Macau Gaming Law series part 12: Too broad suitability checks will dilute their effectiveness

Welcome to the twelfth in a series of articles on the Macau gaming law IAG is publishing throughout the month of March and early April:

Suitability requirements are a long-established element of casino gaming industry regulation all over the world. Having an unsuitable operator or unsuitable person wielding executive power within an operator potentially creates a broad range of undesirable outcomes ranging from negative social consequences such as a high prevalence of problem gambling through to toleration of outright criminal behavior, such as loan sharking, money laundering and even violence.

The “right” type of people should be calling the managerial shots in casinos. Those people – sometimes referred to as “fit for task” – should possess a relatively clean background and the requisite skills and reputation to conduct the business in a fair and healthy manner acceptable to the regulator and the government. In other world they should be “suitable”.

We’ve recently seen Crown Resorts held unsuitable to hold a casino license in Sydney, Melbourne and Perth – albeit with two-year grace periods in Melbourne and Perth given for the company to sort itself out and return to suitability, and an indeterminant period of time for the same curing process to occur in Sydney. In the past certain individuals with criminal histories or of unsavory character have been rejected from holding key roles with a casino operator.

No-one disputes that suitability requirements are appropriate measures. The only question that arises from time to time is one of, “how far should this go?” While clearly any casino license or concession holder should be subject to a suitability requirement, which of that company’s employees, associates and connected entities should also be subject to such a requirement, and which should not?

This question has generally been at least partially answered by defining certain “key employees” who are subject to suitability requirements. Article 14.5 of the Macau gaming law establishes the entities subject to suitability reviews during the term of the concessions:

• Concessionaires;
• Shareholders who hold 5% or more of the concessionaire’s capital stock, their directors, and their key employees;
• Management companies and their shareholders who hold 5% or more of their capital stock, their directors, and their key employees;
• Any employee of the concessionaire, shareholders that indirectly and solely or jointly hold 5% or more of the concessionaire’s capital stock, persons and companies that cooperate with the concessionaire or are involved directly or indirectly in the operation of gaming activities in any manner.

Of these, by far the most onerous is the requirement under article 14.5.2 that “key employees” of shareholders who hold 5% or more of the concessionaire’s capital stock be subject to an ongoing suitability requirement. Article 2.7 of the law defines “key employees” as “members of the companies’ administration organs, holders of positions in the companies’ organs, secretaries of the companies, employees authorized to perform legal acts on behalf of the company pursuant to power of attorney, and other employees with the authority to perform acts in relation to personnel, financial or business management.”

I would read this definition as the Board of Directors, the Executive Committee (headed by the CEO), the Company Secretary, General Counsel, any power of attorney holders and the heads of the HR, Finance and Operations departments (who would be part of the Executive Committee anyway). It does not seem unreasonable that members of this group of senior executives working for the concessionaire itself be subject to suitability, but does this make sense for 5% shareholders? Such shareholders would likely include passive investors whose employees have very little, if nothing, to do with the day-to-day operations of the concessionaire. Does it make sense that, say for example the head of HR of such a company, which may be headquartered on the other side of the planet, is subject to an ongoing suitability requirement?

Instead of subjecting such far-removed people to a suitability requirement, I would suggest Macau’s interests would be better served by focussing the resources available for suitability reviews on the key employees of the concessionaires themselves.

The next article in this series will be published in the next few days.

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