Probity – Navigating Suitability Investigations in the Gambling Sector

If you have ever been directly or indirectly involved in the ownership or operation of a gambling business, you may have been asked to submit to a probity investigation conducted by a gambling regulator or licensing authority. You will know that a probity investigation is not a simple box-ticking exercise.

In the Australian regulatory environment, there is a high level of public awareness, media attention, and concern about probity and integrity issues in the gambling industry. High profile investigations into The Star and Crown were driven by the need to ascertain whether or not the operators remained suitable to hold casino licences in the relevant states. These investigations were extensive and resulted in long-term licence suspensions (now lifted in the case of Crown), and material changes to senior management personnel and the manner in which the operations of the licensee are conducted.

This insight provides an overview of probity. It outlines why probity is so important, and how prospective or existing licensees can ensure they meet their obligations.

What is probity?

Probity is broadly defined as a standard of ethical and moral behaviour which concludes that a person or company complies with and adheres to appropriate principles of “integrity, uprightness and honesty”. This is interchangeable with “suitability”.

Probity investigations relating to gambling operations are usually conducted by a regulatory body to determine if a person or organisation is “fit and proper” or “suitable” to be involved in the conduct and provision of gambling services. These investigations go beyond an assessment of legal compliance – instead, probity is concerned with determining that an applicant’s actions are appropriately governed by what you ought to do, and not just what is lawful, commercially acceptable or expedient. It also considers whether applicants have the relevant expertise and financial capacity to be in a position to, by themselves, or through others, influence the conduct of a licensed gambling business.

In each case, regulators consider the suitability of an individual or organisation – this can result in the regulator determining that the relevant party is not suitable.

When and why?

Authorities that conduct probity investigations in relation to gambling activities include government agencies, liquor and gaming regulators, licensing authorities and, in some cases, racing and sporting bodies.

A regulatory body may conduct a probity investigation:

• before issuing a licence to conduct a gambling business;
• prior to the acquisition by an individual or a company of a direct or indirect interest (or the increase in an existing interest) in a gambling operator;
• prior to the appointment of a director or key person by a company which conducts a gambling operation, or a related company of an entity which conducts a gambling operation;
• in view of a material change in the operations of a gambling operator or in the persons involved in the operations of a gambling operator;
• on an ongoing basis (eg, once every 5 years); and/or
• at any time at the regulatory body’s complete discretion.

For government regulators, conducting probity on gambling operators is key to ensuring that, when participating in gambling activities, the public is protected from financial crime, such as fraud, money laundering and counter terrorism financing activities. Probity is also important to ensure objectivity and consistency in accordance with legislative or other criteria, particularly in relation to a public tender process. In effect, probity is designed to promote the fairness and integrity of the business to be conducted by the relevant gambling operator (and the entities within its corporate structure).

In the Australian context, the disclosure requirements that apply in the gambling industry are more onerous than those imposed by other authorities, including ASIC and the ASX.

For existing gambling licensees, remaining of good character is a continuing obligation and a licensee should make every effort to continue to be in good standing. If a licensed operator is aware of any matter which could taint its good standing, notification to the gambling regulator should always be a priority consideration.

Similarly, where an individual or company proposes to acquire an interest – whether direct or indirect – in a licensee, there is generally a requirement (either by law or under a condition of the gambling licence) that the licensee notify the relevant regulator either prior to or immediately after the closing of the transaction. The acquiring party (including entities and individuals in the corporate structure) will then be required to undergo a probity investigation/review and obtain regulatory approval to be involved in or associated with a gambling operator.

What is involved?

Ordinarily, a regulatory body conducting a probity investigation will ask for information relating to a company or an individual associated with the operation or management of the gambling operation.

This information may include:

• contact details;
• residence details;
• identification documents;
• spouse/partner details;
• qualifications;
• related and associated companies;
• shareholdings;
• statement of assets and liabilities;
• source of funds;
• source of wealth;
• licences, certificates, and memberships;
• arrests, detentions;
• litigation;
• a history of involvement in the gambling industry;
• any past probity or other investigations conducted by regulatory bodies;
• bankruptcy information;
• tax information;
• travel information (particularly relating to the gambling industry);
• written references; and/or
• criminal history.

It may be necessary for the information to be provided to go back several years and to be current at a date close to the date of lodging the information.

In many cases, the applicant is required to provide an unlimited authority to the regulatory body (sometimes referred to as an Authority to Release Information (or ARI)) to make enquires of any body as it thinks fit.

Key considerations

It is important to note that probity is a weighted process. Although regulators will have fixed processes that are required to be satisfied by applicants, regulators usually adopt a risk-based approach when conducting their review and may vary the requirements when there is a justifiable reason.

Disclosing information that is likely to discredit you or your company does not necessarily mean that the relevant regulatory body will conclude that you are not fit and proper to be associated or connected with a gambling operator. As indicated below, omission is often worse.

Instead, investigators are generally concerned with the mechanisms in place to recognise, identify, and mitigate the risk that a company or its personnel might be involved in inappropriate behaviour. For this reason, organisations should show that they are setting and implementing measures at an organisational level to manage these risks. Organisations should also ensure that they have comprehensive and robust policies and procedures in place, and regularly provide training to key employees and other staff. The policies and procedures should be reviewed periodically to ensure that they remain valid and current with the operations of the licensee.

However, regulatory agencies have broad discretion, and their decisions are often not capable of appeal. For this reason, it is important to fully cooperate with any regulatory body that requests information for the purpose of conducting a suitability investigation and to be proactive in making disclosures.

What can go wrong?

Impediments to a successful probity investigation can arise where fulsome disclosure of relevant information is affected by:

• incomplete or incorrect facts;
• contradictory information;
• fear that full and frank disclosure will jeopardise a finding of suitability; and/or
• time and resource pressures.

For these reasons, certain applicants have, in some cases, failed or refused to meet the requirements of a regulatory body, which has resulted in a negative finding as to their suitability to be associated or connected with a gambling operator. Any failure to pass probity will likely need to be disclosed to other gambling regulators (both within Australia and overseas), which may result in reputational damage.

Omission of material matters may have serious consequences. A failure to satisfactorily disclose information to a regulatory body may give rise to:

• implications for your existing gambling licence;
• a direction by a regulatory body to dismiss an employee or remove a person from a position of authority (such as directors or, in some cases, shareholders);
• “blacklisting” a person from being associated or connected with a gambling operator; and/or
• in serious cases, criminal liability.

Probity investigations may also be difficult for venture capital and private equity investors that have a relevant interest in an Australian gambling enterprise, particularly if they have little to do with the day-to-day operation of the business. However, gambling regulators have become more familiar with relevant corporate and governance structures making these obstacles less difficult to navigate for venture capital and private equity investors to invest in gambling operators.

How we can help

Although the general principles underlining a probity investigation are the same, no probity process is identical to the other. The specific circumstances of each situation giving rise to a requirement to undergo a probity investigation/review need to be analysed to identify the disclosure requirements and the appropriate engagement with the regulatory body.

Addisons has relationships with many state, federal, and overseas regulators (including throughout the US and Canada) developed over the course of many years in providing advice and assistance to companies and individuals undergoing probity.

If you would like more information about probity, please contact Jamie Nettleton or Samuel Gauci from the Addisons Gaming and Gambling Team.