<DOC> [109 Senate Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:23704.wais] S. Hrg. 109-50, Pt. 4 GAMING ======================================================================= HEARING BEFORE THE COMMITTEE ON INDIAN AFFAIRS UNITED STATES SENATE ONE HUNDRED NINTH CONGRESS FIRST SESSION ON OVERSIGHT HEARING ON THE REGULATION OF INDIAN GAMING __________ SEPTEMBER 21, 2005 WASHINGTON, DC __________ PART 4 __________ U.S. GOVERNMENT PRINTING OFFICE 23-704 WASHINGTON : 2005 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001 COMMITTEE ON INDIAN AFFAIRS JOHN McCAIN, Arizona, Chairman BYRON L. DORGAN, North Dakota, Vice Chairman PETE V. DOMENICI, New Mexico DANIEL K. INOUYE, Hawaii CRAIG THOMAS, Wyoming KENT CONRAD, North Dakota GORDON SMITH, Oregon DANIEL K. AKAKA, Hawaii LISA MURKOWSKI, Alaska TIM JOHNSON, South Dakota MICHAEL D. CRAPO, Idaho MARIA CANTWELL, Washington RICHARD BURR, North Carolina TOM COBURN, M.D., Oklahoma Jeanne Bumpus, Majority Staff Director Sara G. Garland, Minority Staff Director (ii) C O N T E N T S ---------- Page Statements: Akaka, Hon. Daniel K., U.S. Senator from Hawaii.............. 2 Conrad, Hon. Kent, U.S. Senator from North Dakota............ 2 Dorgan, Hon. Byron L., U.S. Senator from North Dakota, vice chairman, Committee on Indian Affairs...................... 1 Hogen, Phil, chairman, National Indian Gaming Commission..... 3 McCain, Hon. John, U.S. Senator from Arizona, chairman, Committee on Indian Affairs................................ 1 Van Norman, Mark, executive director, National Indian Gaming Commission................................................. 11 Washburn, Kevin, associate professor of law, University of Minnesota.................................................. 13 ............................................................. Appendix Prepared statements: Hogen, Phil (with attachment)................................ 23 Van Norman, Mark............................................. 29 Washburn, Kevin.............................................. 38 Additional material submitted for the record: Allen, W. Ron, chairman, Washington Indian Gaming Association and tribal chairman, Jamestown S'Klallam Tribe, letter..... 43 Eddy, Jr., Daniel, tribal council chairman, Colorado River Indian Tribes, letter...................................... 45 GAMING ---------- WEDNESDAY, SEPTEMBER 21, 2005 U.S. Senate, Committee on Indian Affairs, Washington, DC. The committee met, pursuant to notice, at 9:30 a.m. in room 325 Senate Russell Office Building, Hon. John McCain (chairman of the committee), presiding. Present: Senators McCain, Akaka, Conrad, Dorgan, and Inouye. STATEMENT OF HON. JOHN McCAIN, U.S. SENATOR FROM ARIZONA, CHAIRMAN, COMMITTEE ON INDIAN AFFAIRS The Chairman. T1Last month, a Federal District Court issued a ruling with potentially far-reaching effects on the regulation of Indian gaming. In Colorado River Indian Tribes v. the National Indian Gaming Commission, the court held that the Indian Gaming Regulatory Act as it is now written does not give the NIGC authority to issue or enforce regulations which address the day to day operations of class III gaming facilities, the so-called minimum internal control standards, or MICS. Class III gaming represents the lion's share of revenue created by Indian gaming. The focus of today's hearing is not whether or not the court's decision was correct. Instead, the question before us today is, among tribes, States, and the Federal Government, how do we make sure that there is adequate regulation of class III gaming? Before we begin the hearing, I have a comment on another regulatory matter. In April, I requested that the Department of Justice [DOJ] and NIGC put their heads together to see if they could come up with a proposal to address the ongoing litigation and controversy surrounding class II bingo machines. I understand that the DOJ and NIGC have concluded their discussions regarding a potential statutory fix. While the department has not shared this proposal with the committee, I look forward to seeing it in the near future. Senator Dorgan. STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR FROM NORTH DAKOTA, VICE CHAIRMAN, COMMITTEE ON INDIAN AFFAIRS Senator Dorgan. Mr. Chairman, thank you very much. Today, we are going to hear testimony from Federal and tribal advocates, along with an independent analysis of what roles each government are playing and should be playing with respect to class III gaming. I hope this testimony today will inform this committee in a significant way as to the practical impact of the recent court decision on this matter. I think you posed the question implicitly with your opening statement with respect to the integrity of Indian gaming. It would necessitate a change in Federal law, whether such