and by states, but it must be understood that the federal government is not a serious player in this regulatory effort. The problem is that the Indian gaming lobby has used its ample war chest to delay and obstruct any reform effort. In the face of this purchased inaction by Congress, tens of billions of dollars, mostly in cash, continue to flow through tribal casinos every year, while the integrity of that huge revenue stream is entirely dependent upon a random, sometimes effective sometimes ineffective, patchwork of regulatory efforts by states and Indian nations.
Efforts to undo the CRIT decision have been smashed by the sledgehammer wielded by the Indian gaming lobby. In the world of Indian gaming, the flow of people among the federal bureaucracy, the Hill and the industry, and the ability of the industry to spend vast sums of money, give the Indian gaming lobby tremendous influence at all levels of government. As a result, the sort of comprehensive regulation of tribal gaming envisioned by IGRA’s drafters is simply not there. The Seminole decision and CRIT can both be fixed by Congress, and, overall, IGRA can be modernized to deal with today’s Indian gaming industry. If Congress and the American people want to ensure that there is a comprehensive and effective regulatory regime in place across the industry, it can be done.
Author’s Note: The views expressed herein are solely those of the author.
Footnotes
The Center for Responsive Politics’ website reports that in 2009, the amount exceeded $16 million: www.opensecrets.org/lobby/induscode.php?year=2009&lname=G6550&id=, last visited Sept. 24, 2010. This money may also be coming from non-tribal sources. The gaming industry’s manufacturers and suppliers often finance efforts to influence Congress on behalf of tribal gaming. The National Indian Gaming Association, Indian gaming’s principal lobby organization, actively encourages such non-tribal “associate members” to join for dues that range from $1,500 to $10,000 per year. See: www.indiangaming.org/members/associates.shtml, last visited Sept. 24, 2010.
25 U.S. Code 2701-2721
480 U.S. 202 (1987)
25 U.S. Code 2702
Senate Report 100-446 at page 2.
The NIGC website is www.nigc.gov. The revenue numbers appear at: www.nigc.gov/Default.aspx?tabid=67.
Thousands of words have been written, and millions of dollars spent, attempting to distinguish Class II and Class III gaming. They are both defined in IGRA (25 U.S. Code 2703), and to summarize: Class II gaming is bingo and associated pull-tab sales, while Class III gaming encompasses most other forms of gambling, i.e., lotteries, keno, sports books, slot machines, table games, etc.
25 U.S. Code 2710
Seminole Tribe Florida v. Florida, 517 U.S. 44 (1996)
“The federal government] has charged itself with moral obligations of the highest responsibility and trust. Its conduct, as disclosed in the acts of those who represent it in dealing with the Indians, should therefore be judged by the most exacting fiduciary standards.” Seminole Nation v. United States, 316 U.S. 286 at pages 296–97 (1941).
25 U.S. Code 2704
25 U.S. Code 2711(e)(4)
25 U.S. Code 2717
25 U.S. Code 2713
25. U.S. Code 2702(1)
See, U.S. v. 103 Gaming Devices, 227 F.3d 1091 (9th Cir. 2000), U.S. v. 162 Gaming Devices, 231 F.3d 713 (10th Cir. 2000), U.S. v. Santee Sioux Tribe of Nebraska, 324 F.3d 607 (8th Cir., 2003).
Florida v. Seminole Tribe, 181 F.3d 1237 (11th Cir., 1999)
See: Testimony of NIGC Chair Philip Hogen before the Senate Committee on Indian Affairs, June 28, 2007. http://indian.senate.gov/public/_files/Hogen062807.pdf.
The initial version of the MICS was published on Jan. 5, 1999, at 64 FR 589.
“The Commission intends to work with the tribes and the gaming operations to attain compliance with these regulations through training and technical assistance. The Commission anticipates that most, if not all, tribes will be able to achieve compliance in the time provided. In those instances where a particular tribe or gaming operation is in substantial noncompliance and the Commission believes it necessary to bring an enforcement action, the Commission will follow the process provided for in 25 CFR Parts 573, 575 and 577.” 64 FR 591, Jan. 5, 1999.
When the MICS were published, the NIGC identified and responded to a number of public comments. As is always the case in such matters, it is difficult to know if the comments represent the views of the tribal membership or the views of the lobbyists, lawyers and gaming companies. In any event they must be taken at face value, and a reading of those comments provides a good sense of the opposition. See note 19, supra.
Senate report, note 5, supra at page 1.
Senate report, note 5, supra at page 3.
25 U.S. Code 2710(d).
See, e.g., Oklahoma’s model compact, www.ok.gov/OGC/documents/Model%20Compact.pdf and the California compacts, www.cgcc.ca.gov/compacts.asp.
Testimony of Philip Hogen, note 18 supra.
The Arizona compacts are linked at: www.gm.state.az.us/compacts.htm
466 F.3d 134 (D.C. Cir. 2006)
The exact words in the holding are: “[W]hat is the statutory basis empowering the Commission to regulate Class III gaming operations? Finding none, we affirm.” Id. At 140. Former Chairman Hogen has argued, based on the issue before the court, that the holding is limited to the issue of NIGC authority to enforce the MICS. See his testimony, note 18, supra, at page 4.
25 U.S. Code 2710
A requirement for the conduct of Class III gaming is an approved gaming ordinance. On Aug. 24, 2005, the NIGC issued a bulletin promulgating the model gaming ordinance that is encouraged for use in submissions on and after that date. While this model ordinance recommends an independent gaming commission, this was published long after most gaming tribes had their ordinances approved. See NIGC Bulletin 05-05, “Subject: Revised Model Gaming Ordinance.” Available at: www.nigc.gov/LinkClick.aspx?link=NIGC+Uploads%2freadingroom%2fbulletins%...
Former Chairman Hogen’s testimony, note 18, supra, identifies serious breakdowns in tribal regulation and significant material weaknesses in tribal internal controls.
25 U.S. Code 472
Federal officials who are tribal members, depending upon the tribe, may be part of a native community that relies upon gaming revenues to accomplish basic governmental tasks ranging from elder care to maintaining roads and wells. In addition citizens of Indian nations, including the federal official and his or her extended family may be receiving per capita distributions of gaming revenues under 25 U.S. Code 2710.
25 U.S. Code 450i (j)(2) exempts tribal employees from the operation of 18 U.S. Code 205 and 207, , which deal with criminal financial conflicts of interest.
Richard B. Schiff is formerly Senior Attorney, Deputy Chief of Staff and Acting Chief of Staff or the National Indian Gaming Commission. He holds a BA from the University of Michigan, a JD from George Washington University (Order of the Coif), and an LL.M. University of Virginia.