What type of investigations must a person go through to obtain a gaming license?

Almost all places that have any form of casino gambling require persons to obtain a gaming license before they can own or operate a casino.  To obtain such license, the person must undergo some form of licensing investigation. While the nature of that investigation may differ, increasingly the methods of conducting a background investigation are becoming more standardized. Our goal here is to describe what a person might expect if he or she seeks a gaming license.   

The purpose of the background investigation is to give the gaming regulators the information necessary to decide whether a person is suitable to hold a gaming license. Typically, the gaming regulators are looking into matters such as associations with organized crime, honest and integrity, and adequate business experience. To do this, most gaming regulatory agencies have well trained investigators that are assigned to each applicant.

In some respects, a gaming investigation is easier than criminal investigations because the gaming applicant must cooperate by providing information and files. Because of this, requiring the applicant to complete well-drafted forms can provide the investigators with a wealth of useful information that can build a framework on which to conduct the investigation. Typically, these forms include:

A personal history form that elicits personal, familial, educational, marital, civil litigation, criminal, and residential information. This form also may request employment history, licensing background, and character references.

A personal financial form that asks for financial information including the amount and source of investment in the gaming establishment, tax information, bankruptcy disclosures, salary information, and a detailed statement of assets and liabilities.

Besides these basic forms, regulators can request many releases, waivers, and other relinquishments of rights or privileges. An important waiver is that the applicant must agree not to sue the gaming regulators or their investigators for anything related to the gaming application or the investigation process. A separate release form often contains this provision. This form serves to protect the government and the regulators from civil liability. Suppose, for example, a gaming investigator shares negative or false information with the applicant’s banker. If the banker subsequently cancels a loan with the applicant, the applicant could not successfully sue the investigator or the regulators if he signed a release.

Typical application forms also include unprecedented releases that allow third persons to share information with the investigators with immunity from a lawsuit by the applicant for libel, slander or any other reason. Moreover, these releases may allow third parties to provide information that they could not otherwise legally provide. For example, courts may be able to reopen sealed criminal records

Finally, the applicant may sign release forms that allow the investigators to obtain information from other parties, such as banks and businesses. Any person given this form can provide all information that the investigators request, despite a legal privilege not to have to provide the information. For example, accountants may otherwise refuse to give a client's accounting information to investigators by citing an accountant-client privilege.

Some jurisdictions require the applicant provide sworn statements attesting to the accuracy of both the information contained in personal history and financial forms. This form also may request the applicant to keep the regulators consistently informed of any changes in the information provided in the application. Fingerprint cards are used to verify the applicant’s identity, and to obtain criminal records. These cards may be sent to central processing agencies, such as the Federal Bureau of Investigations in the United States, to learn if the applicant has a criminal history.

Investigations are usually preplanned and logical. The chief investigator reviews the application and assign it to qualified staff based on complexity of the application. An investigative team can have as few as one investigator or as many as a dozen. The size of the team depends on the regulators’ capabilities, the complexity of the investigation, and time requirements, and other considerations. Some regulatory agencies have a small staff and limited resources. These agencies can only place one or two investigators on an investigation despite the complexity.

Where an regulatory agency has the capabilities, it often uses a team approach to complex investigations. The highest-ranking member of the team is usually an experienced investigator. This person has direct responsibility for the daily activities of the investigators involved in the investigation. The ranking member provides guidance to the investigators in his charge, and formulates the investigative strategy. The team may have financial investigators that hold degrees in accounting. Financial investigators are responsible for investigating the applicant’s current financial status, past financial activities, general business probity, and the financial status of the proposed gaming operation. Background investigators would have responsibly for investigating the applicant’s background, general reputation, and personal and business associates. An applicant often becomes aware that the investigators have begun work on the application when asking to appear at an opening interview. Usually, however, the agents have begun the investigative process well before the opening interview.

Investigators will have reviewed the application, and accessed easily available information, such as that contained in the agency’s files. Another primary responsibility is to reconcile the information in the application. For example, investigators review whether the past addresses provided by the applicant reconcile with where the applicant listed as having been employed. Another area is to uncover any unexplained gaps in the records. Any area that raises questions is the proper subject for the opening interview. The investigators should attempt to assure that all the information that they are working with is accurate and complete.

An opening interview is the first opportunity for the applicant to meet with the investigators who will be handling the investigation. It gives the investigators an opportunity to explain procedures and demystify the process. The investigators may review the initial application forms line by line with the applicant to assure that no unintentional omissions, mistakes, or typographical errors exist.

The opening interview may provide a second opportunity for the applicant to reveal previously undisclosed matters before the failure to reveal them is held against the applicant. If investigators later uncover a major item during the investigation, a relevant consideration is that the applicant failed to reveal it both in the application and upon direct questioning in the opening interview.

The Background Investigation

Background investigators have very broad powers. They should be able to inspect premises and demand access to inspect, examine, photocopy, and records, and interview witnesses. They may review civil lawsuits and criminal charges. No set rules should exist about how far back in the applicant’s past the investigators may search. Although the focus may be on the last ten years, if pertinent, they may review a transgression that occurred twenty years ago.

