In the wake of the Enron scandal that rocked the public company sector, Rod Smith, a reporter for Casino City Times, questioned why the gaming industry had not experienced similar problems. Terry Lanni, the MGM Mirage Chairman and CEO had a simple explanation: “We're a highly regulated business. Therefore, any partnerships (involving conflicts of interest) would be impossible to occur in this business. Clearly, any such event such as those in Enron would have been impossible (in the gaming industry).” Likewise, Steve Crown, Compliance Committee chairman at Park Place Entertainment Corp., noted: “From a compliance perspective, we've become our own watchdogs.” Mr. Crown continued, “What saved the gaming industry from the financial turmoil that enveloped other industries was stringent adherence to compliance policies that prevent ‘conflicts of interest.’”
A conflict of interest arises when a person has two duties that conflict, or, more specifically, Black’s Law Dictionary defines it as “a real or seeming incompatibility between one’s private interests and one’s public or fiduciary duties.” In the corporate context, for example, a conflict of interest exists if an employee has a direct or indirect pecuniary or personal interest in a decision being made that needs to be made objectively and in the best interests of only the company. However, the occurrence of conflicts of interest does not necessarily signify impropriety, especially considering that conflicts can arise in everyday life.
Although all conflicts may not be unethical or improper, the heightened state of today’s corporate regulatory environment demands companies implement and enforce industry specific compliance plans designed to safeguard against the negative implications conflicts of interest may give rise to at all levels of the corporate structure. A post-Sarbanes Oxley ABA course listed five key areas compliance plans should address: (1) assigning responsibility for overseeing compliance to a high-level employee; (2) communicating the compliance plan standards and procedures to all employees through training, written communication, or any other means; (3) instituting monitoring and reporting systems to detect unauthorized conduct, enable employees to report unauthorized conduct, and report such conduct to the high-level employees overseeing compliance; (4) effectively enforcing the compliance plan; and (5) ensuring internal corporate disciplinary and remedial actions for employee violations.
A carefully tailored compliance plan will serve as an invaluable guide for a company, because it will assist a company in navigating the myriad of federal, state and local laws affecting its business. Additionally, the plan will provide both ethical and legal guidance to ensure employees act free of any conflicts and carry out their duties and responsibilities in the best interests of the company. Most notably, a well envisioned compliance plan will inform employees of likely pitfalls, institute disciplinary and remedial actions for compliance violations, and implement an approval process for certain actions. These procedures enable companies to effectively vet potential conflicts. Such foresight lays the foundation for an educated and unbiased workforce.
States have passed or enacted conflict of interest statutes and regulations recognizing a need for conflicts of interest oversight. With respect to the gaming industry States have adopted conflict of interest laws regulating how State employees may interact with casino licensees. For example, the Nevada Revised Statutes state “[a] person who holds a license issued pursuant to chapter 463 or 464 of NRS or who is required to register with the Nevada Gaming Commission pursuant to chapter 463 of NRS shall not employ a former member of the State Gaming Control Board or the Nevada Gaming Commission for 1 year after the termination of the member’s service on the Board or Commission.”
The rationale for these policies is compelling: control employee behavior to both bolster regulatory compliance and limit possible violations that could otherwise result in severe financial penalties and subject the company to critical licensing issues while assuring that corporate resources are not squandered through employee self dealing. Therefore, to adequately educate and yield beneficial results, these written policies should not only set forth the objectives of the policy but also the reasons for it.
Many conflicts of interest can be avoided through appropriately designed compliance controls. In such a highly regulated industry as gaming, perhaps the foremost concern is to avoid all conflicts of interest that would reflect poorly upon a gaming organization’s standing with the regulators and could thereby jeopardize its gaming license. This includes ensuring all employees are aware of acts and situations that i) are improper; ii) might give an appearance of impropriety; or iii) might impair their good judgment when acting on behalf of the company.
In particular, potential situations that would give rise to conflicts of interest should be detailed in a compliance plan. These situations include among others:
- Having a significant interest in a firm that does business with the company;
- Borrowing or accepting money or gifts or other favors from a person or firm doing business with the company;
- Engaging in a private business relationship with a person or firm doing business with the company, particularly if the company’s employee supervises the relationship with that person or firm;
- Engaging in a private business relationship with a supervisor or another team member whom the team member supervises;
- Engaging in a competing business or owning stock or other securities of a competitor other than insignificant interests in public companies;
- Engaging in a private business venture with an officer or other employee of a firm that competes with the company;
- Using company resources for personal benefit, such as the extension of complimentaries to further personal rather than a company business purpose.
- Use of company staff or assets for personal business;
- Having an interest in or speculating in products or real estate whose value may be affected by the company’s business;
- Improperly divulging or using confidential information such as plans, operating or financial data or computer programs;
- Indirect conflicts of interest such as transactions involving your spouse, children or other close relative (dependent or independent) or business associate.
Because conflicts of interest will arise as a matter of course, a company should adopt a compliance plan with internal controls to identify and report conflicts. This should include procedures enabling employees to report these conflicts, and a subsequent review process to determine whether the conflict requires intervention or can exist without detriment to the company. Adherence to such a plan enables a company to ensure regulatory compliance while providing employees with the knowledge that their relationships do not conflict with their duties to the company.
When implementing internal controls for conflicts of interest, companies also must ensure those controls comply with any restraints imposed by State conflict of interest laws. Most notably this includes compliance with those State conflict of interest laws specifically designed for the gaming industry. For example, both New Jersey and Colorado gaming licensees must comply with multiple government imposed mandates.
New Jersey Conflicts of Interest Law controls licensee conduct in numerous situations, including prohibiting a licensee from employing State employees who were responsible for casino matters within two years of termination from State employment. Additionally, the New Jersey Casino Control Act regulates political conflicts of interest originating from licensees, one example of which is to prohibit licensees and their agents from making political donations.
Colorado’s Limited Gaming Act and Gaming Regulations control similar conflicts of interest situations. For instance, licensees and their agents are prohibited from giving anything of value to Colorado Limited Gaming Control Commission members and their close relatives or from allowing Commission members and their close relatives from having interests in their casino license. Furthermore, licensees and their agents are prohibited from allowing Commission employees to participate in any gaming authorized by the State and operated by the licensee.
While the principles of sound corporate governance in the area of conflicts of interest are not specific to the gaming industry, due to the highly regulated nature of the gaming industry and its ongoing penchant for expansion into new jurisdictions the importance of an effective compliance plan is only magnified. Indeed, the internal controls of a compliance plan should not only reflect the specific operations of each company but also incorporate controls to ensure compliance with State conflict of interest laws.
When a conflict of interest arises independent judgment is compromised and, more importantly, any assumption that the decision-maker is acting objectively is seen as compromised. Therefore, the key to a good compliance plan is to avoid allowing bias caused by outside influences to interfere with any person’s duties to the company. This is accomplished by appropriately managing conflicts of interest as they occur by using a system of conflict disclosure and management review procedures developed to help employees comply with company policies and government laws and regulations.
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