a change should be immediate, whether such a change should in fact be made. It is an important issue, and I look forward very much to hearing the testimony of the witnesses that have come before us today. The Chairman. Senator Akaka. STATEMENT OF HON. DANIEL K. AKAKA, U.S. SENATOR FROM HAWAII Senator Akaka. Thank you very much, Mr. Chairman. Thank you for holding this hearing. It is very, very important to our country. Today's oversight hearing on the regulation of class III gaming under the Indian Gaming Regulatory Act follows a recent decision by the U.S. District Court for the District of Columbia regarding the case of Colorado River Indian Tribes v. National Indian Gaming Commission. As we address the regulatory authority of NIGC, I believe that it is important that we preserve the sovereignty of Indian nations and provide them with the necessary support in the exercise of their sovereignty. They can help themselves economically, politically and governmentally. I look forward to the testimony in the hearing, and I thank the witnesses here today. I thank the Chairman for holding this hearing. Thank you very much. The Chairman. Senator Conrad. STATEMENT OF HON. KENT CONRAD, U.S. SENATOR FROM NORTH DAKOTA Senator Conrad. Thank you, Mr. Chairman. Thank you for holding this hearing. The court determination obviously raises a whole series of issues. I think it is important that this committee attempt to address them. At the same time, I think it is important that while there is a reaction, there is not an over-reaction. The history of regulation throughout Indian country in gaming has been quite strong. As I have looked across regulation in my State, they really have done a sound job of regulating gaming. Now, we may find that there are other places where that is not the case. To the extent we find abuses, obviously they need to be addressed. But I do hope that we do not have an over- reaction to this one court's decision. Again Mr. Chairman and Senator Dorgan, as ranking member, we appreciate the leadership that you are providing to this committee. The Chairman. Thank you very much, Senator Conrad. Mr. Hogen, welcome. STATEMENT OF PHIL HOGEN, CHAIRMAN, NATIONAL INDIAN GAMING COMMISSION Mr. Hogen. Good morning, Chairman McCain, Vice Chairman Dorgan, and members of the committee. I am Phil Hogen, chairman of the National Indian Gaming Commission. I am an Oglala Sioux from South Dakota. I am very delighted to appear here on behalf of the commission and appreciative that the committee chose to quickly convene this hearing in the wake of the court decision that has been mentioned. I bring you greetings from my fellow commissioners, Nelson Westrin and Chuck Choney. They are on the Coeur d'Alene Reservation in Idaho today meeting with the Affiliated Tribes of Northwest Indians at a long-scheduled consultation session. That is where I would be but for this hearing. I expect the committee is familiar with the history of how we got to where we are, but let me try and quickly review that. Indian gaming is not a Federal program. Indians invented Indian gaming. They do it very well. The Chairman. Mr. Hogen, could I ask you to take us back one step further? The Cabazon decision triggered what action? In other words, basically the Cabazon decision by the U.S. Supreme Court triggered the Indian Gaming Regulatory Act. Right? Mr. Hogen. That is correct, Senator. The Chairman. Okay. And then that gave your commission the authority to regulate what classes of gaming under what circumstance? I would like to have this for the record. Go ahead. Mr. Hogen. Okay. IGRA divided Indian gaming into three categories. Class I is traditional or ceremonial gaming. It is basically not commercial gaming. That was left exclusively within the domain of the tribes. Then there was created class II gaming, which was bingo and pull-tabs and games of that nature such as poker where you do not play against the house. Then the third category was basically everything else, but primarily house-bank games and casino-type gaming. The Chairman. And there is some gray area concerning, because of technology, between class II and class III. Right? Mr. Hogen. That is correct. Class II was permitted to use computers and electronic and other technologic aids, but there was not a real clear definition of where that ended and where slot machines and electronic facsimiles of games of chance began. So that is a troublesome area that we are dealing with. The Chairman. So then the Colorado River Indian Tribe decided not to allow the National Indian Gaming Commission auditors to look at their books. Is that correct? Mr. Hogen. That is correct. That occurred in the context of NIGC attempting to conduct an audit of their Colorado River Indian Tribe's compliance with the minimum