State of flux: changing regulation of the Australian casino sector

Background

Over the last two years, the regulation, and operation, of the Australian casino sector has been in a state of flux – various Australian casino operators have been (and continue to be) the subject of extensive regulatory scrutiny (by way of investigations and enforcement actions), and the regulatory framework within which those operators conduct business has been reformed in a manner that has resulted in the imposition of much stricter and more prescriptive regulatory requirements.

Interestingly, the scope of regulatory scrutiny placed on the Australian casino sector began within the remit of casino regulation but has now extended into other areas relevant to the conduct of a casino business, including corporate governance and financial crimes (anti-money laundering).

Indeed, the Australian casino sector has been subject to an increasing level of regulatory oversight (and activity) by various Australian regulators, including State gambling regulators, the Australian financial crimes regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC) and the Australian corporate regulator, the Australian Securities and Investment Commission (ASIC).

More generally, the Australian legal landscape for the wider gambling industry has resulted in much closer regulatory scrutiny, the implications of which are continuing to unfold. Certainly, the impact of these changes has had an effect, and will continue to have a long-standing effect, not just on Australian casino (and other gambling) operators, but also other Australian gambling stakeholders, including international investors, financiers and customers.

The Australian casino sector

The Australian casino sector is regulated largely under Australian State and Territory legislation. Currently, there is an array of casino operators in Australia, with each operator holding a licence on a state-by-state basis; generally, the right to operate a casino in each Australian States and Territories remains subject to an exclusive licence, save for Queensland, New South Wales and the Northern Territory where two or more casino licences have been granted.

A general overview of the casinos in Australia is as follows:

Crown Resorts

• Crown Resorts Limited (Crown Resorts) owns and operates casinos in each of New South Wales, Victoria and Western Australia, more specifically:
• Crown Sydney Gaming Pty Ltd (Crown Sydney) holds a restricted casino licence in New South Wales to operate the Crown Sydney casino;
• Crown Melbourne Limited (Crown Melbourne) holds an exclusive casino licence in Victoria to operate the Crown Melbourne casino; and
• Burswood Limited (Crown Perth) holds an exclusive casino licence in Western Australia to operate the Crown Perth casino, (together, the Crown Group).

The Star

• The Star Entertainment Group Limited (The Star) owns and operates casinos in each of New South Wales and Queensland, more specifically:
• The Star Pty Limited (Star Sydney) holds a casino licence in New South Wales to operate The Star Sydney casino; and
• The Star Entertainment QLD Limited (Star Queensland) holds a casino licence in Queensland to operate The Star Gold Coast casino and the Treasury Brisbane casino.

Other Australian casino operators

There are various other entities that own and operate casinos in each of Queensland, South Australia, the Northern Territory, the Australian Capital Territory and Tasmania, more specifically:

• Casinos Austria International (Cairns) Pty Ltd (Casinos Austria) holds a casino licence in Queensland to operate the Reef Casino in Cairns, Queensland;
• Breakwater Island Limited (Breakwater) holds a casino licence in Queensland to operate the Ville Resort Casino in Townsville, Queensland;
• SkyCity Adelaide Pty Limited (SkyCity Adelaide) holds a casino licence in South Australia to operate the SkyCity Adelaide casino;
• Delaware North Darwin Casino Pty Ltd holds a casino licence in the Northern Territory to operate Mindil Beach Casino Resort in Darwin, Northern Territory;
• The Iris Group holds a casino licence in each of:the Northern Territory to operate Lasseters Hotel Casino in Alice Springs, Northern Territory;
• the Australian Capital Territory to operate Casino Canberra; and
• Acquis Canberra Pty Ltd holds a casino licence in the Australian Capital Territory to operate the Casino Canberra; and
• Mulawa Holdings Pty Ltd holds a casino licence in Tasmania to operate each of the Wrest Point Hotel and Casino in Hobart, Tasmania and the Country Club Casino in Prospect Vale, Tasmania.

