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‘Let’s Revisit Bifurcated Regulatory System,’ Gatto says

Dave Palermo is an award-winning metropolitan newspaper reporter. He has written about American Indian governments for more than 20 years, working as an advocate for several tribes and tribal associations. He also has co-authored books on gambling and gambling law. He can be reached at dgpalermo1@gmail.com.

(Blog) Dave Palermo: ‘Let’s Revisit Bifurcated Regulatory System,’ Gatto says

The effectiveness of California’s politically bifurcated gambling regulatory system and its enforcement arm under the state Attorney General should be included in the debate over the legalization of Internet poker, Democratic Assemblyman Mike Gatto said.

“As we talk about how California gaming should be regulated in the future, why not revisit the bifurcated system?” said Gatto, sponsor of AB 9, one of two bills that would legalize online poker in what is potentially the nation’s largest Internet market with 38 million people.

“Why not think about whether there is anything we could do better?” Gatto asked. “That should be part of the discussion.”

Criticism of the state’s two-tiered regulatory system, which has been simmering for more than a year over attempts to police the card room industry, erupted last month after what Gatto termed a “mini-scandal” involving the Bureau of Gambling Control.

The bureau’s former chief, Bob Lytle, now compliance officer for the M8trix card room in San Jose, was leaked information by a bureau agent that may have compromised a $119 million skimming investigation, Attorney General Kamala Harris charged in a Dec. 23 complaint.

Lytle denies the allegations in the AG’s accusation, which seeks a fine and revocation of his gambling licenses as a key employee and partner in two Sacramento card rooms.

It was later disclosed by Pechanga.net that Richard Lopes, chairman of the Gambling Control Commission empowered to adjudicate the case, is a friend of Lytle and, as a former Department of Justice (DOJ) official, supervised the bureau in 2013 when the leaks occurred.

It also was revealed by Pechanga.net that commission Director Tina Littleton is living with the former agent who leaked the information.

Lopes and three other commissioners are appointed by Gov. Jerry Brown. Gambling control is a bureau of the DOJ under Harris.

The myriad conflicts, leaked investigatory information and acknowledgement by bureau officials that they lack the manpower and skills to police the state’s 80-plus card rooms has sparked concern about California’s ability to regulate Internet poker.

“This all comes up, ironically, at the best possible time,” Gatto said of the Lytle investigation and criticism of the state’s regulatory system.

“If we’re going to strike this huge, complicated deal [to legalize online poker] … why not consider other improvements we can accomplish at the same time?

“People talk about how this would complicate the online poker analysis,” Gatto said. “I think everything is on the table.”

Democratic Assemblyman Reginald Jones-Sawyer, sponsor of a second Internet poker bill, is also concerned about effective regulations.

The Lytle case “obviously put a little pause in everybody’s step,” said a Sacramento source who requested anonymity. “Everybody said, ‘Oh my god there’s cheating. There’s malfeasance.’

“The last thing [Jones-Sawyer] wants is to pass something and have it blow up” in a regulatory scandal, the source said.

Jones-Sawyer in a press release said the introduction of AB 167, came after “substantial input” from both the commission and the bureau.

“It is absolutely essential that we have a proper regulatory structure in place that provides safe and compliant internet poker access,” Jones-Sawyer said.

Other states have bifurcated gambling regulatory systems. But California is the only state with a commission and bureau under two constitutionally elected officers.

The commission sets policy, drafts regulations and conducts hearings. The bureau handles investigations, compliance audits and enforcement.

The agencies often squabble over jurisdiction and information sharing issues.

Several industry lawyers and regulators, including Lopes, question the advisability of the California structure, which is further compromised by the fact Harris has devoted little manpower and resources to the bureau.

The bureau is largely staffed with sworn law enforcement officers lacking experience and skills in regulatory compliance.

“The culture has to change,” Lopes told GamblingCompliance.com.

Many believe the size and diversification of California’s $10.4 billion gambling industry, which includes tribal casinos ($7 billion), card rooms ($800 million), racetracks ($600 million) and a state lottery ($2 billion), requires a consolidated regulatory apparatus.

The commission and bureau are mandated by law to regulate card rooms and provide limited oversight over the state’s 59 American Indian casinos. Federal law delegates primacy for the regulation of Indian casinos to tribal gambling commissions.

Pari-mutuel wagering is regulated by the California Horse Racing Board and the lottery is under the jurisdiction of the California State Lottery Commission.

“If you get an attorney general and governor with different views on how gambling should be regulated, it does make things somewhat difficult,” Lopes told delegates at a gambling Law conference in San Diego.

“The regulatory system should not be under the thumb of electoral politics,” said William Thompson industry author and professor emeritus at the University of Nevada, Las Vegas.

“California is one of the world’s largest gaming markets with diverse constituents, including tribes, racetracks and card rooms,” says Mark Lipparelli, an industry consultant and former chairman of the Nevada Gaming Control Board.

“That it does not have a consolidated gaming regulatory body presents tough challenges and complexities.”

Regulating online gambling is a looming issue in what appears to be a steep political climb to get a bill through the state Legislature.

“California’s capacity to effectively regulate Internet poker is a sleeping giant,” said a tribal official who requested anonymity.

Unlike previous draft bills, Jones-Sawyer’s AB 167 does not include “bad actor” language intended to preclude licensing firms that took U.S. online wagers after passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006.

Amaya Gaming/PokerStars contends prohibitive “bad actor” language in earlier bills, including Gatto’s AB 9, is intended to keep the company from competing in the potentially lucrative California market.

AB 167 leaves determining license suitability to the regulators.

Meanwhile, Commissioner Richard Schuetz calls the state’s poker rooms the “worst regulated segment” of the nation’s gambling industry.

“We have a regulatory apparatus that is understaffed and doesn’t have access to training as much as they need,” Schuetz said.

Assistant Bureau Chief Stacey Luna-Baxter told commissioners in March the agency lacked the skills and manpower to analyst table game data, a standard industry technique for spotting fraud.

“The monthly submission is too much for us right now,” she said. “It’s [data] going to sit there. We’re not going to be able to analyze it and do what we really need to do with it.”

Luna-Baxter also testified before an Assembly committee that the bureau’s compliance division lacked sufficient skills and manpower to handle Internet poker.

The bureau is hindered by union and Civil Service rules from hiring from outside the DOJ and contracting with consultant specialists in Internet gambling.

But enabling legislation is expected to facilitate the bureau’s ability to seek outside assistance and contract with tribal gambling commissions more skilled than state regulators.

Gatto said a fully staffed, well-funded enforcement agency is necessary to the success of Internet poker.

“We talk about things like how we are going to define what’s legal and what’s not and who’s a good actor and who is not, but what about enforcing current law and having the funds to do it?” he asked.

“If some website in Costa Rica pops up and starts marketing California, we have to make sure we’re enforcing the law or we won’t make the money we expect” from legal websites.

The Sacramento source expressed confidence the bureau will be able to contract with outside agencies to provide the necessary expertise to police the industry.

“The Justice Department is going to do it,” the source said, “but it won’t be the current employees. That’s for sure.”

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