internal control standards that NIGC had promulgated. The Chairman. Over class III or class II? Mr. Hogen. Over all of the gaming operations. The Chairman. Okay. Mr. Hogen. A reason that we have to look at the whole gaming operation is gaming facilities integrate their operations. The dollars may come from the bingo hall or they may come from the slot machines, but they go into the same cage, the same bank, and it is very difficult to look at one without looking at the other. In any event, we looked at class II at Colorado River and we went to go look at class III and they said wait a minute, you do not have the jurisdiction to do this. The reason they argued we did not, is that IGRA provides for a tribal-State compact to frame the class III gaming that will be permissible and permits the States and the tribes to negotiate with respect to the regulatory structure. The Chairman. Arguing that, once the State and the tribes have reached this compact, the regulation or oversight of that gaming responsibilities now left the NIGC. Mr. Hogen. That is what they argued and we disagreed. As a result of that disagreement, we found them in violation of not giving us access. On account of that violation, we assessed a fine. We eventually negotiated an arrangement whereby we could, and we did conduct an audit, but the tribe reserved the right to challenge that principle: Did we have this jurisdiction. The Chairman. And the court's decision said? Mr. Hogen. It said NIGC, you have gone too far; you entered into an area that was left to the tribes and the States and you cannot do what you are doing with respect to class III. The Chairman. In other words, right now at this moment if you went to any Indian tribe in America that has concluded a compact with a State, they could bar you from looking at their books? Mr. Hogen. We do not view the decision that broadly, but the ultimate consequence certainly could be that. The Chairman. In other words, you would go out of business then? Mr. Hogen. Yes; well, we would be out of most of the business because 80 percent of the gaming is class III gaming. That is where the money is. That is where the action is. The Chairman. Do you expect other tribes in light of this to challenge your oversight authority? Mr. Hogen. We certainly do. We have already had, you might call it push-back from tribes; tribes saying we know you have an audit scheduled to come out and look at our compliance, but do not bother coming because you do not have that authority under the Colorado River Indian Tribe's decision. We argue that, well, that is still a work in progress. We are trying to sort that out. We are going to continue business as usual. The Chairman. Does the Administration plan to appeal this decision? Mr. Hogen. We are in negotiations or we are working with our lawyers in the Department of Justice. I expect that we will. We will be asking them to appeal. That decision has not been finalized yet. The Chairman. What was the logic behind this judge's decision? Clearly in the law, it is stated that there would be a National Indian Gaming Commission to conduct oversight responsibilities. What was the judge's logic to say that somehow even though NIGC was created in the law, you would have no ability to carry out your investigative or oversight responsibilities? Mr. Hogen. The Indian Gaming Regulatory Act has been a very positive piece of legislation, but in some respects it is not a model of clarity. For example, it says in terms of findings that the tribes have the exclusive right to regulate gaming, and then it goes on to assign other roles, a role to the Federal Government, a role to States and so forth. I think the paradigm at the time it was written, and of course you were one of the authors, Senator, Indian gaming then was high-stakes bingo. So it was written, okay, this is how we are going to class II gaming and then, not necessarily an after-thought, but okay, then if you are going to do class III, some of these other things apply. Therein, some confusion arose, I believe. It did give the States the right to negotiate with tribes with respect to regulations and we have attached to our testimony, which we ask to be included in the record, a chart that tries to characterize what States have done and what they have not done with respect to getting involved. In many cases, there is literally no State involvement. Our audit teams that have gone out to do these minimum internal control standards audits have never bumped heads with State folks who are out there doing what we do. We find that if we are not out there doing this, for the most part nobody is going to be playing that oversight role. The Chairman. I thought it was important for the record to establish that history. I thank you. Please proceed. Mr. Hogen. You