Obtaining a Non-Restricted Gaming License in Nevada
09/01/2016

Overview

In Nevada, five tiers of registration/licensing capture almost everyone involved in the gaming industry. The first tier is gaming employees who must register with gaming regulators. This process is fairly simple and focuses on an applicant’s criminal history. The process involves a two-page form, fingerprint cards, and a modest fee. The second tier pertains to certain gaming employees and individuals associated with the gaming industry who, because of their positions, must register and undergo a more extensive review. For example, independent agents that bring high rollers to Nevada casinos must file more extensive forms and pay a $750 application fee. The foregoing registrations, however, pale in comparison to licensing. The third tier — for class 3 service providers — is the simplest form of licensing. These are marketing affiliates that provide information about people to licensed operators of interactive gaming systems via databases or customer lists; or provide trademarks, trade names, service marks, or other, similar intellectual property under which an interactive gaming operator identifies its interactive gaming system to patrons. A marketing affiliate is considered a “probationary licensee” and must undergo a cursory background check with the State Gaming Control Board (“Board”). The fourth tier of licensing involves restricted locations and class 2 service providers. Restricted locations are places like taverns with 15 or fewer slot machines that are incidental to the main business. Class 2 service providers offer certain services to interactive gaming operators and class 1 service providers, including geolocation services, patron identification services, and payment processing services. Each applicant must complete an application that covers personal history and limited financial information and undergo a background investigation. The application process is less expensive and less intrusive than the application process for a nonrestricted license, which is detailed below. Nevertheless, the Board agents still conduct a thorough criminal background check on all applicants. Lewis Roca Rothgerber Christie LLP also has a guide to obtaining a restricted license, which can be downloaded from our website at www.lrrc.com. The fifth tier of licensing encompasses the non-restricted gaming license, which involves the most extensive background investigations and is generally reserved for people holding the highest positions in the gaming industry, e.g., ownership or top management. Besides land-based casino operators, a host of others need to obtain non-restricted gaming licenses. These include manufacturers and distributors of gaming equipment, persons who share in gaming revenues, and slot route operators (persons that operate slot machines in another person’s business like a tavern or convenience store). Additionally, several interactive gaming-oriented enterprises must obtain non-restricted gaming licenses. These include operators of interactive gaming systems, manufacturers, and distributors of interactive gaming systems as well as class 1 service providers. Class 1 service providers are responsible for managing, controlling, and operating wagers made and/or games played on interactive gaming systems. This guide concentrates on what is required to obtain a non-restricted license in Nevada.

Who Must Obtain a Non-Restricted Gaming License?

Categories of non-restricted licenses include:

• Casino owners with more than 15 slot machines or any live games.

• Manufacturers and distributors of gaming equipment.

• Operators of mobile gaming systems.

• Operators of slot-machine routes.

• Operators of inter-casino linked systems.

• Disseminators.

• Pari-Mutuel systems operators.

• Operators of interactive gaming systems.

• Class 1 service providers (also known as Interactive Gaming Service Providers).

• Manufacturers and distributors of interactive gaming systems.

• Operators of cashless wagering systems.

While an entity conducting these activities must obtain a license, not every shareholder, officer, director, and key employee must file an application and be found suitable. For example, a person can buy a small fortune in MGM Grand shares without having to obtain a license. This is because Nevada law recognizes that if every shareholder of a public casino company had to be licensed, no public company would invest in the state. Nevada has separate rules on who must be found suitable depending on the type of entity that is seeking a license. The rules differ depending on whether the entitiy is a sole proprietor, joint venture, private stock company, limited liability company or partnership, or a public company. The most liberal rules are for public companies.

a. Public Company Licensing - Shareholders

A publicly traded corporation (“PTC”) is a corporation that:

• Has one or more classes of securities registered pursuant to Section 12 of theSecurities Exchange Act of 1934, as amended.

• Is an issuer subject to Section 15(d) of the Securities Exchange Act.

• Has one or more classes of securities exempted from registration requirements solely by reason of certain exemptions.

