Regulating Gambling and Liquor

Tabled: 8 February 2017

4 Casino supervision

Melbourne's casino—the eleventh largest casino in the world—is the only licensed casino in Victoria. Player loss at the casino was more than $1.8 billion in 2015–16. The casino holds 13 liquor licences and is the only venue in Victoria that provides gambling and alcohol 24 hours a day.

The Casino Control Act 1991 (the Act) is the primary legislative framework for supervision and control of casino operations. One of the principal aims of the Act is to ensure that the management and operation of the casino remains free from criminal influence or exploitation.

This Part of the report examines how effectively the Victorian Commission for Gambling and Liquor Regulation (VCGLR) performs its casino supervision functions.

4.1 Conclusion

There is a need for VCGLR to improve its oversight of the casino. VCGLR is not able to demonstrate that its casino supervision is efficient or effective as is required for best practice regulation of a major participant in Victoria's gambling industry. Despite multiple reviews and proposals to improve VCGLR's approach dating back to 2013, these efforts have not sufficiently progressed due to multiple changes in VCGLR management. Its current approach is not adequately risk based or purposeful and, while further work is underway to improve this area of regulation, many important activities have been undertaken only sporadically.

VCGLR has acted to develop a more integrated, organisation-wide approach to casino supervision, but its compliance division has not applied a level of focus on the casino that reflects its status and risk as the largest gaming venue in the state. As a result, VCGLR has not given enough attention to key risks in the casino's operations.

4.2 VCGLR's approach to casino supervision

VCGLR has not pursued a fully integrated approach to overseeing casino operations. It has chosen instead to have two separate streams—one focused on licensing and the other on compliance. This has made it difficult for VCGLR to maintain a coherent, organisation-wide approach to casino supervision. VCGLR took appropriate actions to address this in late 2015.

VCGLR does not follow the approach used by its predecessor regulators, which had a team solely dedicated to supervising casino operations. VCGLR rotates all compliance inspection teams through the casino, but has not supported them with adequate training, guidance and consistent management oversight.

VCGLR recognises the need to significantly improve its approach to casino supervision—it is currently proposing roster changes in the compliance division to enable it to establish a specialist casino inspection team.

4.2.1 Approach to licensing

The licence for Melbourne's casino was granted in November 1993 and expires in November 2050. VCGLR has a range of ongoing licensing tasks relating to the casino operator and operations including:

  • assessing applications from individuals seeking to be associates of the casino operator and applications from certain categories of employees of the operator
  • managing the regulatory approvals process for the introduction of new gaming products, systems and related functions at the casino
  • reviewing commercial submissions and applications from the operator including any proposed amendments to the casino agreements or licence
  • monitoring date-based obligations under the licence and related agreements
  • taking disciplinary action against the casino operator when necessary
  • assisting with the five-yearly review of the casino operator and licence.

VCGLR established a major licences management team in 2013–14 to provide an improved organisation-wide approach to monitoring the casino operator and other major gambling licensees.

4.2.2 Approach to compliance

VCGLR's predecessor regulators had a specialised team of inspectors solely focused on supervising casino operations. VCGLR undertook a review of its compliance operations during its establishment phase and, in 2013, determined not to use a specialist casino inspection team. Instead it has rotated all compliance inspector teams through the casino using a rotational roster system.

The current roster rotates two staff per team, per shift, from the eight operational teams through the casino. This means that an inspector rostered on at the casino on any particular day may not be rostered back at the casino for 18 days. VCGLR acknowledges that this has resulted in a lack of consistent presence at the casino. It has also made it difficult to maintain continuity of work, consistently apply work practices, and provide adequate training to all staff.

There was also a lack of consistent management oversight in 2013 and 2014, with four different people in the role of manager, casino operations, during that period. This further undermined consistency and led to a number of false starts in reviewing and improving the approach to and conduct of compliance inspection activities. The current manager of casino inspection activities has been in place since October 2014 but is not assigned to the casino on a full-time basis.