have established it very well, Senator. I have a couple of charts here that I think just emphasize what you mentioned. The one chart shows the growth of Indian gaming. Our minimum internal control standards were written in 1999 and went into effect in 2000. What this chart demonstrates, of course, is how strong the Indian gaming industry is and the fact that this system that was developed that has not been challenged until just now, has not significantly inhibited the growth of Indian gaming. Rather, I think it has fostered it. The other chart over here, the pie chart, shows that 80 percent of that $19.4 billion in 2004 was class III revenue. That is where the money is. The other 20 percent is divided between class II gaming and that other gaming that is using the player stations that may be class II or may be class III that we are trying to sort out. Where the money is is in class III. In connection with the development of these minimum internal control standards, NIGC embarked on a very thorough consultation process. We formed a tribal advisory committee and even at that time, this concern about NIGC's getting beyond its jurisdiction was voiced, but the commission then said no, this is the right thing to do. We were directed to promulgate Federal standards and we are doing that. The minimum internal control standards were thoroughly reviewed and revisited in 2002. Again, this issue was addressed. You will find in the Federal Register a reflection of that consultation and that process in the preamble to that 2002 enactment. This is a copy of the minimum internal control standards. They are thorough. They are patterned after established gaming jurisdiction controls. Tribes have been for the most part very accepting of them. When we set out these standards, one of the things they require is that when the tribe does their annual independent audit of their gaming operation, their auditor look at their compliance with their internal control standards and do those internal control standards meet what NIGC has specified as minimums. We get a copy of that report. After screening all of those reports, we select some of those where a number of exceptions are noted, and we go out and conduct a minimum internal control standards audit. This is not a ``gotcha'' deal. That is, we put on our website the checklist that we use to identify all of those areas we are going to look at. We send the tribe a letter saying in 30 days we are going to be out there; we select four dates, a date during each quarter of the preceding year, and our team of from four to eight auditors will go out and look at everything that occurred in that casino on that date to see if it complied with the controls. When we are done, we then prepare a report and issue that report after it is reviewed by our head auditor, Joe Smith, who is seated back here. And then we set up an arrangement to meet with the tribal leadership, the tribal management of a facility, the tribal gaming commission, and we go over that list. In the Colorado River Tribe situation, the list of exceptions was 23 pages long. There were 40 specific exceptions. Now, I am not saying they have a terrible operation. They do not, but it was not a perfect operation. We identified areas where it was deficient. One of those areas was the lack of compliance of their surveillance system. When we went out there to conduct this exit interview, both the management and the gaming commission said, well, I will bet you are going to gig us on shortcomings on our surveillance system, aren't you? And we said yes, yes, we are. And they said, well, that is good because we have been trying to get the tribe to spend money to upgrade the system and they have not seen fit to do that. As a result of our mics audit, they spent $2 million and now they have a state of the art surveillance system and they solved that problem. Notwithstanding State regulation, tribal regulation, they were not moving in that direction. I believe that that is the kind of worthwhile service that we perform with respect to those audits. So that is what we do and generally how we do it. Now we are at the point where tribes are pushing back and saying because of this District Court decision in the District of Columbia, you cannot do this anymore. I think that will be a great disservice to this strong, but perhaps fragile structure that has been developed since the MICS were put in place in 1999. In a number of instances, Arizona I think being one of them, California being another, tribes have pointed with pride as a badge of honor, we are the most regulated gaming there is. We have tribal regulations. We have State regulations. We have Federal oversight. And to now say for 80 percent of that gaming we no longer have that arrangement, I think