Regulating Gambling and Liquor

Tabled: 8 February 2017

2 Licensing industry participants

The Victorian Commission for Gambling and Liquor Regulation (VCGLR) makes decisions on a large number of gambling and liquor licence applications each year. These include applications for permanent licences, temporary licences, variations and transfers of existing licences, and approval of new directors or nominees.

A robust licensing process is essential for VCGLR to meet its legislative and regulatory objectives of minimising harm and ensuring industry participants are suitable.

This Part of the report examines VCGLR's licensing framework and processes, including guidance and training for decision-makers and quality assurance.

2.1 Conclusion

VCGLR cannot demonstrate that all licensing applications are properly examined and assessed before being approved.

VCGLR has made progress over the past two years in reorganising the licensing division, training staff and providing guidance material to support a move to a more risk-based approach to licensing activities. However, significant weaknesses remain in VCGLR's licensing approach, and this has compromised its achievement of legislative objectives for harm minimisation and for the prevention of criminal influence and exploitation.

2.2 Licensing framework and approach

Since its establishment, VCGLR has made some progress in implementing a risk‑based approach to its licensing functions. It has established a licensing branch structure and an initial triaging process for applications informed by basic risk factors.

VCGLR's documented approach to regulating the gambling and liquor industries emphasises:

  • risk-based targeting—analysing the risks presented by individuals and businesses in these industries that may cause harm
  • understanding these risks and using them to guide VCGLR's decision-making, priorities and use of resources in discharging its functions.

However, significant work remains for VCGLR before it has a fully risk-based framework to assess applications.

2.2.1 Risk framework for assessing applications

Following VCGLR's creation in 2012, licensing officers continued to only process either liquor or gambling applications, based on their previous roles, with the exception of a small 'dual licensing' team.

In August 2014, the licensing division was restructured into three streams to encourage a more agile workforce and to implement a risk-based approach to licence processing. This stream-based structure was refined in October 2015, with three streams merged into two. Now, one stream deals with low–medium risk applications (Stream 1) and the other stream deals with medium–high risk applications (Stream 2).

Stream 1 staff triage and assign applications based on a risk rating. The risk rating for each application is determined by the type of application. This is primarily based on a risk-based fee structure initially set by government in 2009, to determine the cost of a liquor licence based on risk factors such as late-night hours and patronage. These risk factors have not been reviewed since they were established in 2009, and this model does not incorporate any risk factors specifically related to gambling venues or licence types.

VCGLR's move towards a risk-based model for processing licence applications was based on advice from external consultants and intended to enable active consideration of risk throughout the entire application assessment process. In late 2014, the licensing branch committed to developing risk indicators and implementing an initial risk matrix, with checklists containing 'red flags' for delegates to trigger the escalation of applications within a team or between teams, and a further risk matrix to be considered during the determination phase. A project plan for developing risk indicators was drafted in early 2015, but the project did not progress and the checklists and risk matrixes have not yet been developed.

VCGLR advised us that it intends to continue with this project as part of a broader program of work focused on its regulatory approach but it will take time. The importance of this work was highlighted in January 2015 advice to the acting chief executive officer of VCGLR from the licensing branch director, in the chair's review of VCGLR in late 2015, and in the June 2016 statement of expectations for VCGLR from the Minister for Consumer Affairs, Gaming and Liquor Regulation.

Since the move to a two-stream model, no applications have been escalated between teams, and we found no evidence of applications being escalated within teams in the licensing files we reviewed as part of this audit. This indicates that following the initial triaging of applications, there is no systematic ongoing review of risk as applications progress through the assessment process.

To deal with the high number of low-risk liquor licence applications, different licensing officers are rostered to process correspondence and objections received for these applications. The aim is to process and finalise applications as quickly as possible, to meet VCGLR's 60-day processing benchmark.

However, VCGLR does not systematically review the risk profile of individual applications when it receives the relevant attachments, so it is not possible to determine whether all applications finalised in this manner are low risk or whether VCGLR should escalate some applications for further review before making a decision.

This approach primarily focuses on speed rather than quality, and it is not in line with VCGLR's claimed risk-based regulatory approach.

A risk-based approach optimises the use of available resources. However, VCGLR does not have an integrated information management system that shows how many cases each licensing officer has on hand, or how many applications individual officers have determined across the entire branch.

