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Dispute Over Authority to Regulate ‘Internal Controls’ Continues

WASHINGTON – A May 11 hearing in the House of Representatives on the oversight of Class III gaming operations turned out to be a rehash of issues that are already before the courts.

Last year, in a decision that is under appeal, the U.S. District Court for the District of Columbia sided with the Colorado River Indian Tribes in a ruling that under the Indian Gaming Regulatory Act, the regulatory framework of Class III gaming – slot machines, blackjack, roulette and other so-called “house-banked” games of chance – has been established by a state/tribal compact, not the National Indian Gaming Commission.

The NIGC retains regulatory authority over multiple facets of Indian gaming under IGRA, but the court found the authority did not extend to establishing minimum internal control standards over Class III gaming. NIGC Chairman Phil Hogen has made the case in Congress that the decision means Class III gaming revenue at tribal casinos is not properly guarded against in-house misappropriation. The lion’s share of casino profit comes from Class III activities.

Prior to the Colorado River ruling, Hogen explained to the House Resources Committee that the commission and many tribes had agreed on minimum internal control standards at Class III facilities. The NIGC inspected tribal casino operations on the basis of the agreed-upon minimum internal control standards. If the standards weren’t being met, the commission and the tribe in question tried to work something out. The system worked pretty well, as Hogen described it, until the Colorado River ruling undermined the commission’s official authority to oversee the internal controls of Class III casino operations.

In brief, internal controls separate the duties within a business, so that no one person performs too many duties without someone else’s immediate knowledge.

Norman DesRosiers, of the Viejas Tribal Gaming Commission, reviewed the importance of internal controls at casinos generally: “Due to the cash-intensive nature of the gaming industry, a sophisticated system of checks and balances (people watching people) is unfortunately necessary to help discourage the temptation for some to misappropriate some of the tribal revenues. ... It is critical that a clear separation of functions, duties and responsibilities be maintained. This separation limits the scope of transactions authorized by one position, without being completed or monitored by another position.”

For instance, DesRosiers continued in written testimony, the same person should not be authorized to order supplies, receive, inventory and pay for them. By separating the functions into different departments, a Class III casino can protect itself from “collusion with suppliers, kickbacks, fraud or embezzlement.” The process of separating functions yields a set of internal controls.

The NIGC still retains the authority given it by IGRA to regulate Class II gaming – bingo, pull-tabs, poker and other “non-banked” card games. But without regulating Class III gaming as well, Hogen related, the NIGC has a problem regulating Class II revenue.

“One of the problems with segregating Class II from Class III, in accordance with the regulation, is [that] the gaming is not segregated on the floor. You will have a gaming facility, and there will be pull-tabs, and there will be bingo, and there will be blackjack tables and slot machines. All of that money comes into the same cage, and you can’t just watch the Class II dollars, for example.”

The majority of gaming tribes continued their objection to the IGRA amendments currently before Congress.

Frank Ducheneaux had a leading hand in drafting the original IGRA of 1988; now a consultant representing Indian gaming associations in Minnesota and the Plains, he told the committee the proposals would destroy sovereignty and self-government in the realm of gaming enterprise.

Ernie Stevens Jr., chairman of the National Indian Gaming Association, said tribal casinos have invested heavily in regulatory systems, spending more than $320 million in support of tribal, state and federal regulatory regimes in 2005 alone. He added that the FBI, the Department of Justice, the Financial Crimes Enforcement Unit of the Treasury Department and the Internal Revenue Service all play a role in keeping Indian gaming clean.

“Tribal governments have stringent regulatory systems in place that compare favorably with any federal or state regulatory systems.”

NIGA Executive Director Mark Van Norman said NIGC’s overreaching would disturb tribe/state relationships forged in negotiations over gaming compacts.

“You know, we believe that it takes a lot of effort for the tribes as sovereigns to sit down with the states as sovereigns and work out compacts for Class III gaming. And there are important ingredients to both relationships, between the tribes and the states. And one of the most serious questions about the National Indian Gaming Commission proposal is that it’s not just directed to minimum internal control standards. It’s to add Class III authority anywhere it [NIGC] has Class II authority, and there is no provision to add harmony, or a way to work together, to respect the

tribal/state compacts, other than the statements of the commission that they will do so. And we think that that is the wrong kind of proposal. The tribe/state compacts should continue to have primacy because all this effort has gone into them, including several city initiatives where the voters of the state have put these compacts into place.”

A Senate bill, S. 2078, contains a provision to clarify NIGC authority over minimum internal control standards at tribal casinos. Rep. Richard Pombo, R-Calif., adjourned the House Resources Committee hearing without publicly indicating whether he expects to introduce legislation derived from the May 11 session.

Gaming tribes have not come forward with a proposal of their own for minimum internal control standards.