Regulation: Background Investigations a Cornerstone of Good Regulation

by Courtney Osgood

For many Tribal Gaming Regulatory Agency (TGRA) licensing investigators charged with conducting supplier and vendor control person background investigations, the primary challenge is the need to conduct comprehensive background investigations, including financial, criminal, and civil record reviews. Although licensing investigators rarely travel to the companies licensed by TGRAs, many of which are headquartered in foreign countries, there is so much information available at the investigator’s fingertips through the internet by accessing Open Source Intelligence (OSINT). Over time, licensing investigators develop a network of colleagues that can be leveraged to access vendor background investigations conducted by other TGRAs. TGRA regulations providing for reciprocity allows the investigator to rely on the comprehensive work of colleagues at other TGRAs to enhance the background investigation of the vendor under present review. TGRA licensing investigators frequently share work product with each other. This is also an opportunity to see the information other state gaming commissions and TGRAs request and review for their background investigations. Licensing investigators also have the internet at their fingertips. It is true that the licensing investigator cannot always believe at face value what they find online, but there are many ways to verify and crosscheck the information. OSINT should be considered a starting point for the licensing investigator. Vendor contacts and licensing professionals from professional networking events and conferences, such as the Indian Gaming Association Tradeshow, can be excellent sources of information.

By way of example, what follows is the process employed by the Pokagon Band Gaming Commission (PBGC) in conducting Supplier and Vendor Control Person background investigations to determine suitability for licensure.

When conducting a company background investigation PBGC licensing investigators perform media searches (Google, Better Business Bureau, and RipOff Report), corporate record searches (certificate of good standing, articles of incorporation/ articles of organization, bylaws/operating agreement, ownership documents, etc.), criminal history searches (arrests, charges, convictions), civil history searches (bankruptcies, litigation, judgments, liens), regulatory violation searches/verifications, current and prior gaming license verifications, and an in depth financial review (three years of taxes and financial reports).

The first step in any background investigation is to review the application. This is to make sure everything is filled out correctly and all required documents are included with the application. When conducting a background investigation on a new supplier, it is wise to always conduct an internet search first. The PBGC conduct the internet search to locate any positive or negative information about the company. Since the PBGC’s first priority is to protect the assets of the tribe, the licensing investigator wants to make sure there is no negative press involving the supplier. Some great websites the PBGC relies on to search for press releases are RipOff Report, Better Business Bureau, and the U.S. Securities and Exchange Commission.

The second step is to review the supplied corporate documents and those documents available through various websites. If the business is a publicly traded company, the licensing investigator can find a plethora of information on the SEC website, as well as the company’s website. If the vendor is not publicly traded, the investigator will need to dig into the company’s online records and those requested by the TGRA. One place to start is the state website where the business is incorporated or located. The investigator can look up the entity to make sure they are registered in their state and are operating in good standing. The PBGC also reviews the company’s articles of incorporation (AOI)/articles of organization (AOO). The AOI should include the company’s name and its business form, the intended purpose of the company, how the capital structure will be organized, how the corporate governance function will be implemented, and details about the corporate record-keeping and general administration. The AOO should include the LLC’s name and address, the nature of the LLC’s business, the name and address of the LLC’s registered agent, and the names of the members, managers, and directors of the LLC. Bylaws should include corporations identifying information such as name, address, principal place of business, designation of the corporation as public or private, fiscal year of the corporation, corporate officers, number of board members, general powers and duties, terms of service and number of directors considered a quorum. The operating agreement includes percentage of members ownership, voting rights and responsibilities, powers and duties of members and managers, distribution of profits and losses, holding meetings, buyout and buy-sell rules (procedures for transferring interest or in the event of a death). As you can see, there is a lot of information that can be gathered when reviewing these documents to help the investigator with their investigations.

