CGCC-8, NIGC or What?
By John N. Roberts

In October 2006, a federal appeals court upheld two lower court rulings that declared the National Indian Gaming Commission (NIGC) did not have the authority to regulate class III gaming in tribal casinos. This case was brought by the Colorado River Indian Tribes and is known as the CRIT decision. This decision has created an issue in California, as the California Gambling Control Commission (CGCC), one of the two state agencies overseeing tribal gaming, has declared it will fill the "void" in regulatory oversight created by the CRIT decision. This is important for California because earlier tribal-state compacts cited federal minimum internal control standards (MICS), not state MICS. This "void" now leaves the state, according to the CGCC, in the position of establishing MICS with the tribes. A March 2, 2007, letter from CGCC Chairman Dean Shelton to tribal gaming leaders stated that the CRIT decision "altered the regulatory landscape for tribal gaming in California." Subsequently, the CGCC has put forth a proposed set of regulations known as CGCC 8. The current debate raging in California gaming now centers around CGCC 8, which attempts to put the state in the position formerly held by the NIGC as related to the oversight of tribal gaming regulation.

The CGCC submitted a proposed regulatory standard, CGCC-8, to the Tribal-State Association (the "Association") on July 11, 2007, prior to its adoption by the CGCC. Any proposed tribal gaming regulations must be approved by the Association, which is comprised of two delegates from each gaming tribe and two representatives each from the CGCC and the Division of Gambling Control of the California Department of Justice. The Association meets at least quarterly and, at present, 34 tribes represent a quorum.

The Association, in accordance with its adopted Protocol for Submission of Proposed State Regulatory Standards to the Association (the "Protocol"), created an Association Regulatory Standards Taskforce (the "Taskforce") to review CGCC-8.

The Taskforce held its first meeting on Wednesday, Aug. 8, 2007. The CGCC then submitted a revised proposed regulation to the Taskforce on Sept. 7, 2007.

Subsequent meetings were held on Sept. 11, 2007; Nov. 7, 2007; Jan. 9, 2008; and Feb. 13, 2008. The state submitted two slightly modified versions of CGCC-8 in March 2008. These meetings were attended by a majority of the tribal regulators and representatives from the state of California.

The purpose of the Taskforce meetings was to discuss proposed criteria and information to analyze and review the proposed regulation. Pursuant to the Protocol, the Taskforce is charged with providing a Statement of Need for the proposed regulation, including the rationale for the need based upon fact or policy. The Taskforce, in developing the Statement of Need, may consider the following: (i) economic impact on gaming operations, including whether the proposed regulatory standards impact small operations differently than large operations; (ii) whether the standard or policy embodied by these proposed regulatory standards is or will be applied to gaming facilities other than Indian casinos, such as card rooms and race tracks; if not, whether there is any disparate impact or discriminatory effect created by the proposed regulatory standards; (iii) whether the proposed regulatory standards fosters uniformity; and (iv) alternatives to the proposed regulatory standards; (v) provide a statement of legal authority; (vi) if basis for regulatory standards is factual rather than policy based, address whether the proposed regulatory standards are duplicative. (See Protocol for Submission of Proposed State Regulatory Standards to the Association, Amended January 21, 2004, Section (B)(2)(b).)

[Note: I wish to thank Jane Zerbi, Joanne Willis Newton, Glen Feldman, Steve Hart, Jay Shapiro, Richard Armstrong, Ray Patterson, Sharon House, Darcie Houck, Michael Lombardi and the other members of the Taskforce small working group for their invaluable and tireless efforts on behalf of the entire Taskforce.]

Statement of Need

The CGCC has cited different rationales for CGCC-8. One rationale cited in the regulation is that the CRIT decision 1 "changed the contours" of a basic tribal-state compact premise that regulatory jurisdiction lies with federal, state and tribal governments when it held that the NIGC does not have the authority to promulgate or enforce its adopted federal MICS 2 for Class III gaming. (Section (a) of CGCC-8.)

However, in the opinion of the majority of tribal regulators, the CRIT decision does not and cannot change the terms of the compact. The state could have expressly addressed the inclusion of the federal MICS in the original 1999 compacts, but did not do so. 3 Nor was this done in subsequent amendments, as the state of Arizona did when it negotiated new compacts with Arizona tribes in 2003. The 2003 Arizona Compacts expressly require gaming tribes in that state to implement the NIGC MICS, as amended from time to time.

The CGCC also contends that its proposed regulation is needed "to preserve the benefits of independent oversight of Tribal MICS compliance" and "serve to increase public confidence that Tribal gaming meets the highest regulatory standards." (CGCC-8, subd. (a).) However, the results of the Tribal Regulator Networking Group’s survey demonstrate that the NIGC MICS remain the applicable standards for tribal gaming operations in California, notwithstanding the CRIT decision.