that is a risk. Tribes rightfully defend sovereignty. Sovereignty has several manifestations. I think the main way you are strong and sovereign is by being self-sufficient, being able to provide for yourself and your people. I think that if we put at risk this structure of strong regulation that involves States, tribes and the Federal Government, we put that sovereignty at risk. With respect to these audits that we go out and do, there are some horror stories out there. There are places where we found deficiencies and they have not been corrected and we have had to in some cases get the tribes to voluntarily close their facility. We are considering closing others because they have not come around. But by and large for the most part, they are success stories. We identify weaknesses. They solve those problems. At the end of the day, they have a stronger operation and we are happy that we have been able to help that. We have conducted 41 audits. Only in one instance, I think, did we duplicate what somebody else did. That was at the Avi Casino in Nevada. Nevada is an unusual jurisdiction to do Indian gaming in because there is really no advantage to the Indians. Nevada lets anybody who can get a license do that. Their compact provides for integral involvement by the State of Nevada. So Nevada does an audit there. Every three years they do an audit of everybody and they cover the whole period of time. There is a little difference in what we require and what Nevada requires, so there was some overlap with respect to that audit. But in those other 40 audits, nobody else did what we did, and as I say, by and large they were success stories. The problems identified were solved. Again, the nature of the operations is the commingling, the intertwining of class II and class III revenues makes it almost impossible to say, well, we will go look at one and not the other. If in fact we are ejected from this area, we may awaken a sleeping giant. That is, States may say, oh, we were asleep at the switch; we are going to come back and we want a stronger, larger role in the regulation on a day to day basis of tribal gaming. I do not think that would be good for the tribes. I think they would rather deal with the Federal Government than the States. And I do not think it would be good for the States either because they would be creating another mechanism. The tribes would end up paying that bill, too. I do not think that would have any advantage over the strong system that we have right now. So we think we have a vehicle to solve this problem. In March of this year we sent a letter to the President of the Senate and the Speaker of the House saying this is a legislative package that would fix some of the problems we perceive with respect to the Indian Gaming Regulatory Act. They dealt with our fees and the chairman's power and so forth, but the narrow issue here was to add in section 7 with respect to the commission's power a clarification that we have authority over class II and class III gaming. We do not want to expand our powers. We do not want to grow a bit. I appreciate Senator Conrad's concern, let's not do overkill here if in fact we have to fix this. We just want to keep doing what we have been doing successfully, not do more. We think with the enactment of the amendment proposed relating to clarification of NIGC's authority in class III gaming, that problem would be solved. We address a number of other things in our written testimony, but I think I will conclude here with respect to what I have to say and I would be happy to try and respond to any questions. [Prepared statement of Mr. Hogen appears in appendix.] The Chairman. Thank you very much, Mr. Hogen. If IGRA is amended to clarify that the NIGC has authority to issue class III MICS, will that impact the role that tribal governments have as regulators? Mr. Hogen. It would not change what has happened for the past 5 years. The Chairman. Would it impact the roles that States play as spelled out in their tribal-State compacts? Mr. Hogen. No; they would keep doing what they are doing. The Chairman. Are the MICS consistent ``industry standards''? Mr. Hogen. We attempt to keep them as current as we possibly can. Next week, our advisory committee will be meeting in Rapid City to again review the MICS and make changes to comply with tehnologic advances and technology advances and so forth. The Chairman. NIGA states in its testimony there is no need for a quick fix to the CRIT decision. Do you agree? Mr. Hogen. No; I think it is urgent that we have a remedy to this problem. The Chairman. Because you are already getting pushed back from some tribes. Mr. Hogen. Yes, Senator; we are. The Chairman. The Department of Justice announced last week its proposed change to the Johnson Act that