Only persons owning more than 10 percent of any class of voting securities of a public company must be licensed. These include shareholders who, individually or in association with others, directly or indirectly, acquired the beneficial ownership of more than 10 percent of any class of voting securities and who must report or voluntarily report the acquisition pursuant to Sections 13(d)(1), 13(g), or 16(a) of the Securities Exchange Act of 1934, as amended. This is further relaxed for institutional investors that can go up to 25 percent with the requisite approvals. Institutional investors, who beneficially own more than 10 percent but not more than 25 percent of the common stock of a registered, publicly traded corporation, may apply for a waiver of the mandatory licensing requirements if the shares are held for investment purposes only. An institutional investor is allowed to beneficially own more than 25 percent but not more than 29 percent of any class of a PTC’s voting securities, if such additional ownership resulted from a stock re-purchase program conducted by the PTC. In such situations, an institutional investor cannot purchase or otherwise acquire any additional voting securities of the PTC that would result in an increase in an investor’s ownership percentage.

• An institutional investor can include any of the following:

• A bank under Section 3(a)(6) of the Federal Securities Exchange Act.

• An insurance company under Section 2(a)(17) of the Investment Company Act of 1940.

• An investment company under Section 8 of the Investment Company Act of 1940.

• An investment advisor under Section 203 of the Investment Advisors Act of 1940.

• Collective trust funds under Section 3(c)(11) of the Investment Company Act of 1940.

• An employee benefit plan or pension fund under Employee Retirement Income Security Act of 1974, excluding an employee benefit plan or pension fund sponsored by a publicly traded corporation registered with the Commission.

• A state or federal government pension plan.

• A group comprised entirely of persons specified above.

• Such other persons as the Commission may determine for reasons consistent with state policies. An institutional investor will not be deemed to hold the shares for investment purposes unless such shares were acquired and are held in the ordinary course of business as an institutional investor. The shares should not be held for the purpose of causing, either directly or indirectly:

• The election of a majority of the members of the board of directors.

• Any change in the corporate charter, bylaws, management, policies, or operations of it or any of its gaming affiliates.

• Any other action that the Commission finds to be inconsistent with holding shares for investment purposes only. The Nevada regulators have not deemed the following activities, among others, to be inconsistent with holding shares for investment purposes only:

• Voting on all matters voted on by stockholders.

• Participating in certain activities related to debt restructuring.

• Making financial and other inquiries of management of the type normally made by securities analysts for informational purposes and not to cause a change in management, policies, or operations.

b. Public Company Licensing - Officers and Directors

Besides shareholders, certain officers and directors of public companies must be licensed. Officers subject to mandatory licensing include:

• Those involved in gaming who are also directors of a company.

• The president.

• Any person performing the function of chief operating officer or chief executive officer.

• Any person performing the function of chief technical officer or chief information officer.

• The chief financial officer or other principal accounting officer. Directors normally subject to findings of suitability reviews are:

• A chairman of the board of directors.

• Directors beneficially owning more than 1 percent of any class of voting securities.

• Directors voting on an executive committee or any comparable committee with the authority of the board of directors to govern the activities of a corporate licensee.

• Directors who are also gaming employees.

The Commission also requires applications for any officer or employee who administers or supervises gaming activities. The Commission may also require an application from any employee or officer if said application would serve the policies of the state regarding gaming.

c. Private Companies, Limited Liability Companies and Partnerships

Historically, every officer, director, and shareholder of a private company had to obtain a license. Recent regulatory amendments have eliminated mandatory licensing of all limited partners, members of limited liability companies, and shareholders of corporations holding 5 percent or less of the beneficial ownership of privately held limited partnership, limited liability company, or corporate licensees. Instead, those holding a 5 percent or less interest in a limited partnership, limited liability company, or corporate licensee must register with the Board and

submit to the Board’s jurisdiction. Additionally, managers, partners, officers, and directors of holding companies who have no control over the operations of the subsidiary licensee may only be required to register with the Board.

The following individuals must register with the Board:

• All stockholders owning 5 percent or less of the equityand voting securities of a corporate licensee other than a publicly traded corporation.

• All limited partners owning 5 percent or less of the ownership interest in a limited partnership licensee.