The closer regulatory scrutiny to which the Australian casino sector is now subject can only be described as a domino effect, with origins in the wrongdoings uncovered through various inquiries into the conduct of the Crown Group.

Crown Resorts

Following allegations in Australian media regarding unlawful and/or improper conduct by Crown Resorts and its subsidiaries (being its casino licensees), which included allegations of money laundering, links to organised crime and that Crown Resorts had knowledge that its personnel were acting in contravention of Chinese law, various inquiries were convened, namely:

New South Wales:

The New South Wales Casino Inquiry (the Bergin Inquiry), which inquired into (among other matters) the suitability of Crown Sydney to give effect to a restricted casino licence and the suitability of Crown Resorts to be associated with Crown Sydney (noting that Crown Sydney had not yet commenced its casino business at the time of the Bergin Inquiry);

Victoria:

The Royal Commission into the Casino Operator and Licence (Victorian Royal Commission), which inquired into (among other matters) the suitability of Crown Melbourne to continue to hold a casino licence and the suitability of Crown Resorts (and other associated entities) to be associated with Crown Melbourne; and

Western Australia:

The Perth Casino Royal Commission (Western Australian Royal Commission), which inquired into the suitability of Crown Perth to continue to hold a casino licence, or to be concerned in or associated with the organisation and conduct of the gaming operations of a licensed casino and the suitability of Crown Resorts (and other associated entities) to be concerned in or associated with the organisation and conduct of the gaming operations of a licensed casino.

In general terms, each of the Bergin Inquiry, the Victorian Royal Commission and the Western Australian Royal Commission (together, the Crown Inquiries) found that:

• the relevant casino licensee had engaged in conduct that was in breach of the relevant licence conditions and/or State legislation;
• the relevant casino licensee was unsuitable to hold a casino licence; and
• Crown Resorts (and its associated entities) was not a suitable associate.

Importantly, none of the Crown Inquiries made a recommendation that the relevant casino licence be cancelled or suspended. Rather, each made several recommendations for the Crown Group to achieve suitability, particularly in connection with the following matters:

• corporate structure, conduct of operations, corporate governance processes and responsibilities, including:ethical conduct;
• risk management and oversight;
• ownership structure;
• board composition (specifically board independence and board tenure);
• remuneration and incentivisation of directors and senior executives; and
• consumer protection and responsible gambling.

Additionally, various recommendations were made for:

• an increase in the regulatory oversight of the Crown Group, including the appointment of an Independent Monitor (in New South Wales) and a Special Manager (in each of Victoria and Western Australia) to oversee the remediation to be undertaken by the Crown Group and provide progress reports to the relevant gambling regulator (but, importantly, not to have the responsibility to be involved actively in the management and operation of the relevant Crown casinos); and
• changes to be made more generally to the casino regulatory framework in each of New South Wales, Victoria and Western Australia.

Importantly, all of the recommendations made by the Crown Inquires have been accepted by the relevant gambling regulator (and State Government) in each of the relevant States and have either been implemented or are in the process of being implemented.

As mentioned above, the most far-reaching outcome of the Crown Inquiries has been the consequential effect on the regulation of the entire Australian casino (and gambling) sector, with increased regulatory oversight and enforcement action and an overhaul of the existing regulatory framework.

However, as expected, the Crown Inquiries had an immediate effect on the Crown Group: while internal changes have been made by the Crown Group to address the issues raised in the Crown Inquiries relating to corporate governance and the general conduct of its casino business, various Australian regulators have also begun conducting investigations into the findings of the Crown Inquiries with a view to taking independent enforcement action against the Crown Group for breaches of casino licence conditions and State legislation. These investigations are ongoing and have, to date, led to the imposition of significant monetary penalties.

Currently, the Crown Group is subject to the following additional enforcement action:

Victorian Gambling and Casino Control Commission (VGCCC):

Since April 2022, the VGCCC has commenced various disciplinary proceedings against Crown Melbourne in relation to the findings of the Victorian Royal Commission.

