When reviewing a licence application, a regulator carries out a due diligence process which is a fundamental step in the procedure towards granting a licence. It is important to remember that this is only the first step – the Wynn case illustrates the necessity for there to be ongoing due diligence from the perspectives of both the regulator and the operator.
The due diligence process and requirements vary between jurisdictions; however, the gambling industry has become accustomed to providing voluminous and detailed documentation, certification, and evidence to prove that the applicant (usually a company) is suitably qualified to be granted a licence.
The analysis consists typically of a due diligence review of:
- the applicant company;
- all the persons who own the applicant (this is a review of the ultimate beneficial owners and other companies in the applicant’s corporate structure); and
- all the persons who have control over and manage the operations of the applicant.
The above persons are reviewed to confirm that they are all of good character, have relevant skills and qualifications, and that there is financial security and stability behind the proposed gambling operation.
The recent decision by the Massachusetts Gaming Commission (MGC) concerning its investigation relating to Wynn Resorts highlights how crucial such an analysis is and how important it is to continue to conduct reviews after the grant of the licence.
The MGC carried out a detailed review of the applicant, when it granted a casino licence (Licence) to Wynn MA, LLC (Wynn).
Wynn, Wynn Resorts and the individual qualifiers (referred to together as the Qualifiers) were granted a positive determination of suitability by the MCG on 27 December 2013. This meant that Wynn qualified for the competitive process which resulted in the grant of the Licence. Wynn prevailed in the competitive process and was granted the Licence on 17 September 2014.
The determination of suitability also applied to those key persons proposed by Wynn as being the key persons to be involved in the operation of the Licence which, at the time, included its co-founder, Steve Wynn, and members of its Board of Directors.
After being granted the Licence, Wynn commenced work to construct the casino premises with the intended launch date of the casino being mid-2019.
A Wall Street Journal (WSJ) article published on 26 January 2018, detailed various allegations of workplace sexual misconduct and sexual harassment of subordinate employees by Wynn’s co-founder, Steve Wynn.
Following the publication of the WSJ article, the MGC asked the Investigation and Enforcement Bureau (IEB) to conduct an investigation into the allegations. The MGC indicated that there were 4 focus areas which it wished the IEB to address in its report:
- a review of the suitability of the individual qualifiers, especially those who potentially had knowledge of the allegations;
- a review of the company action, or lack thereof, taken by senior or executive level managers upon learning of the allegations;
- Wynn’s response regarding the alleged misconduct following the publication of the WSJ article; and
- a review of the potential impact of the allegations upon Wynn’s financial stability.
The IEB’s investigation included interviews of over 100 persons who had knowledge of the sexual misconduct allegations, including victims of the alleged misconduct. Consultants were engaged to assist with the investigation to advise on Wynn’s handling of the claims, and to review Wynn’s financial stability and business practices and the impact (if any) of the allegations.
The investigation confirmed that there had been various allegations of sexual misconduct by Mr Wynn dating back to 2005 and these had not been disclosed to the MGC during the initial investigation process. Furthermore, there were also allegations made after the MGC had issued its initial determination of suitability which Wynn had failed to disclose to the MGC. The MGC noted that Wynn had notified the Nevada Gaming Commission (NGC) prior to publication of the WSJ article but did not notify the MGC.
The IEB found that members of the executive management of Wynn were aware of the allegations but had not informed the Board of Directors and had failed to follow company policies which required that an investigation be conducted into allegations of this nature.
Following the WSJ article, a number of executives and directors, including Mr Wynn, resigned and a restructure of the board and executive management took place. There was also a change in approach implemented relating to the recognition of employees’ rights.
MGC’s Considerations and Decision
Under Massachusetts gaming legislation, Wynn has the obligation to continue to maintain its integrity and financial stability.
The MGC is constituted with the responsibility of ensuring the integrity of the gaming industry and its licensees.