• A general partner of a limited partnership holding company where the partner owns 5 percent or less of the subsidiary licensee and the limited partnership is not a general partner or manager of, nor controls, the subsidiary licensee.

• All members owning 5 percent or less of the ownership interest in a limited liability company licensee.

• Both an individual who owns 5 percent or less of a licensee and a holding company that owns 5 percent or less of a licensee.

• A manager of a limited liability holding company if the company is not a general partner or manager of, nor controls, the subsidiary licensee.

• Each owner of a holding company if the owner owns 5 percent or less of any licensee owned by the holding company.

• An officer or director of a holding company who does not serve on any committee with authority to act in matters involving the activities of the subsidiary licensee and where the company is not a general partner or manager of, nor controls, the subsidiary licensee.

Registration must be made before obtaining an ownership interest in a licensee. When no ownership interest is obtained, such as when a registrant is an officer or director of a corporation, registration must be made within 30 days after the person assumes office. If the Commission subsequently finds a registrant unsuitable, denies an application for registration, or subsequently revokes the registration, the registrant’s ownership interest must be immediately returned to the licensee, and the licensee must refund the amount of money the registrant paid for its ownership interest. Additionally, the Board Chairman has the discretion to require a registrant to file for licensure at any time.

To register with the Board, a registrant must file:

(1) a completed application for registration as prescribed by the Board;

(2) fully executed waivers and authorizations as determined necessary by the Board Chairman to investigate the registrant;

(3) an affirmative statement that the registrant submits to the jurisdiction of the Board;

(4) his/her certified fingerprints; and

(5) an investigative fee in the amount of $2,500 for all registrations.

Once a completed application for registration has been filed, the Board will consider the application no later than 120 days after the first regular monthly meeting following the filing. At the meeting in which the Board considers the application, the Board will:

(1) register the applicant;

(2) decline to register the applicant;

(3) refer the application back to staff; or

(4) recommend the applicant be required to apply for licensure. Where an applicant’s registration has been denied or referred back to staff, the applicant may apply for licensure even if not required to do so. All corporate directors and directors of a private company must file

applications.

Besides the individuals who must undergo the background investigation, the company itself must undergo a corporate investigation.

What Is the Purpose of the Background Investigation for a Non-Restricted Gaming License?

The background investigation gives gaming regulators the information necessary to decide whether a person is suitable to hold a gaming license. Typically, gaming regulators look into matters such as associations with organized crime, honesty and integrity, and adequate business experience. A gaming investigation is always more revealing than a criminal investigation because a gaming applicant must cooperate by providing requested information and files. By requiring the applicant to complete personal history and financial disclosure forms, gaming regulators are provided with a wealth of useful information that can build a framework on which to conduct the investigation.

How Does a Non-Restricted Application Begin?

Applicants must file voluminous forms. The most substantial is the Multi-Jurisdiction Personal History Disclosure Form. True to its name, this form is used in many gaming jurisdictions across the United States and contains two major parts. The first part, consisting of about 45 pages, concentrates on the applicant’s personal history and asks for information including familial background, education, marital status, civil litigation involvement, criminal charges, residential data, employment history, licensing background, and character references. The second part, consisting of about 20 pages, 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 the Personal History Disclosure, an applicant must file a simple preprinted application form stating the basis for applying for a license. This simple form is the only document made public. The Personal History Disclosure, Financial Disclosure, and other documents remain confidential.

An applicant in Nevada must also file:

• A Nevada supplemental personal history disclosure form.

• A form releasing and indemnifying the regulators from any liability as a result of the investigation.

• A request to third parties such as banks or employers authorizing them to release information to the regulators.

• Certified fingerprints and authorization of a criminal history record review.

• An affidavit attesting that the applicant has made full disclosure on the forms.

• Each individual application must be accompanied by a check for $500.