The third and fourth steps are to search a company’s criminal and civil history. Most county and state criminal and civil history can be searched for free online. If the investigator finds a county that does not charge to run a search, remember to test the site to make sure it is providing all of the required information the investigator needs to search (misdemeanors, felonies, upper and lower civil). Remember this is just a cursory search, it behooves the investigator to make sure all information is typed in correctly and that all the “tickers” match what the investigator has searched. Another website the investigator can use is Pacer to search bankruptcies, federal criminal and federal civil cases. Pacer only provides results on the federal level; the investigator will still have to search the county level. If the investigator’s search returns results on the company under review but the investigator is unsure of the accuracy of the information provided, other resources should be accessed to corroborate the information. This point cannot be stressed enough, corroborative information resources are invaluable. Another tip is that if the investigator cannot verify criminal or civil case results obtained online related to the company under review, the investigator should contact the court clerk’s office at the courthouse in the district where the case was tried. The investigator can verify the information concerning the company under review with the court clerk. If the court clerk requires a release, the TGRA should have one completed as part of the license application provided by the vendor or supplier. Another helpful strategy that has assisted investigators when conducting criminal history verifications has been filing FOIA (Freedom of Information Act) petitions with the appropriate police department, sheriff’s office, or law enforcement agency.

The fifth and sixth steps are to search for regulatory violations as well as current and/or prior gaming licenses with other gaming commissions or TGRAs. Again, since it is the licensing investigator’s responsibility to protect the assets of the tribe, the investigator should verify any and all documented instances resulting in non-compliance with gaming commission or TGRA regulations. Reviewing noted instances of noncompliance give the investigator a more in-depth insight on the company’s suitability for licensure. License verifications are also an important step when completing licensing background investigation. License verifications are important to conduct near the beginning of the suitability determination process because the TGRA may not want to license a company that has several licenses revoked or denied by gaming commissions or TGRAs. This should be a red flag to the investigator and prompt contact with the involved gaming commission or TGRA to obtain additional insight on why the vendor’s license was revoked or denied.

The final step to a supplier investigation is to conduct an in-depth review of the company’s financial statements. This is an important step that helps determine if the company is in good financial health. When reviewing a company’s financials, it is a good idea to compute financial ratios. The ratios can tell the investigator many things about a business’ financial health, such as how quickly they can pay off their short-term liabilities (current/quick ratio), a company’s profitability (operating profit margin), how much of a company’s revenues are kept as net income (net profit margin), profitability of shareholder investments (return on equity), a company’s financial risk (debt ratio), if the company is using its assets to generate income (return on assets), and how efficient a company is in managing its inventories (inventory turnover ratio). These are just a few areas of analysis employed by the PBGC. If the company has audited financials, the investigator should always review the notes at the back of the financial statements. After reviewing three years of financial statements for the company, the PBGC also reviews three years of federal tax returns. One thing an investigator might consider doing is comparing the balance sheet provided with the tax returns to the balance sheet provided with the company’s financial statements. This will provide the investigator an indication of whether or not data was reported correctly by the company. After completing the supplier background investigation, the PBGC begins the control person background investigations. The PBGC’s gaming regulations define a control person as, “any person who has the power to direct or cause direction of the management and policies of the business operations of a gaming supplier as verified by the gaming supplier’s ownership and organization structure described in the documents establishing the existence of the gaming supplier and the designation of persons authorized to act on behalf of the gaming supplier. A person shall be presumed to have control when such person owns shares of any corporation that is not a publicly traded corporation and such person owns, controls, or holds the power to vote ten percent (10%) or more of the voting securities of the corporation. Control persons include members of the board of directors, chief executive officer, chief operating officer, and any person with the responsibility and authority to manage the contract on behalf of the gaming supplier with respect to the goods or services being provided to a gaming operation.”

When conducting a control person background investigation, the PBGC performs media searches, criminal history searches (arrests, charges, convictions), civil history searches (bankruptcies, litigation, judgments, liens), regulatory violation searches/verifications, current and prior gaming license verifications, reference checks, employment and residential verifications, and an in-depth financial review (three years of federal taxes and net worth statements). What follows is an example of why an investigator should dig deeper and not just skim the surface of a person’s background.

The most important takeaway is the importance of conducting an in-depth background investigation of casino vendors and their control persons instead of a cursory first impression review to merely satisfy a regulatory requirement. Even if the licensing investigator is unable to travel to the company under investigation, there is a great deal of information available at the investigator’s fingertips and so many colleagues in our industry who are willing to lend a helping hand and share their knowledge.

Courtney Osgood is Senior Licensing Investigator for the Pokagon Band Gaming Commission. She can be reached by calling (269) 926-5490 or email [email protected].