would affect Indian gaming. Why wasn't it a joint announcement with NIGC? Mr. Hogen. They kind of do things their own way there at the Department of Justice. The Chairman. Did you have any role in developing this language? Mr. Hogen. We did. We went to many, many negotiating sessions with the Department of Justice. The Chairman. Do you know when we will get the language? Mr. Hogen. Pardon me? The Chairman. Do you know when we are supposed to get this language? Mr. Hogen. Tom Heffelfinger, U.S. Attorney for Minnesota, indicated last week in Las Vegas that within 10 days or two weeks they would be sending draft language to tribal leadership, so I expect it will be arriving at other offices here in Washington, DC any day now. The Chairman. Thank you. I thank you for your good work and I thank you for your very clear and coherent testimony. I thank you for the continued good job that you do under very difficult circumstances. Senator Dorgan. Senator Dorgan. Mr. Chairman, thank you very much. Mr. Hogen, thank you for being with us once again. The court's decision cited a number of facts. Let me just run through a couple of them with you. The court says the legislative history of IGRA states explicitly that Congress did not intend the NIGC to regulate Class III gaming. Any response to that? Mr. Hogen. We do not read it the same way the court did. Our brief submitted to the court by the Justice Department states that in greater detail, and points to areas in the legislative history where we think this was addressed, and clearly indicates as it states in the purpose of IGRA, that NIGC was being established in part to establish or to promulgate Federal standards. That is what we have done there. Senator Dorgan. Over the years, your compliance enforcement efforts and audits have routinely included class II and class III gaming issues, right? Mr. Hogen. Yes; both areas. Senator Dorgan. When was this issue first raised? I think you stated in your testimony that back some long while ago there were discussions about whether you had the authority or not. The first court challenge was this particular challenge, is that correct? Mr. Hogen. That is correct, but from day one when we started talking about minimum internal control standards to apply to class II and class III, some tribes said you are stepping into an area where you do not have any authority, and we had that discussion. We decided we did. Senator Dorgan. Describe to me a future for your commission if as of tomorrow, for example, you have no authority under any condition to be involved with respect to class III issues enforcement, compliance, auditing and so on. Describe for me that future. Is there much left for the commission? Is there much of a reason for the commission to exist? Mr. Hogen. Well, I think we would need to still exist. We would be a toothless tiger. That is, we could go out and look things over to the extent tribes would voluntarily show us their class III information, and we could point to what we perceived as shortcomings, but all we could do is a ``please fix this'' and there would be no incentive. Tribes would probably cease to have their external auditors analyze the minimum internal control standards because that costs a little more money, things like that. It would be a very less effective role. Senator Dorgan. You had indicated that 80 percent of the gaming revenue is now class III. Is that correct? Mr. Hogen. That is our guess. Nobody knows exactly because tribes do not have to designate it, but that is our best guess, yes, Senator. Senator Dorgan. By far the bulk of the gaming would be outside of the purview of the commission's activities for enforcement compliance auditing and so on, if that were the case. Mr. Hogen. The act says that the tribes have to adopt a tribal gaming ordinance, and they do. That has to be reviewed and approved by the chairman of the commission. Now, that ordinance embraces a lot of things such as this is how we are going to do our gaming. The chairman of the National Indian Gaming Commission has the authority to take enforcement action for a violation of that NIGC-approved ordinance. So there may be a way we could go in the back door and say, well, maybe we do not have class III MICS authority, but your ordinance says you have minimum internal control standards; you violated those, and consequently we are going to take enforcement action. A challenge to such an arrangement would be we then have 225 systems out there, rather than one system. I think the quality that IGRA sought would be diminished. Senator Dorgan. The absence of the Commission being involved in class III issues means that the States would be involved through the compact and also the tribal regulations would be involved. So tell us from your perspective how