An applicant’s gaming attorney is actively involved in the preparation of the application. His/her primary responsibility is to ensure that the information contained in the application is accurate and complete. The gaming attorney needs to carefully review the document to make sure all the questions are answered and have internal consistency. For example, places of employment should correspond to places of residence. Gaps in employment need to be explained. Experienced gaming counsel can help spot potential regulatory concerns and ensure they are adequately explained. This may entail filing a detailed description of the issue in a document known generally as a white paper. In some circumstances, a gaming attorney may conduct or engage a private investigator to ensure the documents are accurate and complete and present the applicant’s best case. The value of a properly prepared application cannot be understated. Incomplete applications can lead to delays in processing and inaccurate or missing information can create unfavorable perceptions by the regulators such as evasiveness, dishonesty, and incompetence, none of which are considered positive while assessing a person’s suitability for a gaming license.

What Happens to the Non-Restricted Application After It Is Filed?

An application is first routed through a section of the Gaming Control Board’s Investigations Division called “Applicant Services.” The application is checked to ensure it is complete and, if not, a letter is sent to the applicant requesting the missing information. Complete applications are forwarded to the Chief or Deputy Chief of the Investigations Division for assignment to a team of agents. During this process, the application is generally referred to as being in the

queue. Once agents are available and assigned, their first task is to review the application to estimate the cost of the investigation in light of the anticipated agents’ time, travel expenses, and other investigation-related costs. The Gaming Control Board charges an hourly fee for its agents. Estimates to conduct an investigation of each applicant can be very high. For example, estimates may range from $80,000 for a very simple investigation to over $1,500,000 for a complex investigation involving foreign citizens. In addition, the costs of investigating the corporation often exceed $75,000 to $150,000. After the agents have estimated the cost, they will send a letter requesting funds from the applicant, usually in the amount of the estimate. The investigation will not begin until the investigative fees are paid.

What Happens After the Fees Are Paid?

An investigative team initiates the formal investigations of each individual applicant. The team can have as few as one agent or as many as a dozen. The size of the team depends on the complexity of the investigation, time requirements, and other considerations. The highest-ranking member of the team (who typically holds the title of supervisor) is usually an experienced investigator with direct responsibility for the daily activities of the agents involved in the investigation. The supervisor provides guidance to the agents and formulates the investigative strategy. Depending on experience, an agent can have the title of agent, senior agent, or special agent. The team typically has two types of agents: financial and background. Financial agents often hold degrees in accounting and 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 agents typically have law enforcement experience and are responsible for investigating an applicant’s background, general reputation, and personal and business associates. An applicant often becomes aware that the agents have commenced work on the application when asked to appear at an opening interview. However, the investigative process usually starts well before the opening interview. The agents 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 and to uncover any unexplained gaps in the records. Any area that raises questions is potential subject matter for the opening interview. The agents will attempt to ensure that all the information is accurate and complete. An opening interview is the first opportunity for the applicant to meet with the agents handling the investigation. The interview gives the agents an opportunity to explain procedures and demystify the process. The agents also review the initial application forms line by line with the applicant to check for unintentional omissions, mistakes, or typographical errors. This is a tedious process that can take two to three hours. A major purpose of this exercise is to fix the applicant’s responses so that if the investigation develops contrary information, the applicant will be deprived of the excuse that it was simply overlooked. In other words, the opening interview provides a second opportunity for the applicant to reveal previously undisclosed matters before the failure to reveal them is held against the applicant. If the agents later uncover a serious undisclosed matter during the investigation, a relevant consideration in determining the suitability of the applicant is that he failed to reveal the matter both in the application and upon direct questioning during the opening interview. In the opening and subsequent interviews, gaming counsel has several roles. The first role is to listen well. The gaming attorney can then ensure that the applicant understood the question and is responsive. The attorney can also often deduce the areas in which the agents may have an extraordinary interest and assist the client in determining the potential concern and how to address it. The second role of the gaming attorney is to provide information that may be in the attorney’s realm of expertise, such as why an application was filed in a particular way or to explain a contract or corporate structuring. Finally, the attorney can assist the agents in making certain that the decorum of the interview is maintained and that the applicant fully understands the obligation to cooperate with the investigation even if the solicited information is embarrassing or personal.

What Documents Are Typically Requested From an Applicant?

At or around the time of the opening interview, the agents make a written request for documentation that typically includes:

• Copy of the applicant’s birth certificate.

