How a ‘disgraceful’ casino was rebuilt

Introduction

When a Victoria Royal Commission submitted a report of its investigations into Melbourne’s Crown Casino in 2021, it could easily have justified shutting the organization down. Instead, it recommended Crown be given a period of time to mend its ways. Now, nearly four years later, Crown’s name is still above the door in Melbourne as well as in Sydney and Perth. But beyond that, almost everything else about the business has changed. Our 1-on-1 interviewee this edition was one of the team at the Victorian Gambling and Casino Control Commission (VGCCC) tasked with deciding whether Crown was suitable to continue to hold a casino license in Victoria. Parallel investigations were also held into Crown’s casinos in Sydney and Perth, but it was widely seen that the VGCCC’s decision would be the test case and applied to all the company’s casino operations. Simon Planzer discovers the litany of license condition failures, how Crown was rehabilitated and how a final decision was made to allow the business to continue.

Simon Planzer: By now the story of the Crown scandal is well known, but how, in your view, did we get to this point? How was Crown able to slip so far from the regulatory standard that it was supposed to be working to?

Andrew Scott: That’s what everybody wanted to know, and the reality is that the Victorian Commission for Gambling and Liquor Regulation, which was the predecessor commission to the Gaming and Casino Control Commission, the VGCCC, had been continually thwarted in its job of regulating Crown. It had the task every five years of reviewing Crown’s suitability and whether it was in the public interest. The most recent review was back in 2018: there has still not been a 5-yearly review since then even though it’s over six years later, because of everything that’s happened. Back in 2016 there was one glaring shortcoming at Crown, which was that it mismanaged its risk assessment so badly that it allowed some of its employees in China to be arrested and imprisoned for trying to promote Crown to Chinese nationals. This was against Chinese law and Crown had been alerted to that as a risk, so it really represented an egregious error of risk management. The VCGLR commenced an investigation into the situation, but Crown claimed legal professional privilege meaning reams of vital material was withheld. This frustrated the regulator who wasn’t able to look properly into the situation when it conducted its 2018 5-yearly review, stating therein that it could not take the “China Arrests” conduct into account. It also delayed things so that its separate disciplinary action into these arrests, which turned out to be one of the worst aspects of the casino’s behavior, was not able to be fully finalized until 2021, when a fine of AU$1 million was imposed.

That figure, which was the maximum available to the VCGLR at the time, was indicative of the other key factor behind your “how did we get there” question: Our penalties were inadequate and amounted to little more than Crown’s cost of doing business.

SP: From what I know from my jurisdiction, legal privilege only applies to communication between the client and their external council. Is that the same in Australia?

AS: Pretty much. As the VCGLR found in its “China Arrests” investigation Crown had advice from their external lawyers, and the advice was to the effect: “If you get your China-based promoters to say A rather than B, they should be able to argue that they are not committing a breach of the law”. Now apart from the advice itself, it’s the way the advice is sought and what the brief is to the external lawyers. If, for example, they had asked: “How we can avoid our staff getting arrested in the first place”, one answer could have been to stop doing any marketing at all. And what the Royal Commission concluded – whether the advice was right or wrong – was that Crown relied on a particular legal interpretation of the law which would enable the employees to argue the toss if arrested. And, when it came to applying that advice, Crown decided to permit them to continue operating. The Royal Commission found that it did so notwithstanding that the Chinese government had, at that time, announced a crackdown on foreign casinos soliciting Chinese citizens to gamble abroad and notwithstanding that Crown’s relevant executives decided to defer their own personal travel to China for a period.

SP: What else did the Royal Commission bring to light?

