Testimony of James R. Hurley (3/23/99)

Mr. Chairman, Senators, I want to thank you for inviting me to appear before you today to discuss the regulation of casino gambling. My name is James Hurley and I am Chairman of the New Jersey Casino Control Commission. The commission is a five-member panel appointed by the governor and confirmed by the New Jersey State Senate which regulates Atlantic City's $4 billion casino industry. I realize the topic for this sub-committee hearing is internet gambling and one of the issues is whether internet gambling can be effectively regulated. What I would like to do is to describe our system of controlling casino gambling and suggest that absent a strict licensing and regulatory system there is no way to ensure the integrity of operators or games.

New Jersey developed a strict, comprehensive regulatory system back in 1977 which was designed to ensure the suppression of organized crime and that the casinos pay taxes on all the money they win. We believe that it has worked very effectively to ensure not only that casinos are owned and operated by people of good character, honesty and integrity, but also that the public has confidence that the games are honestly run, fair and that their winning wagers will be paid.

To accomplish this level of public confidence, New Jersey implemented a licensing system that requires every owner, officer and director of a casino - as well as many of the officers, directors and owners of any holding or intermediary company - to file an extensive license application. They had to disclose detailed information about any criminal record, business affairs, civil litigation, at least five years of personal tax returns and voluminous additional information. Applications for a casino operating license generally fill several large file transfer boxes.

A copy of that application is forwarded to the New Jersey Division of Gaming Enforcement, which then conducts a full investigation into the applicant and its qualifiers. The gaming division looks at criminal histories, bank records, civil litigation, tax returns, SEC filings and anything else that it feels would be pertinent to determine whether a company or a person has the required good character, honesty and integrity. It even looks at newspaper articles to determine not only the fact of an applicant's good character, but also the applicant's reputation for good character.

The results of that investigation are put into a report which is submitted to the Casino Control Commission. We then schedule a public hearing into the application during which witnesses are examined and cross examined, documents are reviewed and placed into evidence and attorneys make opening and closing statements and argue points of law. At the end of that process, we then vote on whether the applicant has met its burden to prove by clear and convincing evidence that it has the required good character, honesty and integrity to hold a license.

The Process is almost identical for every casino employee and casino key employee who works in New Jersey's gaming industry. They file lengthy disclosure forms, submit to rigorous investigations and, if necessary, undergo a full hearing before a commissioner to determine suitability.

Through this process, we can, and have, prevented organized crime and other unsavory individuals from owning or operating a casino in Atlantic City. But we don't stop there. We know that there are other ways for organized crime to infiltrate, influence or control the casino industry. As a result, we subject anyone who sells a product or a service to a casino hotel to licensing requirements.

Before a vendor can sell a slot machine, a deck of cards or a pair of dice to a casino, the company has to file a casino service industry license application. The officers, directors and owners of the company have to be identified and investigated to determine whether the sellers qualify for a license. While the company can start selling prior to the issuance of a license, every single transaction has to be scrutinized and approved, in advance, by our commission.

Anyone who wants to sell non-gaming products or services to a casino - widgets, perhaps - also could face licensing requirements. If a company does "regular and continuing business" - which is defined in our regulations by certain monetary thresholds - it also has to file a license application and undergo a background investigation. And even if the vendor never meets that threshold, if the Division of Gaming Enforcement discovers information that the vendor is unsavory, we can order casinos not to deal with that vendor. Let me give you an example of a wholesale seafood firm in New Jersey that was supplying casinos. The gaming division learned that one of the sales representatives was the head of the Philadelphia-based organized crime family. Even when the seafood firm offered to have that sales representatives handle only non-casino accounts, we indicated that was not sufficient and we ordered casinos not to deal with the firm.

Through the licensing and registration of casino service industries, we have prevented organized crime and other unsavory elements from coming in the "back door" to influence casino operators.

Let me now move on to the second prong of our system - oversight and control of casino operations.

Regulations on internal and accounting controls, gaming equipment and on the operation of the games ensure effective control and fair gaming for the public. Every casino operates under a strict set of regulations and internal controls that spell out with great detail how gaming operations are to be conducted. The rules of the games are detailed in our regulations as is the basic organizational structure for the casino. In addition, the casinos operate under the constant scrutiny of our inspectors who are on duty in every casino around the clock.

Every slot machine that an operator wants to use must be tested and approved in advance. Testing is done by the Division of Gaming Enforcement in a specialized electronic games laboratory in Atlantic City. The gaming division makes certain not only that the machine pays back at least the minimum 83 percent as required by law, but that it pays back precisely what the manufacturer says the program is designed to pay back. Once a slot machine program is approved, the computer chip containing the game is placed in the machine and sealed by the gaming division.

When large slot machine jackpots are won - $35,000 or more - our inspectors secure the machine and gaming division agents test the computer chip to make certain that it has not been tampered with in any way.

Cards are inspected when a table opens and they cannot be used for more than a single day. Dice are checked when a craps table opens to make sure they are perfectly square and balanced. They too are only used for a single day. Roulette wheels are tested to make certain that they are balanced and true. There are specific procedures that casinos must follow to make certain all cards are in a deck and to reduce the possibility of cheating and collusion.

All of this is done with a system of people, watching people, watching people. The actions of a dealer are watched by a floorperson and both of them are watched by a pit boss. Shift managers watch the pit bosses and then there is an elaborate surveillance system that can monitor activities at every table and every slot machine as well as everything that goes on in count rooms or the cashier's cage. Our inspectors are on-site watching as well and plainclothes agents of the Division of Gaming Enforcement regularly are in the casinos. Both our inspectors and the gaming division also have complete access to the surveillance system from our own offices.

Under every slot machine is a compartment where the winnings fall. But to open the compartment, there are two locks and the casino only has the key to one of them. We have the other one. The same with the drop boxes attached to the gaming tables - two keys are needed to open them. That means that our inspector must be present when the cash is collected from slots and tables.

The money is counted in secure count rooms. Once again, to get into the count room, you need to open two locks - we control one and the casino controls the other. Our inspector is physically present when all of the currency is counted and when high denominations are counted. The counts are videotaped - the "soft" count, where paper money is counted - is even audiotaped. In either case, our inspector has to verify the count before the money can leave the room. This procedure allows us to verify the amount of the casino's tax liability.

We also require casinos prevent underage persons from gambling. Every year, casinos escort more than 30,000 underage persons from casinos. Generally, fewer than 500 are actually found gambling, but casinos know that we take this issue very seriously. If they fail to keep underage persons from gambling, casinos are subject to complaints and we have imposed significant fines against them.

The list of controls goes on and I know our time is limited. It is difficult to adequately explain in mere words how these systems work. I would like to invite you, Mr. Chairman, and the rest of the committee to visit Atlantic City to see first hand the protections we have in place.

I hope, though, that I have given you a flavor of the kinds of protections that need to be in place to ensure that games are run fairly and by honest people and that they can't be manipulated. From what we know about Internet gambling right now, I do not believe the same kind of protections are in place or if they ever could be put in place. The lengthy procedure of background checks on employees, inspections of machines, oversight of operations simply cannot be ensured through internet gambling. Without them, I cannot see how anyone could have any level of confidence in the fairness of the games or the likelihood of receiving their winnings.

I'd be happy to answer any questions.