In summary, the Victorian Royal Commission found that Crown Melbourne:

• had devised the “China Union Pay process”, a process that allowed patrons to use credit or debit cards to access funds to gamble at the Crown Melbourne casino, to evade Chinese currency restrictions (and to enable the illegal transfer of funds from China), and that the China Union Pay process was illegal and constituted serious misconduct;
• failed its responsible services of gambling obligation through having:
• breached its code of conduct for the Responsible Service of Gambling by consistently failing to intervene to prevent gambling harm,
• frequently allowing customers to gamble for long periods without a break,
• at times for more than 24 hours; and
• failed to comply with a statutory direction by the regulator to take all reasonable steps to prevent players from using devices to simulate ‘automatic play’ when gambling on electronic gaming machines; and had utilised an illegal “bank and blank cheques practices” which involved:the exchange of a bank cheque (payable to a customer) for gambling chips valued at the face value of the cheque; and the exchange of a blank cheque (payable to Crown Melbourne) for chips used to gamble at Crown Melbourne.

The VGCCC initiated disciplinary proceedings against Crown Melbourne in connection with each of the above findings of the Victorian Royal Commission on the basis that:

• the “China Union Pay process” breached Sections 68(2)(c) and 124(1) of the Casino Control Act 1991 (Vic) (the CCA);
• the responsible services of gambling obligation failure breached Section 20(1)(dc) of the CCA; and
• the “bank and blank cheques practices” breached Section 68 of the CCA.

Under the CCA (which was amended following the Victorian Royal Commission), the VGCCC has the power to take the following disciplinary action against Crown Melbourne (including on a retrospective basis):

• imposition of a fine (up to a maximum of AU$100 million);
• cancel, suspend or vary the terms of Crown Melbourne’s casino licence; and/or
• issue a letter of censure drawing attention to any contraventions, which may include a direction for Crown Melbourne to take steps to rectify those contraventions.

To date, the VGCCC has imposed the following fines on Crown Melbourne:

• one fine of AU$80 million for the China Union Pay process; and
• two fines totalling AU$120 million for failing its Responsible Services of Gambling Obligation.

There has not yet been any outcome in respect of the disciplinary action relating to Crown Melbourne’s “bank and blank cheques practices”.

The VGCCC has indicated that it is considering further the findings of the Victorian Royal Commission. There is a risk that further disciplinary action could be taken by the VGCCC against Crown Melbourne in connection with the findings of the Victorian Royal Commission, leading to the possibility that further penalties (including fines) will be imposed.

AUSTRAC:

On 1 March 2022, AUSTRAC commenced proceedings against Crown Melbourne and Crown Perth for breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act).

These proceedings are current; a first case management hearing is scheduled for 13 February 2023.

In these proceedings, AUSTRAC claims that there have been 547 contraventions of the AML/CTF Act by Crown Melbourne and Crown Perth (together), namely:

• Breaches of Section 36(1) of the AML/CTF Act (which relate to ongoing customer due diligence):382 contraventions by Crown Melbourne; and
• 165 contraventions by Crown Perth; and
• Breaches of Section 81 of the AML/CTF Act (which relate to the adoption and maintenance of an AML/CTF program) – the number of contraventions is too numerous to be quantified.

Each contravention of the AML/CTF Act attracts a maximum civil penalty of between AU$18 million and AU$22.2 million, meaning that there is a theoretical possibility of a penalty being imposed against the Crown Group of an amount in excess of AU$12 billion. However, it is unlikely that the maximum penalty will be imposed.

Indeed, it has been reported that Crown Resorts and AUSTRAC are in discussions to reach agreement on a Statement of Facts (which would include, among other matters, the number of contraventions of the AML/CTF Act as well as the amount of the penalty). Further, in the absence of agreement being reached between AUSTRAC and Crown Resorts, numerous defences are likely to be raised by the Crown Group.