AS: I think probably the most flagrant behavior of Crown was to enable continuous play on EGMs by letting patrons put plastic picks into the sides of the machines. As you know, continuous play is a very harmful way of playing for certain people, but when we formally directed them to stop the behavior, their response was baffling. Having given the direction to them, they came back and effectively said, “Ah, okay, we will interpret that as applying only to some picks, not to others. The Crown picks that we give to EGM players, with the company logo on, we’ll stop doing that. If they want to put another device which serves the same purpose in a machine, we’re not going to see that as something we’ve been directed to stop.” That example goes to the heart of what they considered compliance to be, yet even post the Royal Commission findings, they were still making that argument for a time.

Another very egregious example was the fabrication of invoices to increase the amount of cash that a Chinese player could use to gamble with. This got around the fact that Chinese nationals weren’t allowed to bring as much cash as they wanted from mainland China. The Royal Commission found that:

Crown Melbourne “happily assisted its wealthy Chinese patrons to breach the currency laws of their country….[who] transferred up to $160 million from accounts in China to the Crown Towers Hotel. Purportedly this was to pay for hotel services but in reality it was to spend at the gambling tables…what occurred also contravened local laws and likely allowed money laundering to take place.” The other issue that we discovered was that junket operators had connections with organized crime which was obviously very concerning.

SP: What do you see as the main reasons behind these failures? Different factors may have contributed, but what were the main ones.

AS: In my personal opinion, there was one thing above all else and the Bergin inquiry’s own recommendations go some way to supporting this; the presence of James Packer as the largest shareholder of Crown. He had started selling down his stake, but I think he still had about 35 percent when the Royal Commission was called. He was a very powerful personality, he had an influence over the management team, he was able to get private shareholder briefings on financial performance that was not available to the market and he was certainly prioritizing profit over compliance and everything else. What came out very clearly in the Bergin inquiry1 was that senior people, including board members, were looking to do what Packer wanted done, rather than what was necessary for normal business compliance. Bergin actually put it quite colorfully: “…the real power was exercised by Mr Packer both by reason of his personality and also the somewhat supine attitude adopted by Crown’s operatives.”

There was a very telling email produced in the Bergin inquiry from Andrew Demetriou, the former chief executive of the Australian Football League who was chair of Crown Melbourne at the time and a significant director of Crown Resorts. In his email to Packer, he said: “I remain committed to serving the best interests of Crown and, most importantly, you.” That’s not the kind of behavior any director would ever learn in governance 101.

SP: So actually, we could call this a toxic demand from Packer. “I’m not interested how you do it, but you have to increase profits no matter what.”

AS: I think it did come to the point where I imagine there were Crown executives who were afraid to come up with bad financial news for fear of Packer’s response. It’s very important to realize just how much direct input the Bergin inquiry found Packer had.

SP: Thinking about the culture that pervaded Crown, the company culture had reached such a questionable level do you think it would ever have been possible to continue without replacing various individuals?

AS: I think initially Patricia Bergin thought some key individuals might be able to remain. But subsequent events proved otherwise, so I think the observation you make is probably correct. It’s incredibly hard to change the tone at the top with the people who set that tone still in place.

SP: What did the Royal Commission conclude?

AS: The Royal Commission was led by an eminent retired Federal Court judge, the Honorable Ray Finkelstein. He described Crown’s conduct as a disgrace, elaborating that this was shorthand for illegal, dishonest, unethical and exploitative. Based on that description, it was no surprise that the Royal Commission found Crown Melbourne unfit to hold a casino license. But instead of recommending that the license be canceled, the Commission recommended that Crown be given an opportunity to reform itself. Part of the consideration was no doubt the substantial harm that canceling the license would have caused to the Victorian economy and to innocent third parties. It also took into account that Crown had already begun a significant reform program.

In late 2021, the government accepted the recommendation and, under the supervision of a special manager, gave Crown two years to undertake a program of reform and remediation to overhaul its operations and demonstrate a genuine commitment to and progress towards becoming a casino that would meet the highest standards of integrity. At the end of the following two years the newly established VGCCC would be responsible for deciding Crown’s fate.