Based on the above premises, the MGC determined that, although there had been numerous serious instances where the Qualifiers had failed in their obligations, measures had been taken to address the shortcomings. The main measures taken were:
- a special committee had been formed to investigate the allegations and to examine the relevant policies and procedures;
- changes in the executives and the executive structure, moving away from a founder-led organisation to one where there was a separation of the roles of the Chairman and the CEO;
- changes in the Board of Directors with the appointment of new, gender diverse, competent directors;
- the updating of policies and procedures;
- the implementation of new channels for reporting and filing employee complaints;
- training for employees; and
- more regular staff and manager briefings and meetings.
Wynn submitted applications for new individual qualifiers to replace persons no longer involved with Wynn, and the MGC approved all these new persons as suitable.
Despite the remedial action taken by Wynn, the MGC determined that Wynn should be penalised for their shortcomings. The MGC:
- imposed a US$35 million fine on Wynn for its breaches and to deter it from future breaches;
- imposed a US$500,000 penalty on the CEO for his previous failings;
- criticised approved persons for their shortcomings; however, ultimately considered that they remained suitable;
- imposed various conditions on Wynn, and its Board of Directors, such as:
- the appointment by the MGC (at Wynn’s expense) of an independent monitor to report to the MGC;
- that timely reports of directors’ attendance records be provided to the MGC;
- that the role of the Chairman and the CEO remain separate throughout the term of the Licence; and
- that any actions in any court or administrative tribunal filed against a Qualifier be notified immediately to the MGC; and
- imposed a condition that an executive coach be appointed by the Board of Directors to train the CEO on leadership, communication, enhanced sensitivity to human resources matters, and team building.
Considerations from this Case
This case highlights various matters relevant in determining the suitability of a gambling sector applicant and its continued suitability as a licensee.
A regulator needs to, first and foremost, ensure that it complies with its legal obligations and acts within the parameters established by its governing legislation. The MGC was very careful to refer to the legislation which established its obligations in conducting its review to ensure that it acted in making its determination subject to its powers and functions. This is also an important consideration for legislators when drafting legislation, so that they ensure that they provide a regulator the required autonomy to conduct its functions effectively.
A regulator needs also to consider other matters (together with its legal obligations) when deciding which course of enforcement action to take. Matters such as the licensee’s past performance, its reaction to the breaches and the commitment the licensee demonstrates in implementing relevant obligations are all matters which should be taken into consideration when a regulator reviews a licensee’s good standing. A regulator needs to also consider and evaluate the financial commitments and investments of the licensee in the licensed operation. These are all indications of how serious and committed an operator is to the licensed operation.
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 gaming regulator should always be a priority consideration. In essence, there is a requirement of continuous disclosure. Notification to the regulator, as is emphasised by the MGC in its report, indicates that a licensee understands its obligations and takes them seriously. If possible, it is always better for the licensee to notify the regulator before the latter becomes aware of a matter of concern through a third party, such as ‘the press’.
This Wynn investigation confirms how important being of good character is for a gambling licence holder. Being licensed means not only remaining compliant with technical and financial obligations, but also remaining of good character. Although Wynn is licensed in Massachusetts, it was not yet operating the casino when these events occurred, however, it was still accountable for ensuring that it remained compliant with the laws and requirements of Massachusetts and the MGC.
The decision taken by the MGC is similar to that taken by the NGC, which imposed a US$20 million fine on Wynn Las Vegas in respect of the same issues. This confirms that regulators take a similar approach when evaluating matters of concern. Unless a licensed entity commits a serious breach of its licence obligations, regulators opt to impose fines rather than choosing to suspend or cancel the licence. This, however, depends on the nature of the breach and each issue is to be reviewed on its own merits. If, however, there is a negative impact on the players or the fairness of the game, or there is a suggestion of serious criminal behaviour (for example, money laundering), it is more probable that the licence would be suspended or cancelled.
The approach taken by the MGC and the NGC does not mean that they are being lenient. A fine is still a significant deterrent and enforcement tool, not only because there is a negative economic aspect of a fine but also the black mark it leaves on the reputation and good standing of the gaming operator. A fine needs to be disclosed to all other regulators by whom the operator (or other members of its group) is licensed and/or it needs to be included in the details submitted in applications for future licence/s. This disclosure could result in the operator’s good character being reviewed more closely by other regulators.