• Current and previous passports. These items should be provided at the time of the applicant’s initial interview. At that time, the agents will likely review the passports, make copies, and immediately return them to the applicant.

• Copy of the applicant’s last will and testament.

• Copies of any trust agreements, trust tax returns, and a list and valuation of assets held by the trusts of which the applicant is a party.

• Copy of any current employment and/or stock option agreement(s). The applicant will likely have to provide a list of the applicant’s duties and responsibilities for the applicant’s position(s) relative to this application.

• Copies of any federal, state, county, or city licenses held by the applicant individually or as a representative of a business.

• Detailed narrative of any questioning by any governmental agencies includingdates, circumstances, and dispositions.

• Copies of any litigation and arbitration for the applicant as an individual, member of a partnership, member/manager of a limited liability company, or shareholder, director, or officer of a corporation. Involvement can be as either a plaintiff/defendant or defendant/respondent. Requested documentation typically includes the following:

o Original complaint.

o Amended complaint(s).

o Cross complaint(s).

o Disposition, Summary Judgment, Settlement Agreement.

o Written narrative describing the circumstances that led to the lawsuit or arbitration.

• Federal, State, and Local individual income tax returns for the past five years (minimum), including all supporting schedules (W-2’s, 1099’s and K-1’s). If the most current tax return has not been prepared, the applicant will need to provide a copy of the filed extension form and a copy of the income tax returns for the previous five years. The applicant can request duplicate copies of missing returns from the applicant’s local Internal Revenue Service office.

• Complete bank and brokerage account records for a 5-year period. This includes the following documents:

o Bank account/savings account/brokerage account statements.

o Canceled checks.

o Savings passbooks.

o Deposit slips.

o Check registers.

o Information requested above should be provided in its entirety for the period requested. Documentation must clearly show the source of deposits, the payee of checks, and the source and recipient of transfer of funds.

o If canceled checks and deposit slips are not returned by the applicant’s bank, copies of specific items may be requested from the financial institution upon board agent review of check registers and bank statements.

o The financial information requested applies to all bank and brokerage accounts (opened and closed) held by the applicant, the applicant’s spouse, or jointly during the specified period.

• Copies of original note receivable agreements for a 5-year period and a written explanation regarding the purpose of the note. If the note receivable is from an individual(s), the applicant should provide the social security number and date of birth and define the applicant’s relationship with the individual(s).

• Escrow documents for the purchase of all real estate currently owned. Escrow documents include mortgage loan statements or notes, trust deeds, and settlement statements (showing down payment and closing costs). If the property is co-owned with another person or persons (excluding the applicant’s current spouse), the applicant typically must provide the social security number and date of birth and define the applicant’s relationship with the other owner(s).

• Appraisals on all real estate owned or a written explanation of the method used to determine market value.

• Copies of statements pertaining to any pension or retirement funds, IRAs, and annuities for a 5-year period.

• Copies of life insurance policies and statements confirming current cash surrender values.

• Copies of current license registration on all vehicles owned or leased.

• Copies of notes payable and credit line agreements incurred for a 5-year period.

The applicant should provide term sheets, if not included in the agreements, and loan amortization schedules. If the applicant’s liability is owed to any individual(s), provide his/her social security number and date of birth and define the applicant’s relationship with the individual(s). Later supplemental requests may include other financial records such as certificates of deposit; purchased cashier’s checks; notes and loans receivable or payable, financial statements; accountant’s work papers; brokerage accounts; contingent liabilities (i.e., guarantees); and business investments. Besides personal financial records, the financial agents may also review the applicant’s businesses. Typically, the applicant must provide a list of all business investments for a 5-year period. The applicant is asked to indicate on the list those investments in which the applicant actively participates and those in which the applicant is a passive investor. To this extent, the agents may request business records for all personal business investments in which the applicant is involved or actively participates, exclusive of normal buy/sell activities on the stock market. This document request may include but is not necessarily limited to:

• General and limited partnership agreements for partnerships. Articles of organization and operating agreements for limited liability companies.

• Articles of incorporation of corporations.

• Meeting minutes.

• List of all partners, shareholders, officers, directors, members, and managers and percentage of ownership held by each:

   o Stock/membership certificates, if applicable.

   o Social security number and date of birth of all parties.