The two primary purposes of fieldwork are to verify the information provided by the applicant and to uncover information that the applicant may not have revealed. Because of the nature of fieldwork, an applicant may not have much contact with the background investigators. They are often working with other law enforcement agencies, and conducting extensive interviews to learn the character of the applicant.

A full background investigation starts with but goes beyond a check of the applicant’s police record. The investigation delves into the applicant’s business and personal associates and methods of doing business. The investigators review civil court records to decide the types and nature of all civil litigation involving the applicant, and to ensure that the applicant has fully revealed the litigation.

All investigations involve standard checks of court and agency files. Schools and universities are contacted to verify education. Military information is verified with the respective branch with attention on any disciplinary or other derogatory information. Marital information is reviewed with attention to divorces. This is important because divorces often are acrimonious and the files contain allegations of wrongdoing. Moreover, former spouses and court documents often are sources of information relevant to the investigation. For example, pleadings in a custody case may attack the competency of the applicant based on illegal activities, such as drug use. In a divorce, the pleadings may allege hidden assets, sources of income, or other information inconsistent with the application or the applicant’s tax return, or which are related to illegal activities

Background investigators also verify criminal information on the applicant. Most important are the circumstances of all arrests or detentions and whether the applicant revealed all of them. Many law enforcement agencies keep extensive records. While investigators may discover that the applicant failed to reveal a criminal record by checking court records. The major sources, however, are police records and law enforcement information systems. These include local sheriffs, local police, the Federal Bureau of Investigation, the Drug Enforcement Administration, customs and immigration, organized crime task forces, other gaming regulatory agencies, and liquor and other privileged license agencies. Other sources of law enforcement information are computer data bases maintained by different law enforcement agencies.

Among the types of law enforcement information available are arrest reports, incident reports, field interrogation reports, and intelligence reports. Police records often have information that was not presented to the court because the witness could not be found or the police failed to follow constitutional guidelines in obtaining it. Unlike criminal actions, regulatory agencies are not burdened by the same rules about what can be considered. For example, the court cannot consider a detailed sworn statement by a witness that now is unavailable to testify. A regulatory agency may use such information when considering an applicant’s request for a privileged gaming license.

Whether the prosecutor dropped the charges against the applicant, or even if the applicant was acquitted, is not conclusive in a licensing investigation. Standards for granting gaming licenses and standards for proving criminal guilt are different. The same incident reviewed in the same light may be insufficient to justify a criminal conviction, but may be sufficient to deny a gaming license. Criminal background checks do not end with the applicant, but may extend to the applicant’s family, friends, business partners and associates.

Records of civil court proceedings often provide information that proves relevant to a background or financial investigation. These lawsuits may contain allegations of unscrupulous business practices and the identity of persons who have had unsatisfactory business experiences with the applicant. Evidence of disposition of the civil cases is also important. Cases end for many reasons. Sometimes the person seeking relief abandons the case. He may realize that he will lose, or that the other person does not have the money to pay even if he wins. The case also may become too expensive or time consuming. Other cases may settle. Terms of the settlement may suggest the validity of the allegations. For example, if the person sued pays a substantial portion of the amount requested, it may show that the allegations have some merit.

Beyond the nature or omission of civil lawsuits, a review of litigation may reveal that an applicant abuses the civil court system to gain economic advantages. The existence of many lawsuits may show a pattern of using the judicial system to avoid or compromise legitimate debts.

Besides criminal and civil court records, governments keep information on people much of which may be relevant to the person’s suitability as a gaming licensee. For example, the consumer affairs division of a state government may have complaints filed by customers of the applicant’s business that contain allegations of fraud, or deceptive trade practices. Similarly, the equal opportunity employment offices may have complaints alleging sexual or racial discrimination in the workplace.

Governments usually have a considerable amount of public information on corporations and partnerships. Individual applicants for casino licenses often have extensive business backgrounds. These may involve prior and contemporaneous businesses. Reviewing corporate information from these businesses may reveal the applicant’s associations. Often whether a person acted as an incorporator, director, or officer is public information that can be found through government offices, such as a corporate register or secretary of state. These searches may reveal corporations not listed on an application.

Corporate books contain a wealth of information. Incorporation papers show the date of incorporation, and number of authorized shares. Subsequent filings usually show the list of initial officers and directors and any changes to them, along with dates of each change. The corporate minutes contain information on significant events, such as major acquisitions or loans, and the hiring or firing of key personnel.

Verification of employment history also is done for many reasons. It establishes the person’s experience in a particular area. Verification also is a vehicle to explore the applicant’s honesty. Here the investigators often go beyond the stated reasons for changing employment and decide if other reasons exist. On paper, the stated reason may be a reduction or change in staffing, when the employer fired the person because of suspected theft. Employers that have reason to suspect that an employee is stealing, may not use that reason to fire the employee because they fear that the may get sued for doing so. If another legitimate reason is available to fire the person, they may seize the opportunity to use that excuse. An investigator may take advantage of the applicant’s release of all liability to convince the employer to detail the facts leading to the applicant’s firing or resignation.