2.3 Assessing liquor licence applications

VCGLR received about 15 800 liquor licence applications in 2015–16, including new applications, temporary licence applications, variations, transfers and changes to directors for existing licences. The bulk of liquor licence applications—almost 10 000— were for temporary liquor licenses.

VCGLR must assess and determine liquor licence applications in accordance with the Liquor Control Reform Act 1998 (LCRA).

We assessed a sample of 85 liquor licences that were granted between August 2014 and March 2016, to determine whether:

  • decisions and the reasons for them were adequately documented
  • there was adequate documentation on file to support decisions
  • decisions were made in accordance with the legislation.

2.3.1 Consideration of relevant matters

VCGLR's assessment of liquor licence applications does not adequately address the requirements of the LCRA. It does not sufficiently consider the key matters specified in legislation that must be assessed when making a determination for every application, including:

  • the suitability of applicants
  • the identification and assessment of associates
  • the potential impacts on amenity
  • the potential for misuse and abuse of alcohol.

The LCRA specifies applicant suitability and amenity and harm issues associated with the granting of a liquor licence as grounds on which VCGLR may refuse to grant an uncontested application.

VCGLR advised that because Victoria Police, local councils and the public can object to an application on any of these grounds, VCGLR considers that when no objection is received it can proceed to grant a licence without needing to document its own assessment of these matters. VCGLR considers that in these circumstances the VCGLR staff member is entitled to assume the granting of the application is in accordance with the LCRA.

This view is not soundly based. The LCRA states: 'It is the intention of Parliament that every power, authority, discretion, jurisdiction and duty conferred or imposed by this Act must be exercised and performed with due regard to harm minimisation and the risks associated with the misuse and abuse of alcohol.'

The LCRA clearly obligates VCGLR to gather and carefully consider evidence on all matters, including 'optional considerations' specified in the legislation, when they are relevant to the decision to grant or refuse a licence. This includes any associated risks or potential harm arising from the misuse or abuse of alcohol.

It is good practice and good public policy for a regulator to make use of all available powers to further the purpose of the legislation and demonstrate that decisions are made in support of policy objectives. Failing to do this undermines confidence that the licensing approach is effective and that decisions are soundly based.

VCGLR's recently obtained advice indicates that licensing determinations should be based on all relevant considerations and not just on mandatory criteria. Specifically, this advice states that:

  • VCGLR is required to determine an application by reference to both the grounds for refusal and the objectives of the LCRA.
  • Reasons for decisions should refer to the relevant statutory provisions in more detail and identify at the outset the test to be applied, any mandatory considerations and other considerations relevant to the decision. This includes the relevant objectives of the Act under which decisions are made.

The case study in Figure 2A provides an example where VCGLR did not document its consideration of an applicant's initially undisclosed criminal history when recording the reasons for granting the licence application. The decision recorded on this application should have documented VCGLR's assessment of the relevance of this history and the fact that the applicant did not disclose it in his application to its determination on his suitability to hold a licence.

Figure 2A
Case study: Liquor licensing

An applicant applied for a liquor licence but did not initially disclose his history of criminal convictions. Victoria Police lodged an objection to the application based on the lack of information the applicant had disclosed in his application about his criminal history. Following the objection, the applicant provided details of his criminal history to VCGLR, which showed that he had a range of earlier convictions and his most recent criminal conviction was for making a false statutory declaration. Once VCGLR became aware of the applicant's criminal history, Victoria Police withdrew its objection. The applicant also advised VCGLR that he was a current director of two other licensed premises and a former director of two further licensed premises.

The applicant was granted a liquor licence. There was no evidence on file that VCGLR asked the applicant for further information or an explanation about his criminal history. In addition, the decision record for this application did not explicitly deal with the relevance of the past criminal convictions and their initial non-disclosure to its assessment of the applicant's suitability. This was despite Victoria Police bringing the issue of the applicant's criminal convictions to VCGLR's attention.

Despite having copies of the applicant's criminal history, VCGLR believed there was no evidence on which to question whether the applicant was suitable to hold a licence. Although having a criminal conviction does not preclude an individual from holding a liquor licence, we expected VCGLR to document its examination of these matters as part of its assessment of the applicant's suitability.

Source: VAGO.

