A Problem with Gaming Regulatory Agencies

Noted gaming industry veteran Richard Schuetz (l.), who has held positions as an operator, supplier and regulator, believes the state of gaming regulation is pitiful. He cites his own experience and his observations during his long career in gaming.

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A Problem with Gaming Regulatory Agencies

“Who will guard the guards themselves?”—Juvenal

I have some strong opinions about gaming regulation. These opinions began to evolve in the early 1970s when, as a college student at the University of Nevada, Reno, I started dealing at Harrah’s Casino to help pay for my education.

My interest in regulation was further stimulated when I spent more than two years researching and writing on the history of gaming regulation in the state of Nevada for the period 1945-66. This effort was undertaken as a train-wreck of a dissertation topic for a Ph.D. in economics. My interest continued to grow when I went to work in casino operations and as I worked my way up through the casino business, eventually becoming the CEO of a Las Vegas casino resort.

My inquisitiveness expanded when I joined the board of directors of a games manufacturer and had the wonderful experience of needing to apply for licensure in more than 100 different gaming jurisdictions around the world.

The final chapter of my curious journey occurred was when I went flying through the revolving door in a backasswards direction and became a regulator by accepting a gubernatorial appointment to the California Gambling Commission. And, as if that experience was not enough, I then doubled down and became the executive director of the Bermuda Casino Gaming Commission.

From all of these experiences, I have come to possess a great many opinions about regulation and regulators. The most important lesson I took from these experiences is that I learned more about regulation from being regulated than I did from being a regulator. Allow me to repeat this—I am absolutely convinced that I learned a great deal more about regulation by being regulated than I did by regulating. My takeaway is that there is a significant fault of many regulatory bodies in they don’t have sufficient talent in the agency in senior positions who have material experience working in the industry, especially casinos. I believe this weakens these agencies.

Another way for me to state this is most regulatory entities lack insight into the industrial reality they are trying to regulate. To really learn how the industry works, I would argue one needs to park his or her butt in it for a decade or more. But then this would be my position in the same way most regulators would suggest that having actual experience in the industry is not at all necessary or important. I would suggest to them that it is difficult to compare A to B when one only has experience in B.

I believe this shortcoming of understanding on how the industry works explains why I sometimes think we have agencies with people utilizing checklists who may not even know why an item is on the checklist, how it got there, how it relates to other items on the checklist, and if it even still needs to be on the checklist. Also, and of critical importance, the people who are making those checklists, or making decisions based on those checklists, sometimes have little insight as to whether the checked item is a critically important moment of truth in the internal control process, or just another checklist item of minor or no importance.

For those that think actual industry experience is unimportant, I wonder if they would be happy if the internal controls and procedures for their heart surgery were approved by political appointees who had never operated on a heart. Or, how would they feel about flying in a plane that had been approved by a part-time commission that did not know engineering and without anyone among them who had ever worked in aeronautics?

It may be the case that those regulators who have no actual experience in the industry believe that by interacting with the industry in the context of the rule-making processes that this shortcoming is eliminated. I would suggest that this is incredibly naïve and is like believing that if the industry is so compelled to do the right thing, regulation really isn’t necessary.

If one looks at the vast array of non-gaming regulatory entities in the US one will find that they do embrace people with industry backgrounds. The Chairwoman of the Nuclear Regulatory Commission is a well-recognized nuclear engineer. If one looks at the Securities and Exchange Commission one will see an abundance of experience relevant to the task at hand, and on and on it goes. When it comes to gambling entities, however, finding material industry experience is rare.

Why is this the case? I think it started back in the days when many considered the industry to be dirty and thought having someone from the industry involved with regulation would be like allowing the fox in the hen house. But that was then and this is now.

I find it particularly interesting that now many of the appointments to gambling boards and commissions come from politics, or the appointments are made by politicians, so any concern about having people of low moral character and integrity involved in the process seems to have gone by the wayside for it is constantly reflected in polling that politicians are one of the least respected groups in the entire country. If people are to have confidence in the honesty, integrity and character of appointed regulators, or the people making the appointments, the political world is not one that is to be relied upon.

I also believe that the industry is partly responsible for ensuring that there is a paucity of experience in regulatory agencies for they have never lobbied aggressively to raise wages and salaries for these entities, and it is a raising of wages and salaries that would help bring this change about. And I believe the industry has been hesitant in lobbying for higher wages because they, like with problem gambling, does not want to pay for it. I also suspect that the industry finds it is a lot easier to operate with a regulatory agency that knows little about the business. I think it is easier to train the politicians and regulators to say gold standard at least once a week, under the notion that if you tell a lie long enough, some folks will believe it.

During my career, I have also had the opportunity to work closely in both operations and in regulation with both the tribal and commercial sectors, and I believe the tribal sector is much better about embracing and paying for sound regulation. Part of this is due to scale, for most tribes have only one or a few casinos to regulate. I also believe the tribes are more serious because they are not just regulating a business, but they are regulating a casino that is critical to tribal nation-building. In other words, it is everything to the tribes, including their self-sufficiency as a nation. My experience has been they work very hard to get it right.

It is worth noting that in a tribal environment that openings for key people in the regulatory area are often advertised nationwide, whereas this is seldom the case for state gambling board members and commissioners. If the states were really serious about looking for the best qualified people, they would utilize an open-market search. But the politicians will not allow this and I would argue that they do not want the most qualified. They want to be able to give out political favors and also work to ensure that the appointee “goes along with the program” when involved in regulatory decisions that may have political ramifications.

When results matter, firms go to great lengths to ensure that remuneration packages are appropriate to attract qualified human resources. They also enlist firms to assist in the sourcing and identification of the best candidates. I cannot imagine a top notch firm going to a group of politicians and asking them to pick the firm’s leadership team. In fact, I believe that it would be an unmitigated disaster, yet state after state relies on this technique to fill many of the higher level positions in our regulatory entities.

You only need to have witnessed the spread of sports wagering of late in the U.S. to understand that most elected officials are lost when it comes to gambling. Governments have no earthy idea what they are doing, are often the pawns to lobbyists and the industry, rely on a curious combination of experts who have never worked in or regulated sports wagering and who are conflicted in numerous ways. When these same politicians are then given the ability to appoint the regulators for this weird thing they have created, the error is compounded.

There was probably a logic at one time to keep people with industry experience away from the regulation of gambling, but that time is long past. With the ever increasing complexity of financial arrangements and the infusion of digital technologies into all aspects of the business it is absolutely necessary that the regulatory agencies have in-house expertise, and have in-house expertise that has a voice. I believe it is time to rethink what we are doing by working to finance and source true professionals in the task of gaming regulation, and getting away from the fully monetized political system that is basically interested in rewarding its friends and kin, lining its campaign chests and representing its political interests. If the industry is truly interested in being regulated at the highest levels of integrity and ethics, and being sustainable, it better stop allowing the politicians to own the process.

Articles by Author: Richard Schuetz

Richard Schuetz started dealing blackjack for Bill Harrah 47 years ago, and has traveled the world as a casino executive, educator and regulator. He is sincerely appreciative of the help he received from his friends and colleagues throughout the gaming world in developing this article, understanding that any and all errors are his own.