• Stock certificate books.

• General ledgers.

• Cash receipts and disbursement journals.

• 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.

• Accountant’s work papers.

The applicant is best served by meeting with his/her gaming attorney shortly after the application is filed to consider what documentation should be collected. If the applicant waits until receiving the document request letter, the investigation may be delayed while the documents are collected. In some cases, such as missing bank records or government records, this can cause substantial delays as the banks and the government are notoriously slow in processing requests for documentation. If the applicant has collected a majority of the documentation in advance of the request, it is more likely to be timely, complete and better organized.

What Is the Background Investigation All About?

Two primary purposes of the background investigation 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 agents. They often work with other law enforcement agencies and conduct extensive interviews to learn the character of the applicant. Background agents have very broad powers. They can inspect premises and demand access to inspect, examine, and photocopy records and to interview witnesses. They review civil lawsuits and criminal charges. Background agents have even been known to request and to make copies of company and individual computer hard drives to review files and email correspondence. Anything written down or memorialized electronically or in any other form may be the subject of a request from a background agent regardless of whether it is personal or business related. For instance, agents have requested electronic copies of an applicant’s business and personal emails and have copied and reviewed content on hard drives found in both personal and business computers. Agents may even request access to information stored on smartphones. 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 agents review civil court records to learn the types and nature of all civil litigation involving the applicant and to ensure that the applicant has fully revealed the nature of 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 are often acrimonious and the files (or the ex-spouse) can be valuable sources for allegations of wrongdoing. Background agents also verify the applicant’s criminal information. Most important are the circumstances of all arrests or detentions and whether the applicant revealed all of them. Agents may discover that the applicant failed to reveal a criminal record by checking court records. The major sources of information 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. 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, gaming regulatory agencies are not burdened by the same rules about what can be considered. Records of civil court proceedings also 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. 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, to harass or damage competitors, or to create unlawful competitive advantages. Besides criminal and civil court records, governments maintain substantial information on people, much of which may be relevant to the person’s suitability as a gaming licensee. For example, a state’s consumer affairs division 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, which may involve prior and contemporaneous businesses. The review of corporate information about these businesses may further 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 also may reveal corporations not listed on an application. Corporate books also contain a wealth of information. Incorporation papers show the date of incorporation and the number of authorized shares. Subsequent filings usually show the list of initial officers and directors and any changes, 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 is done for many reasons including establishing the person’s experience in a particular area and exploring the applicant’s honesty. Here the agents often go beyond the stated reasons for changing employment and decide if other reasons exist. An agent 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. No set rules exist about how far back in the applicant’s past the agents may search. Although the focus may be on the last 10 years, agents may review a transgression that occurred 20 years ago.

What Is the Financial Background Investigation All About?

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 agents than with the background agents, as the production of financial documentation plays a major part in the investigation. Financial agents are the beneficiaries of most documentation supplied by an applicant and use the documentation 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/her sources. Financial records often reveal identities and financial arrangements with the applicant’s associates. Financial agents also scrutinize sources of income and records of payments through these documents. Tasks that financial agents can perform during their investigation include:

• Analyzing the source of funds.

• Tracing primary holdings to their original sources.

• Verifying personal income information to confirm current holdings are consistent with income reported to the tax authorities.

• Preparing a cash-flow analysis.

• Verifying the applicant’s net worth.

A source of funds analysis traces from where the applicant receives income and the source of

funds from which assets are purchased. The regulatory goal is to ensure 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, in particular, are the beginning points because they contain both deposits and withdrawals. Deposits often reveal sources of income. As such, all deposits are reviewed to learn if they are ordinary, such as biweekly salary deposits, or extraordinary, such as the onetime sale of an automobile. Large extraordinarydeposits will be verified by reviewing source documents. Standard bank records that agents 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. Bank accounts are the usual, but not exclusive, location for deposited funds. Other possible depositories include brokerage accounts and savings and loans associations. An agent will often 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 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. If a substantial difference exists, the agent 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.

What Is the Role of Counsel During the Investigation?