Reliance on information from applicants

VCGLR largely accepts the information provided to it by applicants at face value. It relies heavily on the honesty of applicants and the diligence of Victoria Police and potential objectors to raise issues about the suitability of applicants, amenity issues or social harms associated with applications.

The LCRA specifies applicant suitability as a matter relevant to VCGLR's assessment of liquor licence applications. Under the LCRA, applicants must provide details of their associates when applying for a liquor licence, and this includes the associates of all directors where the applicant is a company. VCGLR provides Victoria Police with a copy of the application. However, VCGLR's assessment processes do not provide sufficient assurance that all directors and associates are declared and sufficiently scrutinised as part of the liquor licensing process.

License application forms require applicants to disclose information on directors and associates. The LCRA makes it an offence for an applicant to provide false or misleading information to the VCGLR, including by omitting material information. This offence and the requirement for applicants to complete a statutory declaration places obligations on applicants to be truthful, and VCGLR is entitled to place some reliance on this when making determinations on applications.

However, VCGLR does not take adequate steps to confirm the accuracy of information provided by applicants. Specifically, it does not require applicants to provide company extracts from the Australian Securities and Investments Commission (ASIC) to support their applications, and it does not routinely conduct its own ASIC searches to verify that all directors and associates have been correctly identified.

We conducted ASIC searches on 19 companies that had been granted liquor licences since 2013, and found that four had either directors or shareholders that had not been disclosed at the time the application was made. This demonstrates that the LCRA's provisions do not ensure the accuracy of information that applicants submit and indicates that VCGLR should not simply rely on the diligence and honesty of applicants.

VCGLR's reliance on self-disclosure by applicants is a significant weakness in its assessment of applicants' suitability. If VCGLR's processes do not ensure that applicants disclose all associates, then resulting checks by Victoria Police will be incomplete and licences may be granted to applicants with unsuitable company directors or associates. Clearly, VCGLR needs to take action to mitigate this risk by requiring applicants to provide evidence to support the information they provide and to be more proactive in checking this information.

VCGLR's view is that requiring all applicants for liquor licenses to submit an ASIC extract would place extra regulatory and financial burdens on applicants. However, the cost of an ASIC company extract is not excessive, and VCGLR has not demonstrated that the additional burden would not be justified. We note that VCGLR requires this information for gambling licence applications.

Further, VCGLR does not have sufficiently robust processes in place to ensure that liquor licence holders comply with obligations to inform it of changes in company directors and associates after a licence is granted.

Unlike most gambling licences, which have expiry dates, liquor licences are granted once and do not expire if the licensee continues to make annual licence renewal payments and is not found to be in serious breach of the LCRA. The LCRA recognises that the ownership, control and associates of liquor licences may change and requires licensees to advise the VCGLR of any changes in directors or associates. These important provisions are relevant to VCGLR's achievement of the objectives of the LCRA.

VCGLR relies primarily on licensees informing it of relevant changes. Compliance inspectors undertaking routine inspections may sometimes pick up changes, although they do not systematically check for changes in directors or associates due to a lack of consistently applied compliance procedures.

VCGLR could better monitor whether company details have changed via random checks of licensees. Alerting licensees to the possibility of being randomly checked would encourage compliance with the LCRA.

2.3.2 Decision records

Decision records are retained on VCGLR's licensing files to document the basis for licensing decisions. To determine whether a robust assessment process was in place, we looked at decision records to assess whether they acquitted applications against all relevant legislative considerations, clearly documented reasons for decisions and were signed by a VCGLR staff member with the appropriate authorisation to make the decision.

Although licensing files were well organised, there were gaps in the quality and content of decision records. The decision records we examined were inconsistent, did not comprehensively address key matters specified in legislation or contain sufficient information to demonstrate why a liquor licence was granted. Analysis of 85 liquor licensing files showed:

  • the LCRA was mentioned in only 13 per cent of decision records
  • misuse or abuse of alcohol was mentioned in only 16 per cent of all decision records
  • it was unclear who had made the decision in 60 per cent of all decision records.

The poor quality of decision records means the VCGLR cannot provide adequate assurance that liquor licence applications are assessed in accordance with the legislation.

VCGLR has acknowledged that its decision records could be more complete. VCGLR recently conducted a quality assurance review, which highlighted issues with decision records for liquor licence applications, and undertook to do more work to improve decision records.