Wynn’s proactive approach to change and the actions it took to implement changes were relevant in the MGC’s (and NGC’s) determinations to issue fines and conditions instead of suspending/cancelling the relevant Licence. Wynn’s past failings were mitigated by the approach taken once the allegations were made public.
Lessons from this Case for the Australian Gambling Sector
Although the facts of the Wynn case relate to a US operator and its obligations in US States, the decision is applicable internationally, including in Australia. Australian regulators always conduct a thorough due diligence investigation and review of gambling operators, since this is a crucial element in the licensing process for a gambling operation.
One of the main principles arising from the Wynn case is that the obligation of being of good character does not cease once the licence is granted but is an ongoing requirement throughout the term of the licence (irrespective of whether or not the licence is operative).
Suitability of casinos in Australia has been monitored through the conduct of regular reviews of a casino, and a casino’s operations to ascertain whether issues have arisen in the case of the casino’s business which have not been dealt with in an appropriate manner. Traditionally, reviews had been conducted of each of Crown and Star (respectively, the Melbourne and Sydney casinos) every 5 years.
For example, in the case of the most recent review of Crown Melbourne, the Victorian Commission for Gambling and Liquor Regulation (the Commission) was required to investigate and form an opinion about:
- Crown’s suitability to hold a casino licence;
- Crown’s compliance with the Casino Control Act 1991, the Casino (Management Agreement) Act 1993, and the Gambling Regulation Act 2003 and the regulations made under those Acts;
- Crown’s compliance with transaction documents relating to the casino and the casino complex, and any other agreements between Crown and the State, or a body representing the State, that impose obligations on Crown in relation to gaming; and
- whether it was in the public interest that the Crown casino licence continue to be in force, having regard to the creation and maintenance of public confidence and trust in the credibility, integrity, and stability of casino operations.
On completion of the review, the Commission affirmed each of the matters outlined above, but also made 20 recommendations concerning Crown’s operations.
The Casino Modernisation Review NSW (the Review), finalised in 2017, made a recommendation that the mandatory review of the casino licence required by the Casino Control Act 1992 (NSW) (the CCA) be abolished. The NSW Government, in response to the Review, noted this recommendation and indicated that it proposed to amend the CCA to allow for one further review of The Star, and to undertake one initial review of Crown Sydney after a reasonable period of operation. Subsequently, consideration would be given to the abolition of the review provision, an extension of the existing five year time frame, and other amendments to its operation, as appropriate.
In any event, we have no doubt that circumstances that may affect a casino’s reputation (for example, inappropriate actions by a senior executive, allegations of wrongful conduct) will lead to investigations being conducted by the relevant Australian State regulator/s.
Below we consider the lessons which regulators and operators can take from the Wynn case.
In the Wynn case, the Qualifiers considered that they did not have to notify the MGC of the allegations when submitting their initial applications. This might have been because the application forms were not worded to require disclosure of those matters. Asking the right questions during the due diligence phase is crucial since the information and documentation collected are the basis upon which the decision on whether to grant a licence is made. A regulator, therefore, needs to ensure that all situations that could be influential to its review are covered in its investigations.
It is difficult to include in an application form all questions to cover all matters that may be of concern. A regulator should consider listing matters about which it must be notified and then ensure that questions are asked of those remaining matters in a more general manner so that it is informed of all the matters of interest.
Application forms should be a living document, such that they continue to apply when an operator becomes aware of a matter which might have not been considered previously and was not addressed in the current form. Consideration should be given by Australian regulators to amending the application forms in respect of these matters. The updating of an application form should be communicated on the regulator’s media channels (and directly to licensees) to ensure that licensees and prospective applicants are informed of the amendments.
It is essential for a regulator to be updated with developments and for all licensees (existing and prospective) to notify the regulator of any relevant changes.