SP: You mentioned the impact that canceling the Crown license would have on the local economy. As I understand it, Crown was Victoria’s largest local employer and contributed hundreds of millions of dollars a year to the state in taxes. Did the sense that Crown was too big to fail put pressure on you as regulator?

AS: No. In fact, the opposite was true. We set up a decision- making process which enabled us to completely turn our attention away from the possible consequences. Our decision would be based purely on the evidence. Possible consequences could have absolutely zero impact on whether they were suitable or not. It’s not as if this was a decision that would say there’s not going to be a casino in Melbourne. There would be someone else, just not that operator.

Having said that, I don’t want to give the impression that we ignored the possibility that Crown would fail. In fact, there was an implicit assumption within the new legislation that it would. The 2021 legislation set out that Crown’s casino license would be automatically canceled after the two-year reprieve, unless the VGCCC was clearly satisfied they were suitable to continue operating. So, we effectively had three strands of work: first we had to hold Crown accountable for its past misdemeanors, those classified by the Royal Commission as serious or criminal misconduct. The VGCCC determined that these disciplinary actions should be kept separate from the suitability decision itself. It was important to complete the disciplinary actions well ahead of the April 2024 suitability decision to avoid any confusion that one had any bearing on the other. After all, the disciplinary actions were as a result of Crown’s actions up to 2021; the suitability decision was based on whether the 2024 version of Crown was sufficiently better.

Second was establishing the necessary foundations to enable us to make the decision as to Crown’s suitability and here the legislation gave the VGCCC a binary decision-making power. We could either say ‘yes’, Crown is suitable, or ‘no’, Crown is not suitable. As you have mentioned, the possibility that Crown would receive a ‘no’ decision had huge ramifications for the State of Victoria and this led to what became known as the Plan B project. We collaborated closely with the state’s Department of Justice to amend the Casino Control Act to give the VGCCC the power to appoint an independent manager to step in and take over the running of the casino at the end of the two years, if required. We then negotiated contractually binding agreements to enable the government and Crown to work together to achieve an orderly transition should Crown lose its casino license. The Melbourne casino forms part of a large entertainment complex that includes dozens of high-end retail shops, restaurants, bars, cinemas and conference facilities. These are not run or controlled by the casino itself, but by its parent company, Crown Resorts, as well as numerous independent business owners. The legally enforceable transition agreements were a critical component in preparing for the suitability decision, protecting Victoria’s economy and community from potentially dire consequences, primarily the loss of 1000s of jobs in the event that Crown had to shut down in a hurry.

Lastly there was working out just what the suitability decision itself would be, and here we relied on the update reports of the Special Manager, Stephen O’Bryan, a very senior lawyer installed by the government and backed by a sizable support team.

SP: So of those three strands, the penalties, the suitability decision and the Plan B, which was the most challenging?

AS: I think they all had their challenges, and obviously they were not entirely independent of each other. Among the many things that arose during the two years, one had the potential to be a showstopper for Crown: it was at risk of running out of money. In his 2021 report, Commissioner Finkelstein commented that of all the suitability criteria for a casino license holder, financial stability was perhaps the most important. 18 months later, and less than a year before our suitability decision was due, Crown gave evidence to the Federal Court of Australia during anti-money laundering proceedings brought by AUSTRAC our national money laundering enforcement agency. It claimed that a looming AUS$450 million fine could affect its solvency if immediate payment was required. Because this matter so obviously affected Crown’s suitability, we undertook an investigation so that we could then take that report into account in the evidence that we were looking at to make our suitability decision. Our investigation itself found Crown’s financial situation was stable in the context of the wider corporate group. But without the investigations, highly relevant questions about Crown’s suitability would not have been answered or been part of our suitability considerations.