2.4 Assessing gambling licence applications

VCGLR received almost 8 000 gambling licence applications in 2015–16. VCGLR is responsible for administering 18 different types of licences and approvals. A large volume of applications comes from trade promotion lottery permits, modifications to electronic gaming machines (EGM) including new games and systems, new gaming industry employees and associates of venue operators.

We reviewed a sample of 100 gambling applications that VCGLR granted between 2014 and 2016, including from the following types:

  • new and renewal gaming venue operator licences
  • associate or nominee of gaming venue operator licences
  • directors of gaming venues
  • gaming industry employees
  • casino industry employees
  • new and modified gaming machine hardware and game software
  • sports controlling bodies.

We reviewed these files to determine whether VCGLR made decisions in accordance with the Gambling Regulation Act 2003 (GRA) and the Casino Control Act 1991, and whether decisions met the objectives of the legislation, including that gaming on gaming machines is conducted honestly and that the gambling industry is free from criminal influence and exploitation.

We also assessed VCGLR's administrative practices to determine whether there was adequate documentation in the files, including whether decisions were appropriately documented.

2.4.1 Licensing gaming venue operators, directors, associates and nominees

Venue operator licences allow an entity to operate gaming machines in Victoria. The licence is granted for 10 years, after which it must be renewed. The GRA specifies that when assessing applications, VCGLR must be satisfied:

  • the applicant and associates are of good repute, having regard to character, honesty and integrity
  • the applicant has, or has arranged, a satisfactory ownership, trust or corporate structure
  • whether any person related to the ownership, trust or corporate structure has a business association with a person who, or body or association which, is not of good repute or has unsatisfactory financial resources
  • any person connected to the ownership, administration or management of the operation or business is a suitable person to act in that capacity.

VCGLR typically obtains sufficient information from applicants for gambling licences to enable it to address these matters. The files documenting VCGLR's assessment of applications for gaming licences were in good administrative order and the documentation on the basis for these licensing decisions was generally adequate.

However, we identified an instance where VCGLR's licensing of venue operators and associates did not fully ensure that the legislative objectives of the GRA were met. The case study in Figure 2B provides an example where VCGLR's assessment process was not sufficiently robust to ensure VCGLR fulfilled the objectives of the legislation relating to avoiding criminal influence and exploitation.

Figure 2B
Case study: Gaming venue operator's licence

A key objective of the GRA is to ensure that the management of gaming machines and gaming equipment is free from criminal influence and exploitation.

An associate of an applicant for a venue operator's licence (the applicant's husband) stated in the application that his role was to provide financial support and operational assistance in the management of the venue, which clearly indicated that he was a significant investor and ongoing manager of the business.

VCGLR's licensing process appropriately identified that the associate had previous business connections with an alleged underworld figure who is excluded from Victorian race tracks and Crown Casino.

The matter was referred to the compliance branch for investigation. The compliance branch determined that 'there probably wasn't an issue arising from this association because there hadn't been reports of contact between the alleged underworld figure and the applicant for two years'.

This advice appears deficient as it was solely based on a review of publicly available information. There was no evidence on the file that VCGLR:

  • put this matter to the applicant to obtain explanations and assurances about the nature and status of the association with the alleged underworld figure—this was surprising given that it did seek additional explanations from the applicant about her husband's failure to disclose his involvement in a number of liquidated companies
  • sought any information from Victoria Police on the relationship between the applicant and the alleged underworld figure.

It is of further concern that VCGLR granted the licence and did not place any conditions on it to deal with the risks associated with this matter.

Source: VAGO.

In Figure 2B, VCGLR did not properly investigate the relationship between the associate and the alleged underworld figure. This could undermine the objectives of the GRA to ensure that the management of gaming machines and gaming equipment is free from criminal exploitation. VCGLR should properly consider and investigate matters that are central to achieving the objectives of the GRA.

2.4.2 Electronic gaming machines—assessing 'no net detriment'

Gaming venue operators have to apply to VCGLR for approval of additional venues or machines. The GRArequires VCGLR to satisfy itself that the net economic and social impact of its approval will not be detrimental to the wellbeing of the community where the venue is located.