These recent regulatory investigations into, and disciplinary action taken against, the Crown Group has ultimately led to a broader review of the entire Australian casino sector. Indeed, Australian regulators have begun reviewing in closer detail the manner in which business has been conducted by other Australian casino operators, in particular:

• The Star;
• Reef Casino;
• Ville Resort Casino; and
• SkyCity Adelaide.

The Star

In a manner similar to the Crown Inquiries, and following the findings of the Crown Inquiries, various inquiries into The Star were convened during 2021, namely:

New South Wales:

An independent review (the Bell Review) into the suitability of The Star and its associates as being concerned in or associated with the management and operation of The Star casino in Sydney; and

Queensland:

The External Review of the Queensland casinos of The Star (External Review), which inquired into:

the casino operations of The Star Gold Coast and Treasury Brisbane to examine whether those operations are consistent with the objectives of the Queensland casino legislation;

the suitability of each of the Star Group licensees to hold a casino licence and the Star Group to be associated with the operation of a casino in Queensland; and

whether enhanced regulatory measures relating to casinos are required in Queensland.

In general terms, each of the Bell Review and the External Review found that The Star (and its subsidiaries) had engaged in conduct in breach of the relevant licence conditions and/or State legislation. Interestingly, neither the Bell Review nor the External Review came to a view as to whether The Star (and its casino licensee subsidiaries) was unsuitable to hold a casino licence and/or was not a suitable associate (as relevant). Rather, this determination was left to the relevant State Governments.

In a manner similar to the Crown Inquiries, each of the Bell Review and the External Review made recommendations for The Star to remediate any breaches, and those recommendations have been accepted by the relevant gambling regulators (and State Governments).

Ultimately, in response to the findings in each of the Bell Review and the External Review, each of the New South Wales regulator and the Queensland Government formed the view that The Star (and its casino licensee subsidiaries) was unsuitable to hold a casino licence and/or was not a suitable associate (as relevant) and took the following disciplinary action:

New South Wales:

The NSW Independent Casino Commission (NICC) suspended the casino licence of The Star Sydney for an indefinite period.

In summary, the NICC concluded that The Star Sydney is not currently suitable to hold its Sydney licence and that it is no longer in the public interest that The Star Sydney remain in control of its Sydney casino. The licence suspension came into effect at 9:00am (AEST) on 21 October 2022.

The Star Sydney casino will remain open during the period of the licence suspension; however, the NICC has appointed Mr Nicholas Weeks as the Manager to oversee the operation of the casino (including making any decisions relevant to the management and operation of the casino) until 19 January 2024 (however, the NICC has the power to re-appoint the Manager on an ongoing basis, until it has determined that The Star Sydney is able to demonstrate suitability).

The NICC has also imposed a fine of AU$100 million on The Star Sydney for failing to stem criminal activity and money laundering (which is the maximum penalty that may be imposed under New South Wales casino legislation).

Queensland:

The Queensland Attorney-General determined that various entities in The Star corporate group are not suitable to be associated or connected with the management and operation of a hotel-casino complex or hotel, by reason of it not being a person of good repute.

Accordingly, the Attorney-General:

• appointed Mr Nicholas Weeks (the Manager of The Star Sydney) as the Special Manager for both The Star Gold Coast and the Treasury Brisbane; and
• directed that the casino licences of each of The Star Gold Coast casino and Treasury Brisbane casino are to be suspended for a period of 90 days on a deferred basis with effect from 1 December 2023.

It has been announced that a deferred commencement date for the licence suspension was provided to allow The Star corporate group entities an opportunity to remediate its management and operations and return to a position of suitability. In other words, if The Star (and the relevant The Star group entities that hold Queensland casino licences) makes suitable progress, the Queensland Attorney-General may determine to postpone or rescind the suspension of the casino licences.