Legal counsel plays three important roles during the investigation. First, counsel serves as the “point person” for coordinating the agents’ requests for documents or information. Requests are usually made by letter to the applicant with copies to his/her counsel or by telephone call to counsel. The speed and accuracy of the assembly and transmission of requested information has a direct impact upon the length and cost of the investigation. By coordinating the production of documents and information, counsel can review the materials for responsiveness, clarity, accuracy, and completeness. The applicant’s level of preparation and cooperation largely determines the length of the investigation. Counsel’s second role is that of an “observer.” If requests are made without notice to the applicant’s counsel, the applicant should inform counsel of the request. By analyzing the nature of the information requested and observing the direction of the investigation, counsel can make educated guesses about the agents’ concerns or areas of interest. With this knowledge, the applicant has the ability to dispel any misconceptions and to prepare ahead of time any necessary rebuttal for the Board and Commission hearings. Counsel’s third role is “presenter.” An applicant’s counsel, being familiar with the Board and Commission hearings, will be presenting and introducing the applicant in front of the Board and Commission.

What Happens After the Investigation Is Complete?

After the investigation is complete, the agents typically will have a final or “closing” conference with each individual applicant. This closing conference has three primary purposes. The first is to get answers to any remaining questions that arose during the course of the investigation. The second is to inform the applicant of any areas of interest or concern that the investigation may have uncovered. An area of interest is something that will be highlighted in the investigative report that is unusual, but alone will not typically result in a denial of an application. An area of concern is an issue that alone could result in denial of the application. The third purpose of the closing conference is for the applicant or his/ her counsel to provide an explanation for any unexplained matters uncovered by the investigation before the final report is written. The investigative report, which is not made available to the applicant, is then forwarded to the State Gaming Control Board and the Nevada Gaming Commission for their consideration in deciding whether to grant a license. The time period between the closing conference and the Board hearing is often only a few weeks and can be quite hectic. During this time, the applicant and gaming counsel should address and evaluate the issues raised during the closing conference. This process may include interviewing and preparing witnesses and gathering documentation for introduction as exhibits. Also, the applicant and his/her gaming counsel need to anticipate any other issues that may be raised during the Board hearing. Finally, the strategy for the Board hearing, including the substance of any presentation, is developed and refined.

What Happens at the Board Hearing?

The Board licensing hearing is on the Board’s monthly meeting agenda. The agenda is divided into sections based upon the types of items. Individual agenda items are not heard at set times; rather, the items are taken in order according to item number. Although applicants are given a specific time to be present for their hearing, they should be prepared to wait, sometimes for several hours. Once the agenda item is called, the applicant and legal counsel take their places at the podium. All applicants must attend unless the Board Chairman has waived their appearance. The Executive Secretary of the Board reads the agenda item as to who or what is properly before the Board for determination. If possible, counsel should work with the agents before the submission of the agenda item to ensure its accuracy. An error in the agenda item may cause the Board to delay the hearing until the next regularly scheduled meeting to allow for the correction. This delay may be mandated by Nevada Open Meeting Law, which prohibits the consideration of matters in a public meeting that are not accurately described in the posted agenda. Once the agenda item is read, counsel and the applicant identify themselves for the record. Ordinarily, the Board allows the applicant to affirmatively prove his/her suitability. Gaming counsel often organizes a complete presentation that may be accompanied by a PowerPoint presentation or the offering of witnesses. The presentation often starts with an opening statement. To better prepare the Board and avoid any delays, the applicant may submit briefs and exhibits. All briefs and exhibits should be submitted to the Board at least three days before the hearing to give Board members and the agents an opportunity to review them. During the presentation, the applicant may affirmatively address areas of concern raised by the agents. At any time during the presentation, the applicant and his/her witnesses may be subject to intense examination by the Board members. After the applicant presents his/her case, the Board has the prerogative to question the applicant about any aspect of his/her personal or business life that impacts his/her suitability. Although Board members generally use the investigative summary as a guide for their questioning, they are not constrained to the summary. Gaming counsel’s job is challenging because an applicant cannot examine evidence contained in the written summary prepared by the agents. The applicant is unable to investigate or verify either the source or the accuracy of any information contained in the summary. Moreover, the case presented against the applicant need not conform to any of the traditional rules of evidence. For example, unlike a typical court case, weight can be given to hearsay (statements by persons who do not have personal knowledge of the stated information but who learned of it from another person). After the presentation and questioning, the applicant’s gaming counsel is offered the opportunity to give a closing statement. After that, the Board begins an open deliberation followed by one of the Board members making a motion. The most common motions are:

• To continue the matter.