Economic Impact

The provisions of CGCC-8 authorizing the CGCC to conduct undefined "on-site compliance reviews" and requiring tribes to work with the CGCC to resolve any disputed findings of the CGCC’s compliance review may pose a significant economic impact on tribal gaming operations, particularly for smaller tribal gaming operations. Costs include the staff time dedicated to producing records and escorting CGCC staff in conducting comprehensive reviews/audits in addition to the cost of audits already being performed. The unrestricted compliance reviews contemplated by CGCC-8 could require a tribe to devote a great deal of staff time to responding to the state auditors and their findings.

Application to Card Rooms

The CGCC acknowledges that there are no MICS in place for non-tribal gaming facilities in California. Beginning in 2003, the state spent the better part of a year drafting MICS for the card rooms, eventually presenting them to representatives of the card rooms during a meeting in 2004. The reaction was not favorable, as the state had not consulted with the advisory group of card room executives and attorneys, which was established for this very type of endeavor, during the year-long drafting period; the final product revealed a perceived lack of understanding of MICS in general and how they should be applied to the card rooms. The state’s MICS were a conglomeration of the NIGC MICS and various statutes from Nevada and New Jersey. As of the writing of this article (May 2008), five years later, no further MICS applicable to card rooms have been put into final form although draft MICS have recently been published by CGCC.

Although the card rooms and tribal gaming facilities have in common some internal operations that inarguably require oversight—such as table games operations, currency drop and count, and surveillance—the state does not at present require card rooms to implement MICS.

Uniformity

CGCC-8 is felt by most tribal regulators as not needed to foster uniformity because uniformity already exists. As noted above, a Tribal Regulator Networking Group survey shows that the NIGC MICS remain the minimum standards for California tribes despite the CRIT decision.

It may be a little-known fact that it was primarily Indian tribes, including California tribes, not the states that first supported the adoption of MICS to protect the integrity of Indian Gaming as well as the assets of the Indian tribes in a uniform manner. Those tribes who were members of the National Indian Gaming Association (NIGA) in the 1990s initiated what was termed a "MICS Work Group," and tribes voluntarily offered the services of their professionals, including internal auditors, accountants, gaming commissioners, gaming managers, attorneys, etc., to develop a model MICS to be used by any gaming tribes, especially those tribes who did not have the expertise and/or resources to develop their own MICS, so that those tribes which were just starting out would have the ability to protect the integrity of their gaming operations. This NIGA MICS were used voluntarily by tribes for many years, until the NIGC decided that they wanted to promulgate a federal MICS. It is a well-established fact that a large portion of the first MICS promulgated as a regulation by the NIGC was based primarily upon the product of NIGA’s MICS Work Group.

Alternatives to CGCC-8

Since circulating its first draft of CGCC-8 in late March 2007, the CGCC has met with opposition from tribal gaming regulators on a number of fronts. Most, if not all, Taskforce members questioned the need for the regulation because they felt the state had failed to show any deficiency with the status quo. Many Taskforce members also viewed the regulation as a wholesale amendment of the 1999 compact—and thus the proper subject of renegotiations with the state—rather than an elaboration or clarification of what the compact already permitted. Nonetheless, in the spirit of good faith and in response to repeated requests by the CGCC, tribal gaming regulators and tribal attorneys proposed alternatives language to the objectionable portions of CGCC-8 as well as viable alternatives to the regulation itself. The proponents of these alternatives did not purport to speak on behalf of all or even most of the other members of the Taskforce, but hoped to spur discussions that would result in a compromise approach that most of the parties could live with.

The CGCC initially rejected the proposed alternative language, but later drafts of CGCC-8 attempted to incorporate some of the language proposed by some of the tribes.

Legal Authority

California does not have civil regulatory jurisdiction on Indian land absent a federal statute expressly conferring jurisdiction on the state. Public Law 280 did not confer such jurisdiction. 4 The only state civil regulatory jurisdiction that exists over a California Indian casino is through a tribal-state gaming compact negotiated pursuant to IGRA. The compact, at Section 8.2, expressly provides nothing therein affects the civil or criminal jurisdiction of the state under Public Law 280.

The CGCC cites to Compact Sections 8.4.1, 8.1.8, and 7.4 as the legal authority for CGCC-8. (See CGCC "Statement of Need for adoption of Regulation regarding Minimum Internal Control Standards (CGCC-8)," dated April 6, 2007). However, in the opinion of most tribal regulators, none of these Compact Sections provide legal authority for the requirements the CGCC seeks to impose on tribes and tribal gaming agencies through CGCC-8, which would require the adoption of internal control standards at least as stringent as the federal MICS, submission of the financial audit to the CGCC, and submission to financial and MICS compliance reviews/audits by the CGCC.