Additionally, the Queensland gambling regulator, the Queensland Office of Liquor and Gambling Regulation (QOLGR), imposed various fines totalling AU$100 million on the following entities of The Star corporate group:

• The Star Entertainment Qld Custodian Pty Ltd – AU$30 million (payable by 31 March 2023); and
• The Star Entertainment Qld Limited – $30 million (payable by 30 June 2023) and AU$40 million (payable by 31 December 2023).

The action of the New South Wales regulator in suspending the casino licence held by The Star Sydney is unprecedented. To date, there has not been any instance in Australia of regulatory intervention in a manner where a gambling operator has been subject to external independent control. Indeed, the determinations by each of the New South Wales regulator and the Queensland Government that The Star’s casino licences should be suspended indicates that Australian gambling regulators are prepared to impose stricter disciplinary action in circumstances where a gambling business has not been conducted in compliance with the overall regulatory framework or where there have been material regulatory breaches.

Further, The Star is subject to the following additional enforcement action:

AUSTRAC:

On 30 November 2022, AUSTRAC commenced civil penalty proceedings in the Federal Court of Australia against The Star Pty Limited and The Star Entertainment QLD Limited (the Star Entities) for breaches of the AML/CTF Act.

These proceedings are current; a first case management hearing is scheduled for 13 February 2023.

In these proceedings, AUSTRAC claims that there have been various contraventions of the AML/CTF Act by the Star Entities, namely:

• Breaches of Section 36(1) of the AML/CTF Act (which relate to ongoing customer due diligence); and
• Breaches of Section 81 of the AML/CTF Act (which relate to the adoption and maintenance of an AML/CTF program).

As mentioned above, each contravention of the AML/CTF Act attracts a maximum civil penalty of between AU$18 million and AU$22.2 million. However, the Statement of Claim does not detail the quantum of the penalty being sought by AUSTRAC against the Star Entities.

In a manner similar to the AUSTRAC proceedings against Crown Resorts, The Star and AUSTRAC are likely to enter into discussions to reach agreement on a Statement of Facts (which would include, among other matters, the number of contraventions of the AML/CTF Act as well as the amount of the penalty). However, there is a key difference between the proceedings brought by AUSTRAC against the Crown Group and The Star; AUSTRAC has also claimed that The Star intentionally mislead National Australia Bank in connection with its compliance with AML/CTF obligations.

ASIC:

On 12 December 2022, ASIC commenced civil penalty proceedings in the Federal Court of Australia against 11 current and former directors and officers of The Star for alleged breaches of their duties under Section 180 of the Corporations Act 2001 (Cth) (Corporations Act).

These proceedings are current; in these proceedings, ASIC claims that each of the directors and officers of The Star failed to exercise the degree of care and diligence a reasonable person in their position would have exercised in the corporation’s circumstances.

In summary, ASIC alleges that:

• the relevant directors:approved the expansion of The Star’s relationship with certain individuals with reported criminal links, rather than addressing money laundering risks by inquiring into whether The Star should be dealing with them;
• when provided with information about money laundering risks affecting The Star, did not take steps to make further enquiries of management about those critical risks (which is a breach of director duty obligations under the Corporations Act);
• the relevant directors and officers:did not adequately address the money laundering risks that arose from dealing with Asian gambling junket Suncity and its founder, and, additionally, continued to deal with them despite becoming aware of reports of criminal links; and
• did not appropriately escalate money laundering issues to the Board of Directors; and
• the relevant officers knowingly permitted the submission of misleading statements to National Australia Bank (NAB) regarding the use of China Union Pay cards at NAB ATMs on The Star’s premises.

If the relevant directors and/or officers are found by the Federal Court to have breached the Corporations Act:

• a maximum penalty of AU$1.05 million for each breach may be imposed against the relevant director and/or officer; and
• the directors and/or officers can be disqualified from holding any current or future directorships.