• To refer the matter back to the Staff.

• To recommend that the application be denied.

• To recommend that the application be approved with or without conditions or for a limited or unlimited duration.

What Happens at the Commission Hearing?

Although the Commission has the final authority to deny or approve a license, its hearings are generally shorter in duration than the Board’s. Commission members receive a full transcript of the Board’s hearings before their meeting. They need only ask about matters not covered in the agents’ summary or in the transcript. The Commission hearing, which is typically scheduled two weeks after the Board hearing, is similar to the Board hearing. Items are heard in order as listed on the Commission’s agenda but may be taken out of order at the Chairman’s discretion. The Executive Secretary reads into the record the title of the matter, and the applicant and witnesses are identified for the record. The applicant ordinarily is given the opportunity to prove his/ her suitability, and like the Board hearing, can offer an opening statement and give an affirmative presentation. The applicant may call witnesses and present documentary evidence. The Commission will not generally consider documents unless the applicant files the original and eight copies of the document with the Executive Secretary at least eight calendar days before the hearing. The failure to filedocuments in a timely manner may result in the deferral of an application. The Commission can also ask questions or seek clarification of any point. Once discussion is over, the applicant may make a closing statement. Thereafter, the Commission will close the hearing to further comments from the applicant. Commission members may then discuss, in the open meeting, the merits of the applicant’s suitability or possible conditions to the license. After the discussion, one of the Commission members will make a motion. The most common motions are:

• To continue the matter.

• To refer the matter back to the Board.

• To deny the application.

• To approve the application with or without conditions or for a limited or unlimited duration.

• A combination of the foregoing.

The Commission’s voting rules are different from those of the Board, where a simple majority determines the action taken. If the Board has given a favorable recommendation on an application or had a tie vote, a simple majority of votes by the Commission will determine the action of the Commission. If the Board has recommended denial of the application, the Commission must have a unanimous vote to approve the application. The Commission must take action on an application within 120 days after the Board’s recommendation. If it fails to do so, the application is deemed approved. The Commission routinely requires applicants to waive the 120-day rule if a continuance is necessary. If it denies an application, the Commission must prepare and file a written decision setting forth the reasons for its action. No written decision is necessary after the approval of an application.

Judicial Review

A denied applicant for a Nevada gaming license has no recourse against the Commission to seek a reversal of the adverse decision. This is contrary to the practice before most administrative bodies where the courts can review a decision to determine whether the agency acted arbitrarily.

What Are the Reasons an Application Might Be Denied?

In essence, the regulators are attempting to decide who is not suitable to be licensed because either the person’s involvement in the industry would create a poor public perception (e.g. the person has a poor reputation) or that a person’s involvement in the gaming industry is likely to result in regulatory violations. Because of this, regulatory licensing issues typically concern the applicant’s character, experience, cooperation, regulatory compliance, or financial viability. Denials based on character issues may include:

• Arrest or conviction of a crime involving violence, gambling, or moral turpitude

• An unexplained pattern of arrests.

• Arrest for a gaming crime.

• Association with organized crime or unsuitable persons.

• Failure to list negative information on the application.

• Poor business ethics as demonstrated by civil cases, such as for fraud, and government action, or for securities violations.

• Sustained or current illegal drug use.

• Discovery of unsuitable business practices such as bribes, tax evasion, and the like.

• Failure to provide truthful and complete answers to the gaming agents.

• Denials based on regulatory compliance may include:

• Prior unsuitable operation of a casino or other gaming business.

• Poor, absent, or incorrect recordkeeping.

• A pattern of regulatory violations, intentional or not.

• A lack of diligence in completing the gaming application.

• Failure to respond in a timely manner to agents during the course of the investigation.

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