These decisions are made by VCGLR commissioners, rather than being delegated to licensing officers or executive staff. VCGLR provides the commissioners with social and economic impact assessments containing information on key indicators such as unemployment, homelessness and housing stress in the area where the venue is located. The assessments also contain data on the number of gaming machines in the area and the average spend (loss) per head, relative to the statewide average. The content and quality of the social and economic impact assessments has improved, in line with the recommendation made in our 2010 report Taking Action on Problem Gambling.

Applicants try to show in their applications and in hearings in front of the Commission how increasing the number of gaming machines will have a positive impact on the community, for example, by providing increased employment or by the venue making financial contributions to the community. The Commission assesses these factors to determine whether there is 'no net detriment' to the local community as a result of increasing the number of gaming machines.

The GRA does not provide guidance on how the test for no net detriment should be applied. VCGLR has undertaken a number of initiatives to improve the way it assesses no net detriment, including:

  • providing information to commissioners during their induction
  • holding biannual meetings to discuss the content, style and consistency of VCGLR decision records on gaming
  • drafting guidance material for EGM matters.

Despite this, VCGLR still lacks comprehensive guidance for commissioners on how to assess and calculate net detriment. Its draft guidance for assessing EGM matters provides summaries of key points from case law, however there is further opportunity for VCGLR to refine this and provide more comprehensive guidance for commissioners.

In our 2010 report Taking Action on Problem Gambling, we recommended that the former gambling regulator develop principles for assessing net detriment. The former gambling regulator did not accept this recommendation on the basis that it published its reasons for decisions in determinations on its website. It proposed reviewing the format for its written decisions to ensure its reasons were clearly articulated.

Since our 2010 audit, and following a 2013 Victorian Civil and Administrative Tribunal (VCAT) case, the Commission has changed the way it reports on net detriment in its decision records. VCAT stated that a table of likely economic and social benefits and disbenefits, with comments on the weighting to be given to each factor, would be a useful way to transparently deal with the no-net-detriment test.

The Commission's recent decision records show a focus on no net detriment, and it has been clear in listing the factors it takes into consideration and the relative weighting that it gives each factor when making a decision.

However, there is scope for the Commission to further improve its decision records as some stakeholders, in particular local councils, advised that they found it difficult to understand how the Commission reached a position of no net detriment, particularly in areas with high levels of socio-economic disadvantage and a high number of EGMs.

The Commission is also currently reviewing the adequacy of its decision documents, which provides it with an opportunity to clarify the principles for assessing net detriment, strengthen decision-making and develop a transparent framework.

2.4.3 Other gambling licensing decisions

Gaming industry employees and casino special employees

When we reviewed the processing of employee applications, we found that VCGLR receives enough information from applicants to be assured that all legislative requirements have been met. Applicants provide a criminal history check, a credit report and two passport photos to support their application.

VCGLR has a template for licensing officers that directs them to consider all relevant legislative requirements before they approve an application. There was evidence that when issues with suitability were identified, licensing officers undertook further checks, including asking the applicant for more information before granting the licence.

Sports controlling bodies

VCGLR approves sports controlling bodies by assessing whether they have appropriate processes and policies in place to ensure the integrity of betting on their particular sport, and whether they can monitor and enforce their own integrity systems.

We examined the process for approving three applications from sports controlling bodies. We found that the application forms and VCGLR's assessment of them demonstrate compliance with the legislative requirements for approval, and the assessment process was well documented.

New and modified gaming machine hardware and software

VCGLR approves new and changed hardware and software for EGMs using a framework established by the GRA, and Victorian and national standards.

Applications for VCGLR approval of EGM hardware and software must include a recommendation from an approved testing laboratory. These laboratories are nationally accredited, and VCGLR assesses their work using a range of evidence. The laboratories are engaged directly by the manufacturers, and VCGLR has little visibility on the extent of other work performed by these laboratories for the manufacturers.

Our 1998 report Victoria's Gaming Industry: An insight into the role of the regulator commented on fairness issues for players of EGMs and suggested opportunities to improve the level of information made available to players about 'metamorphic games'. These games typically feature players accumulating tokens over multiple games and then reaching a bonus phase, where they receive free games, after accumulating a particular number of tokens.