The Financial Background Investigation

The background investigation is usually less of a daily burden on the applicant than the financial investigation. This is because the applicant is likely to have more contact with the financial investigators than with the background investigators, as the production of financial documentation plays a major part in the investigation.

The investigation of an applicant usually begins with the request for basic documents that provide the back up for the information contained in the application. Some documentation is merely to confirm the person’s identity and to collect relevant identifiers to conduct a background investigation. These may include birth certificates, social security cards, naturalization or alien registration papers and the like. Most of the initial documentation requests, however, concern the applicant’s finances. This documentation is necessary to conduct a cash flow analysis and to verify net worth. These requests may include income tax returns; savings passbooks, bank statements, canceled checks, deposits slips, and check registers; escrow documents for real estate; and other records that substantiate or verify sources of income. Investigators use these basic documents to begin their investigation. Initial review of these documents may evoke questions requiring the investigator to make further requests.

Later supplemental requests may include other financial records that document certificates of deposit; cashier’s checks purchased; notes and loans receivable or payable, financial statements; accountant’s work papers; brokerage accounts; contingent liabilities (i.e., guarantees); business investments; and appraisals of real estate holdings.

Business records requested may include general ledgers; cash receipts and disbursement journals; minute book; stock certificate book; canceled checks and bank statements; accounts payable and receivable ledgers; payroll records; state revenue reports; financial statements; loan agreements; notes and loans payable and loans receivable; partnership agreements; savings accounts, passbooks, and deposit records; copies of federal and state income tax returns and audit adjustments; and accountant’s work papers.

Financial investigators use these documents for many reasons. If the applicant provides part or all of the financing for the gaming establishment, these records reveal the adequacy of the applicant’s resources and the suitability of his sources. Financial records often reveal identities of and financial arrangements with the applicant’s associates. Financial investigators also scrutinize sources of income and records of payments through these documents.

Tasks that financial investigators can do during their investigation include (1) source of funds analysis; (2) tracing primary holdings to their original sources; (3) verifying personal income information to confirm that current holdings are consistent with income reported to the tax authorities; (4) preparing a cash-flow analysis; and (5) verifying the applicant’s net worth. An applicant should be required to identify the source of bank deposits or the nature of payments reflected on canceled checks.

A source of funds analysis traces where the applicant receives income and the source of funds from which assets are purchased. The regulatory goal is to assure that the applicant is not a front for unsuitable individuals who are financing the acquisition of a casino. It also provides insight into the applicant’s business and associations.

Bank records are the most common vehicles for establishing source of funds, provided all accounts are revealed. Bank statements are the beginning points because they contain both deposits and withdrawals. Deposits often reveal sources of income. All deposits are reviewed to learn if they are ordinary, such as biweekly salary deposits, or extraordinary, such as the one-time sale of an automobile. Large extraordinary deposits should be verified by reviewing source documents. Particular attention should be made to large cash deposits. While good reasons may exist for an applicant to deposit cash into an account, it is also the easiest method by which criminal activity may be hidden because it has no trail. Whether an applicant made an extraordinary deposit in cash can be determined by reviewing a teller’s cash sheets.

Standard bank records that investigators may review include (1) signature cards showing who is authorized to use the bank account, (2) monthly statements showing all activity on the account, including deposits, withdrawals, and checks paid, (3) canceled checks, and (4) deposit tickets showing a breakdown of checks, cash deposited, and identification of the checks. The applicant may have other documentation that will greatly help in the investigation, such as check registers, copies of all checks deposited, and the canceled checks.

Many persons also use check record programs on their home computers, such as Quicken, which can generate several reports. Computer programs also may generate net worth reports that investigators may use to compare with the application. A better source, however, is a review of a bank’s loan files. Most loans require the applicant to make some level of disclosure of assets to qualify for the loan.

Bank accounts are the usual, but not exclusive place into which funds can be deposited. Other possible depositories include brokerage accounts and savings and loans associations. An investigator should review all accounts before conducting a cash-flow analysis or reconciling income to expenses.

A principal concern of many regulators is the protection of tax revenues. Applicants who intentionally fail to pay other taxes, such as federal income tax, may be unqualified to hold a gaming license. A primary method of investigating whether a person fully pays federal income tax is to compare cash flow with reported income. This requires the investigator to identify all bank and other accounts that the applicant has used for personal transactions during the relevant period. They can derive this information from the application, tracing the flow of funds, credit checks, review of correspondence, bank checks, and other methods. Once they identify all accounts, the investigator will then total all deposits, and deduct transactions that do not involve taxable income (e.g., sale of a car for less than the purchase price, transfers between accounts, the principal amount on repayment of loans, etc.). If a substantial difference remains, the investigator may confront the applicant for explanation of the difference. Beyond this, tax returns provide information on sources of income, verify businesses, and provide information on associations.

This summary of the licensing process was provided by IGML member Anthony Cabot of the law firm of Lionel Sawyer & Collins, Las Vegas, Nevada.