The Compact at Section 8.4 provides for "regulations adopted by the State Gaming Agency in accordance with Section 8.4.1," which require association approval. The purpose of such regulations is to "foster statewide uniformity of regulation of Class III gaming operations throughout the state" so that "rules, regulations, standards, specifications, and procedures of the Tribal Gaming Agency in respect to any matter encompassed by Sections 6.0, 7.0, and 8.0 shall be consistent" with that regulation adopted by the state pursuant to Section 8.4.1. Further, neither the state gaming agency nor the association may adopt regulations that materially alter express provisions of the compact or render any such provisions void or a nullity.

Section 8.1 states that the tribal gaming agency is vested with the authority to, and must, promulgate rules, regulations or specifications ("rules") governing a series of topics, which do not include a requirement to adopt or enforce the MICS. There is no compact provision that refers to the MICS. 5 Simply put, Section 8.4.1 does not authorize a uniform state regulation on the MICS because it is not a matter encompassed by Section 6, 7, or 8 of the compact.

Section 7.4 and its subsections do not authorize the CGCC to establish minimum internal control standards for tribal gaming operations, do not authorize the CGCC to mandate that tribal gaming agencies submit copies of tribal internal control standards and annual audits (financial or MICS-related) to the CGCC, and do not authorize the CGCC to conduct the comprehensive and unrestricted compliance reviews contemplated CGCC-8, or require tribes to engage in steps to address the CGCC’s review findings.

Finally, Section 8.1.8 requires the tribal gaming agency to adopt a rule requiring an independent CPA to conduct a financial audit at least annually and to ensure enforcement in an effective manner. Since these sections clearly establish the tribal gaming agency as the responsible authority for regulating the annual independent financial audit of the tribal gaming operation, Section 8.1.8 does not provide legal authority for the CGCC to require submission of the financial audit report or to conduct compliance reviews/audits of the financials or of audited financial statements. In fact, the compacts contain specific audit provisions for the state to verify revenue share, which clearly would have been unnecessary if the financial compliance review/audit proposed by CGCC-8 was authorized under the compact.

In sum, CGCC-8 cannot confer civil regulatory jurisdiction to the state that was not conveyed by the compact. As such, CGCC-8 is viewed by most tribal regulators as an unauthorized extension of the state’s authority under the compact. In the absence of legal authority, the provisions of CGCC-8 amount to material amendments of the tribal-state compacts. As such, they must be negotiated between the state and the tribe pursuant to section 12.1 of the compact. Indeed, the fact that the 1999 and 2004 compacts do not authorize the state to require MICS adoption, submission of financial audits, or to conduct MICS and financial compliance reviews/audits is evidenced by new compacts and new memorandum of agreements specifically including these provisions.

Duplicative

With respect to its MICS-related provisions, CGCC-8 is duplicative in that tribes already have in place standards at least as stringent as the NIGC MICS, and these standards are enforced by tribal gaming agencies. In addition, in recent weeks a number of California gaming tribes have amended their tribal gaming ordinances to expressly incorporate the NIGC MICS. By so doing, those tribes have granted the NIGC authority to monitor and enforce tribal compliance with those standards, up to and including the authority to close non-conforming facilities, under 25 U.S.C. § 2713 and 25 CFR pt. 542.3(g). The first of these ordinance amendments were approved by the chairman of the NIGC and went into effect in January 2008. A number of additional tribes have announced their intention to similarly amend their gaming ordinances in the near future.

Conclusion

At its March 28, 2008, meeting, the CGCC voted to adopt CGCC-8 with minor revisions. The proposed regulation will be forwarded to the association for a first read at its May 7, 2008 meeting.

One of the benefits of the numerous Taskforce meetings was the establishment of better communication among tribal regulators and with state regulators. While the parties do not agree on the language and intent of CGCC-8, they all agree that effective regulation of tribal gaming is the overriding concern of all parties. And that is the most important issue to agree on.

John N. Roberts is an attorney and the Executive Director of the San Pasqual Gaming Commission in Valley Center, California.

1 Colorado River Indian Tribes v. NIGC, 466 F.3d 134 (D.C. Cir. 2006)
2 25 CFR pt. 542.
3 The absence of the MICS was a product of negotiations among the parties during the compacting process.
4 See Act of Aug. 15, 1953, ch. 505, 67 Stat. 588 (codified as amended at 18 U.S.C. § 1162, 25 U.S.C. §§ 1321-1326, 28 U.S.C. § 1360).
5 The fact that the MICS was not included is no accident. At the time of the compact negotiations, the NIGC had promulgated federal minimum internal control standards, required tribes to adopt tribal standards that meet or exceed those federal standards, and enforced compliance with the foregoing. Also, while some tribes took the position that NIGC lacked jurisdiction under IGRA, California tribes adopted MICS and the NIGC actively enforced the MICS.