For most games within this category, the theoretical return-to-player percentage before the bonus phase can be well below the statutory minimum level of return of 85 per cent. This is acceptable given that the bonus feature is an intrinsic part of the game and there is overall compliance with the minimum level of return. However, the electronic game information screen available to players of metamorphic games does not currently disclose information on the extent to which the bonus feature contributes to the overall return to players. There is an opportunity to provide additional information to players on this issue.

2.5 Supporting licensing decisions

With applications being processed and determined by a large number of licensing officers, it is important that VCGLR provide licensing officers with up-to-date, consistent and comprehensive guidance and training.

2.5.1 Online guidelines for licensing staff

The licensing branch of VCGLR launched an interactive online 'Wiki' site in November 2015 to make guidance on licensing processes more accessible and to encourage greater staff engagement. Although this was a positive development, the content on the site is incomplete and inconsistent in style, which reduces ease of interpretation and application.

While guidance is available for contested applications, licensing officers commented that they did not rely on the guidance available and asked a colleague instead.

Where an application is uncontested, we found there was insufficient guidance to assist licensing officers to consider relevant information on matters such as applicant suitability. This could compromise the quality of licensing decisions, as licensing officers may make inconsistent decisions or follow poor practice by not using guidance.

2.5.2 Training licensing officers

Over the last two years, the licensing division has provided training to cross-skill all staff in both gambling and liquor, with the aim of training each person in the area that was unfamiliar (either liquor or gambling).

Although this was a positive step, staff are not yet fully trained and experienced in both areas, because not all licensing officers in Stream 1 process a mix of liquor and gambling applications.

VCGLR's most recent quality assurance process has identified that some staff require further training.

2.6 Quality assurance and management reporting

A robust quality assurance licensing process should assure the Commission that the powers it delegates are being appropriately used. It can also provide information for VCGLR to allow it to identify any areas for improvement in its guidance and training.

Management reporting is an important function because it provides regular information on the performance of an area. It lets management identify any issues and target its resources to address issues with performance.

2.6.1 Quality assurance

There is no evidence that VCGLR consistently applied quality assurance processes across its licensing activities before 2014. The licensing branch began a quarterly quality assurance review of liquor and gambling decisions in 2014–15, which focused on whether:

  • applications were allocated to the right stream, based on the risk allocation model
  • there were supporting documents on file, such as training certificates, documents on maximum patron capacity, and planning permits
  • Victoria Police and the local council received a copy of the application for comment
  • objections were made in accordance with the legislation
  • the reasons for the licensing decision or determination were clearly stated.

These quarterly reviews examined too few applications and criteria to provide VCGLR with assurance that its licensing decisions adequately considered the information submitted by applicants or objectors, and that its decisions were made in accordance with legislation and internal guidance.

In 2016, the licensing branch reviewed and strengthened its quality assurance process. It is now reviewing 14 files per month (eight liquor and six gambling) and has expanded the criteria to include assessment of whether:

  • applicants had an opportunity to respond to matters raised in a contested application
  • licensing delegates had the correct delegation
  • operational policies and instructions were taken into account where necessary
  • unambiguous reasons were recorded for decisions.

The licensing branch has improved its quality assurance process. Its report to the Commission identified issues for further improvement but did not include an action plan. VCGLR's licensing division needs to address remaining deficiencies in its quality assurance process by using an action plan that includes time frames for monitoring progress.

2.6.2 Management reporting

Management reporting on licensing activity is narrowly focused on the number of applications processed and the speed of processing.

The licensing branch produces monthly reports that track the number of applications processed against the following benchmarks:

  • 100 per cent of applications received are finalised or cleared each month
  • 80 per cent of applications are finalised within 60 days
  • 95 per cent of applications are finalised within 120 days.

The monthly report also presents data on:

  • numbers of pending applications
  • numbers of applications over the benchmark
  • totals for the preceding month
  • year‑to-date total for the financial year
  • numbers for each category of application—commercial licensing, employee licensing, products, minor gaming and liquor—against each of the benchmarks.

There is evidence that the licensing branch uses these monthly reports to manage its activities by prioritising actions in the branch and moving resources to meet needs.

However, the internal benchmarks in the monthly report differ from VCGLR's Budget Paper 3 (BP3) targets, which means that VCGLR does not have a monthly report that tracks all BP3 performance. VCGLR reports separately to the Commission and the department on a quarterly basis on its progress against BP3 measures.

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