Initiatives which could assist a regulator include:
- keeping an open communication line with licensees. This could be achieved in various ways, such as periodic meetings with licensees, or appointing a licensee relationship officer to each licensee who has a more direct and regular relationship with the licensees assigned to him/her;
- monitoring the media, especially specialised, industry focused sources;
- liaising with other regulators (both gambling and others, e.g. financial) to share information (where possible and permissible);
- periodic updating requirements;
- periodic re-evaluation of licensees; and
- risk rating licensees depending on their probity and activities.
When a regulator becomes aware of matters, whether through press articles or otherwise, it needs to be in a position to act decisively and in a timely manner to ensure that a detailed investigation is initiated to enable it to make an informed decision on what action to take, if any.
The reality of the gambling sector is that it is highly regulated. If an operator fails to adapt to this reality, it will inevitably fall foul of its obligations (whether or not stated expressly) and face enforcement action from a regulator (or regulators).
The best way for an operator to address this reality is to ensure that it has a strong compliance function within its structure. This function will depend on the size of the operator, with the larger operators requiring a compliance team within the organisation to be involved in all matters which could affect the operator’s good standing.
Smaller operators should still have a compliance function within the organisation. However, to minimise costs, these operators may choose to outsource their compliance function. This will enable them to have expert advice available in a timely manner. As the organisation grows, the operator could introduce a compliance role within the organisation, which could be trained and assisted initially by the outsourced service provider.
Retaining the services of persons who are not employed by the operator (for example external members of its compliance committee) could also be beneficial. A properly experienced person (or persons) without a vested interest in the operator can provide impartial observations which might not always be raised by persons employed by the operator. This could be achieved through establishing a compliance committee which periodically meets to discuss and review compliance issues.
A licensee could also consider appointing a key member of its compliance team as the liaison person with regulators, so that there is a direct communication line. This would also ensure that regulators are informed of a notifiable matter and that notifications are consistent for all regulators.
The compliance team should have an autonomous role with access to all the relevant functions within the organisation, including the board. Internal corporate governance procedures should provide the compliance team with the powers required to conduct its functions.
Ultimately, the effectiveness of the compliance team could be the determining factor in maintaining the operator’s reputation. If the compliance team does not perform its role well, the operator could face enforcement action which is costly, not only for the fines that may be imposed but also for the resources required to address the breaches and the negative effects of any enforcement action. Needless to say, an extreme failure could have extreme consequences, such as a loss of the licence.
The compliance function itself needs to operate in an efficient manner across the operator’s organisation. The following are actions it can implement:
- educate the organisation on the importance of compliance;
- be accessible to the organisation;
- set periodic meetings with the board and other departments within the organisation;
- create checklists to distribute internally, to assist other functions within the organisation to understand and comply with requirements;
- analyse issues in a diligent manner to determine what action needs to be taken;
- have a good relationship with the regulators;
- keep the management and directors updated with any compliance issues (with compliance being an agenda item at all board meetings);
- be proactive within the organisation;
- assist in determining the operator’s risk appetite; and
- review and ensure that policies and procedures are compliant with legal obligations, and amend them when required.
Management and the compliance team need to operate hand-in-hand because a business cannot operate without negative consequences unless a compliance approach is adopted. Business growth which fails to take into account its legal obligations will ultimately be subject to review by regulators and possible enforcement action.
The Wynn case gives a clear message that licensed operators need to operate in a manner which is consistent and takes into account its legal obligations, its internal policies and procedures, and which respects its regulators. Operators must remember that it is necessary to maintain ongoing vigilance in its compliance functions to ensure that its regulators are kept informed; likewise, regulators should ensure that this occurs and at the same time keep themselves informed of matters which may affect the suitability of their licensees. This requires continuing investigations of the licensee and its associates, including as to their ongoing probity.
For a better understanding of probity please refer to Addisons’ focus paper entitled: Probing “probity”: What you should know about suitability investigations in the gambling sector.1
Please feel free to contact any member of Addisons Media and Gaming team to discuss and advise on your due diligence obligations and submissions; to advise on your compliance obligations, and/or to assist with your compliance function.
1. Accessible here.
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