The Royal Commission’s findings signposted which matters would underpin our disciplinary actions. Our remit was to hold Crown accountable for its failures which, let’s not forget, were either serious misconduct or criminal conduct. They had made AUS$ tens of millions in profits from these activities, so any fine could not just neutralize the profit made. It had to be more than that, because it was serving both as a deterrent for Crown as the gambling leader in the state, and a general deterrent for all other gambling licensees. We also had to take into account as one of the considerations in fixing the size of the penalties that they should not be something that would financially cripple Crown. In the end, by mid 2023, we issued fines totaling AUS$250 million and ensured that there was clear air between imposing the fines and our assessment of the operator’s suitability.

Perhaps the most difficult part of preparing for the suitability decision was determining the criteria by which we would assess whether Crown had reformed its operations and culture. Two years is a short time in which to achieve such major change in a large organization, so our expectations needed to be realistic. However, it was long enough for Crown to demonstrate sufficient progress towards what became known as the Melbourne Transformation Plan. The Casino Control Act required us to consider the Royal Commission reports into Crown’s casinos in Victoria and Western Australia, and the Bergin inquiry in New South Wales. We had to consider the special manager’s progress reports, but in the end, the VGCCC alone was required to determine Crown’s suitability to keep its license.

Fortunately, we were also able to consider reports or inquiries into Crown by any relevant regulator including our own reports about disciplinary actions, which provided insights into their culture and attitude to regulation. Crown’s responses to these actions raised concerns early on that it was not genuinely committed to improving how it operated. I’ve already mentioned Crown’s response to our action against the use of picks to in effect lock gaming machines into continuous play mode. Another example was their confrontational and argumentative response to our action against their failure to follow their own Responsible Gambling code. That response was withdrawn when Crown installed a new chair, and we received a fresh and far more contrite response, which Crown then consistently displayed in the later disciplinary action processes.

Once the special manager’s final report was delivered to us in early 2024, our job became clearer. The report confirmed that across a range of work streams, including culture, governance, risk management, mitigation of criminal influence and gambling harm, Crown had built up a significant momentum for change. Nonetheless, the five commissioners, of which I was one, still had two concerns: were we not just satisfied but clearly satisfied that crown was suitable to hold the casino license? And how could we as an agency ensure that Crown’s continuing efforts were sustained in the years to come?

SP: What threshold did you as a commission rely upon to meet the requirement that you were clearly satisfied that Crown was suitable? How did you define clearly satisfied?

AS: That wasn’t easy. Clearly satisfied was a phrase that Justice Finkelstein used in his report: his recommendation was that Crown ought to lose its license in two years, unless we were clearly satisfied it was suitable. That phrase then found its way into the legislation that was passed at the end of 2021 and so we had to ask ourselves, what do we think it means? We could find no legal precedent for that particular phrase. It obviously needed to be something higher than just scraping over the line, but it didn’t need to meet the criminal threshold of beyond reasonable doubt either. The position that we adopted, and we were helped with legal advice here, was what’s called in Australia the Briginshaw standard of being comfortably satisfied. And then the question becomes, how do you become comfortably satisfied? Do you need to be satisfied just over the line of 50 percent but with a lot of different factors that all are at that level or does the most important element need to be a long way beyond the 50 percent line. And if other less important elements are still hovering around that 50.1 percent then, does the biggest, most influential criterion being well satisfied carry everything to the point of comfort?

SP: Your answer seems to refer to priorities. What were these priorities? What were the areas where you clearly needed to see more than the minimum?

AS: Well, there were four areas where we needed to see a culture change and they were all spelled out by the special manager right from his first progress report. We were looking for improved governance and compliance, improved risk management, improvements to the responsible service of gambling and that financial crime had been properly addressed. So those were the four work streams that he and his team followed through. And that’s the best way of saying what we thought were the priorities.