The inspectors we interviewed during the audit acknowledged a lack of expertise in monitoring casino operations. They attributed this to a lack of standard operating procedures, inadequate training on casino activities, and limited opportunity to have continuous exposure to the casino due to the roster.

VCGLR's review of its compliance operating model, together with the reduction in staff, has also highlighted a loss of expertise in casino supervision. VCGLR is in the final stages of consultation to change its rostering arrangements to provide for the establishment of a specialised casino team with responsibility for both gambling and liquor to strengthen inspectors' skills in overseeing casino operations.

4.2.3 Integration between licensing and compliance

VCGLR has recently acted to address the need for a coherent organisation-wide approach to casino supervision and integration between the licensing and compliance divisions. Managers from the two divisions now meet regularly to share information, and members of both the licensing and compliance divisions attend meetings with the casino operator.

4.2.4 Reviews and proposals to improve casino supervision

VCGLR has been slow to act on multiple prior reviews and proposals to improve its approach to casino supervision.

There were three separate proposals from the compliance division between 2013 and 2015 to review the scope and scheduling of audits and inspections conducted at the casino. They were not acted on, largely due to ongoing changes in management of the division.

These proposals were focused on creating a more purposeful, risk-based and targeted approach to VCGLR's casino supervision activities. They also sought to increase staff awareness of risks such as money laundering and criminal infiltration, and improve the use of information obtained during audits and inspections.

External review in 2015

VCGLR commissioned a consultant to review its regulatory approach to the casino in August 2015. The consultant found:

  • VCGLR lacked a coherent organisation-wide approach to the casino operator across its licensing and compliance functions
  • a very underdeveloped risk-based approach to casino regulation, with little supervision effort directed at areas of high harm such as problem gambling and risks associated with intoxicated patrons and money laundering
  • an absence of direction and leadership for compliance staff at the casino
  • slow progress in clarifying roles and responsibilities with co-regulators such as Australian Transaction Reports and Analysis Centre (AUSTRAC), the financial intelligence agency with regulatory responsibility for anti-money laundering and criminal abuse of the financial system, resulting in little certainty that assumptions about 'who is doing what' were based on solid ground
  • a loss of corporate knowledge and expertise on the casino and its unique operations, compounding the weaknesses in VCGLR's regulatory approach.

This review recommended VCGLR improve its approach to casino supervision by:

  • reviewing keys risks and its regulatory interventions, to adopt a more risk-based approach
  • developing the expertise of licensing and compliance staff working on casino matters through regular training
  • identifying and advising government on any legislative impediments to a more risk-based approach
  • establishing a cross-organisation casino risk group to monitor risks, share casino‑related intelligence and information, engage with co-regulators, adapt VCGLR practice, and report regularly to the VCGLR executive
  • working with co-regulators to clarify roles and responsibilities.

VCGLR has begun actions to address the findings and recommendations from this review, including recently completing a regulatory strategy risk review of its approach to the casino.

Regulatory strategy risk review

The regulatory strategy risk review began in mid-2016 to assess the risks of VCGLR's current activities at the casino against the requirements in the Act.

The review has been completed and recommends reducing or eliminating VCGLR compliance activities at the casino in areas where the casino operator has a responsibility or incentive to mitigate risks, such as the handling and counting of money and casino chips, and the verification of gaming equipment. However, the review does not demonstrate that VCGLR has assurance that the casino operator is in fact effectively managing these risks.

VCGLR does not think that maintaining compliance activities in these areas is necessary because its compliance data shows a low breach rate in these types of casino operations. However, the acknowledged weaknesses in VCGLR's approach to casino supervision mean that this data cannot be relied on to justify a reduction in supervision.

4.3 VCGLR's compliance activity at the casino

We found that some audits on key areas of risk for casino operations have not been performed consistently or at all since 2012.

The Act prohibits the casino operator from running the casino unless the VCGLR has approved its system of internal controls, and administrative and accounting procedures. While the Act requires the casino operator to implement the approved controls and procedures, VCGLR should regularly assess whether this is happening.