In light of the various disciplinary action, and enforcement action, taken against the Crown Group and The Star group, Australian regulators have taken broader enforcement action in relation to Australian casinos, in particular:

Reef Casino:

The QOLGR fined Casinos Austria an amount of AU$10,000 for a breach of Queensland casino legislation – the QOLGR concluded that a junket arrangement involving the Reef Casino breached Queensland casino legislation as the Reef Casino had not received written approval from the Queensland Gaming Minister to enter that arrangement.

The Ville Resort Casino:

The QOLGR brought proceedings in the Federal Court of Australia against Breakwater for alleged breaches of Queensland casino legislation, namely:

• paying a junket operator in “cash and loyalty points”; and
• operating a junket agreement that was not approved by the Queensland Gaming Minister.

The proceedings are current, with a possible outcome that substantial fines will be imposed on Breakwater.

SkyCity Adelaide casino:

AUSTRAC commenced civil penalty proceedings in the Federal Court of Australia against SkyCity Adelaide for breaches of the AML/CTF Act.

In a manner similar to the AUSTRAC proceedings against the Crown Group and The Star, AUSTRAC claims in these proceedings that there have been various contraventions of the AML/CTF Act by SkyCity Adelaide, namely:

• Breaches of Section 36(1) of the AML/CTF Act (which relate to ongoing customer due diligence); and
• Breaches of Section 81 of the AML/CTF Act (which relate to the adoption and maintenance of an AML/CTF program).

The proceedings are current, and it is likely that the outcome of the AUSTRAC proceedings against each of the Crown Group and The Star will be relevant when assessing the possible outcome of these proceedings.

At this stage, only some of the Australian casino operators (that is, the larger Australian casino operators) have been the subject of regulatory scrutiny.

Of course, the regulatory scrutiny against the Australian casino operators described in this article relate only to investigations and disciplinary action by Australian regulators that has been made publicly available (most likely due to the fact that the relevant regulators consider that those investigations, and the outcome of those investigations, are matters in the public interest). There is always a risk that the other Australian casino operators have been (or will be) the subject of a closed-door investigation.

It is clear from the increased scrutiny of Australian regulators that, at some stage in the near future, all of the Australian casino operators are at the risk of regulatory investigations (and perhaps disciplinary action) by an Australian gambling regulator (at the very least).

Moreover, the broader Australian gambling sector is likely to be reviewed in a similar manner (indeed, this has already begun). In the last six months, AUSTRAC has initiated various investigations into Australian sports bookmakers. More specifically, AUSTRAC has:

• commenced an enforcement investigation into online wagering operator Entain Group Pty Ltd (operating in Australia under the Ladbrokes brand). AUSTRAC will investigate whether Entain complied with its obligations under the AML/CTF Act during the period of July 2016 to June 2020; and
• appointed External Auditors for Sportsbet and bet365 to assess compliance with obligations under the AML/CTF Act and the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No.1) (AML/CTF Rules).

Future impact

There is no doubt that the Australian gambling sector is highly regulated. The recent findings of significant misconduct and non-compliance across the Australia casino sector will lead to further regulatory restrictions for Australian casino operators (this process has already begun in certain States, such as New South Wales and Victoria).

However, the public perspective of inherent non-compliance embedded in the Australian casino sector and, by extension the broader Australian gambling sector, will be long-lasting. There is unlikely to be public sympathy for greater restrictions being imposed.

While international investment will remain active in the Australian gambling sector, there is a real risk that the recent events in the Australian casino sector (in particular, the findings of serious misconduct and non-compliance by Australian casino operators, as well as the consequential changes made to State casino legislation which have resulted in a stricter regulatory framework, may impact the transaction risk appetite for gambling sector transactions. This risk is further fuelled by the uncertainty around the possibility of further State legislative changes which may have an adverse impact on the conduct of a gambling business (including, for example, increased tax rates) and concerns about the certainty and financial security associated with investments of this nature.

Certainly, Australian gambling operators will need to review the manner in which business has been, and is being, conducted and consider the changes required to not only address any previous non-compliance, but to also ensure ongoing compliance with not only relevant gambling laws, but all applicable laws.