From a legal perspective, being clearly satisfied is a standard that has never been specifically defined in Australia. We wanted to find a method that would give us comfort that, based on the evidence, Crown had become suitable. In other words, not a borderline call but one that we could justify with evidence. This prompted the five of us to engage in robust discussions, challenge each other’s thought processes and push points beyond polite conversation. Underpinning this testing of ourselves was a vital element: mutual trust. Over the two years we went out of our way to connect as a group outside the work environment. As a result, we were able to work through situations where we disagreed in a way that allowed us to see where the other was coming from. Eventually we reached a point where we had no level of comfort that the evidence pointed to Crown still being unsuitable. That might sound like a lot of negatives, but it added up to a decision. As our choice was between yes or no, that left us with a yes decision. More than that, it was the only decision that felt comfortable. All five of us recognized what the legislative phrase clearly satisfied felt like.

SP: You said your second concern was to ensure that Crown’s commitment to change was sustained after the special manager left. How did you satisfy yourselves that this would be the case?

AS: Yes, and this was really about how would we ensure that Crown continued to lock in the gains it had made by completing its transformation plan once the Special Manager’s role concluded and he no longer had daily oversight of its reform program. We decided we would have to replace the outgoing special manager with something less intensive that would nevertheless ensure Crown did not slip back into its old ways. Consequently, we exercised our statutory powers to issue a direction to compel Crown to implement the transformation plan over the next three years and to periodically review it via our transformation plan audit team to ensure the reforms remain relevant and fit for purpose in the context of changing circumstances.

SP: That’s a fascinating insight into a really thorny decision. A lot of our readers are private practice lawyers. How much did you rely on external counsel on your side?

AS: Significantly. We have our own seven- or eight-strong internal legal team, but we engaged DLA Piper who in turn engaged a very experienced barrister and even a retired Federal Court judge. We were very much in the trenches, but they were right there with us. I had been 40 years in private practice before this role and it was very helpful from my perspective as an experienced lawyer to be able to do what I think Crown ought to have been doing and challenging the external legal advice. Unless you test that advice, you don’t know how well it will stand up to scrutiny.

SP: As we end, I wonder if we could zoom out and ask what, from this incredibly large and high-profile case, have you learned that could be applicable elsewhere? What are the key takeaways that you would like to share with other regulators?

AS: I wouldn’t presume for a second to say that ours was the only process that could be done to arrive at such an important decision, but the critical things for us were the need to start preparing for the decision early. Two years might seem a relatively long time, but in reality, it’s a very short time. An early start to planning is vital, and getting the help you will need to make the decision is vital. In our case, that included getting external receivers and managers retained in advance, even if we might not have ended up needing them. So that if in April 2024 we say Crown is not suitable, we don’t just then have to start hunting around for the right sort of external manager. So we did go out into the market very confidentially and retained a potential manager, gave them some early briefings about what the scope of their role would be and what the timelines would be. As it ended up, it wasn’t needed but we had to be able to avoid the unplanned-for consequences of saying the license should be cancelled. If we had said that and the government accepted that and did it, then without some contingency all the jobs would be lost because there wouldn’t be an operating casino until a new operator was eventually installed. That’s going to hurt the economy. It’s going to hurt a lot of innocent people and hit the surrounding businesses that are all dependent on the casino being a hub. So the other part was making sure we had that transition process contractually locked in with Crown and the government so that the casino would continue to operate while Crown was leaving the building.

SP: Having gone through that lengthy process, are there powers that you would have wished for or things you couldn’t do that you would have wanted to do?

AS: Yes, I think it would have been helpful if we had been able to take into account all the business as usual issues that our team encountered with Crown during the two years we were developing our decision. Instead, what we had to do was identify important issues and construct them as investigations, then use reports of a relevant regulator namely, ourselves arising out of those investigations. If we had been able to consider everything that happened with Crown vis-à-vis the regulator from the end of the Royal Commission to the time of the suitability decision, it would have been a bit easier. But really, it’s unreasonable for any regulator to expect a licensee to be perfect: that’s too high a standard. We’re not perfect, so we can hardly expect them to be. What we do expect is for them to be as good as they can reasonably be after having tried as hard as they can possibly try. As commissioners we had to get to the point where we understood that the casino operator could be suitable, even if it was not perfect.