VCGLR's program of standard inspections and audits at the casino includes over 30 separate activities. There are audits on premium players, table games, money counting and gaming equipment, and the operator's surveillance department.

In late 2013, a compliance division manager overseeing activities at the casino directed inspectors to stop doing routine audits and inspections while the templates for these activities were reviewed. However, this review did not proceed as it was superseded by other planned reviews, and the program of routine inspections and audits did not restart until around September 2014 when a new manager began at the casino. VCGLR inspectors have conducted the audit program regularly since then apart from the exceptions noted below.

4.3.1 Assessment of the casino operator's internal audit function

Regular reviews of the casino's internal audit activities can provide assurance about the adequacy of the casino's internal controls and oversight. VCGLR planned to undertake a quarterly audit on the operator's internal audit function, but has not undertaken any such reviews since August 2012.

VCGLR obtains information on the casino operator's annual internal audit program and copies of the agenda and minutes of the operator's audit and compliance committee meetings. However, VCGLR could not demonstrate that it systematically reviews this material. In addition, the information the operator provides is not sufficient to give assurance that its internal controls and oversight are robust or adequate, because it does not adequately demonstrate the risk assessments, resources, processes or quality assurance used in these activities.

VCGLR can request complete documentation of the operator's audit and compliance committee meetings but has not done so since 2013. This is a gap in its approach because this information could be used to improve its understanding of the effectiveness of the operator's internal controls and to inform the targeting of VCGLR's compliance activities.

VCGLR advised that it intends to reinstate audits of the operator's internal audit function and review the information provided by the operator.

4.3.2 Money laundering

Regulatory authorities worldwide seek to prevent and detect money laundering—the introduction of money from illegal activities into a legitimate financial system.

VCGLR has a standard audit program on the risks of money laundering associated with gaming by premium players at the casino. However, this audit has only been conducted three times since VCGLR was established in 2012 due to a lack of staff with enough knowledge to conduct it. VCGLR advised that it plans to increase the frequency of this audit when it has addressed the deficiencies in its casino supervision training.

4.3.3 Commission-based players and junkets

Commission-based players participate in either a premium player arrangement, where the casino pays them a commission based on their turnover of play, or a junket arrangement, where the casino pays a commission to a junket organiser who introduces a player or group of players to the casino.

VCGLR has audited the casino operator's junket and premium player arrangements five times since the beginning of 2015. These audits have identified potential weaknesses in the casino operator's documentation for some players and junket arrangements.

VCGLR is assessing further information from the casino operator on these matters and has directed the casino operator to cease its relationship with a particular junket operator following one of these audits.

VCGLR advised that the frequency of this audit will be increased when it establishes a specialist casino team. Although this is a positive step, restrictions on VCGLR's capacity to fully access the operator's systems compromise the robustness of this audit.

4.3.4 Controlled contracts

Certain categories of contracts that the casino operator enters into are deemed to be 'controlled contracts' under the Act. The categories currently include contracts for gaming equipment, security and surveillance, and gaming-related contractors. The controlled contract regime aims to help prevent the casino operator from entering into business associations with suppliers who may lack integrity.

VCGLR has not undertaken an audit of controlled contracts since 2013 and could not demonstrate that it regularly assesses the effectiveness of the casino operator's controls on these contracts. VCGLR advised that the casino operator had not informed it of any new controlled contracts between 2013 and late 2016 and that it will conduct a risk review to determine whether an audit is required on these contracts.

4.3.5 Analysis of VCGLR audit results

VCGLR does not routinely analyse the results of its audit and inspection activities at the casino. In the absence of such analysis, VCGLR is unable to properly reflect on the results of its own work to inform the conduct, adjustment and better targeting of casino inspection activity.

VCGLR advised that it has not prioritised analysis of the results of the current audit program due to the low breach rate detected. However, VCGLR does intend to analyse its audit program when it has reviewed and adjusted the focus of its compliance program at the casino to inform the targeting of resources.

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