that relates to your enforcement and your audits. Are they up to that or are they up to your standards? Do you do a better job? Do they do a lesser job? Tell me your assessment of all that. Mr. Hogen. There are over 20 States that have compacts with tribes, and they are very diverse. Minnesota, for example, got in early; cut some perpetual compacts with the tribes, and give a very minimal role to the State with respect to regulation. Some of the more recent compacts, Oklahoma for example, have a more participatory role for the State. The problem with Oklahoma is it looks good on paper, but they only have three people in their office and they have 30 gaming tribes out there. They are, at least not yet, up to that task. Senator Dorgan. Sorry for interrupting you, Mr. Hogen. My point it, we are going to have others testify that say the commission is unnecessary. It is unneeded. With or without the question of whether you have the authority to deal with class III, it is duplicative and unneeded and the States and the tribes will do just fine, thank you. Respond to that. Mr. Hogen. Okay. I think one of the most important things we bring to the table is we give validity to what the tribes and what the States do. As we come along objectively from the outside, look at it, and say these are the rules. They either are playing by the rules, which we find in most cases, or they were not playing by those rules, but they fixed that. So we validate that good job that they do, and we have that national perspective that gives us the tools to do what needs to be done in diverse circumstances. Senator Dorgan. Mr. Hogen, thank you for your testimony. As always, thanks for your assistance when you appear before the committee. Mr. Hogen. Thank you, Senator. The Chairman. Mr. Hogen, I just want to reiterate, when we contemplated the Indian Gaming Regulatory Act, we clearly contemplated an Indian Gaming Commission. That is why it was created. Perhaps the language is somewhat murky, but I find it very difficult to accept the proposition that now that Indian gaming has gone from $500 million a year to $19.5 billion, and no sign of slowing, that somehow now we do not need a regulatory agency. It defies logic. In consultation with Senator Dorgan and other members of the committee, I think we are going to have to come up with some fix for this. I have said a thousand times, and I will say it again, when we wrote the act, Senator Inouye and I and others wrote the act, if you had told us that by this time it would be a $19.5 billion a year business, we would have been astonished, to say the least. I continue to point out to my Native American friends who assert this is simply an issue of tribal sovereignty, issues of tribal sovereignty not only entails activities on Indian lands, that are conducted by Indians; 99 percent of the patrons of these Indian gaming activities are non-Indians. So we have an obligation to non-Indians as well as Indians to make sure that these gaming activities are honest, straightforward and adequately regulated. I think you and the commission overall over time have done a good job at that. To wit, there have been a minimum, an absolute minimum of allegations of corruption in Indian gaming activities. So it seems to me to want to abandon what has been a successful regulatory scheme, I would take some convincing before agreeing to that. Thank you, Mr. Hogen. Mr. Hogen. Thank you, Senator. The Chairman. Our next witnesses are Mark Van Norman, executive director of the National Indian Gaming Association and Kevin Washburn, who is the associate professor of law at the University of Minnesota. Welcome to the witnesses. We will begin with you, Mr. Van Norman. STATEMENT OF MARK VAN NORMAN, EXECUTIVE DIRECTOR, NATIONAL INDIAN GAMING COMMISSION Mr. Van Norman. Thank you, Mr. Chairman. Thank you, Senator Dorgan. NIGA appreciates the opportunity to testify here today. I am Mark Van Norman, the executive director of NIGA. Previously, I worked for the Justice Department and as an attorney for my tribe. As you know, tribes generally oppose amending the Indian Gaming Regulatory Act because we are concerned about undermining Indian sovereignty. We believe that amendments to the act should be considered in consultation with tribal governments. If after consultation the committee determines to move forward, we ask that you move forward in regular order and protect IGRA from negative amendments. We also ask that you include timely access to secretarial procedures in lieu of compacts once States raise an 11th Amendment defense to the tribal-State compact process. Indian gaming has been a tremendous success story for tribes. Historically, the United States signed treaties guaranteeing Indian lands as permanent homes, and a few years later went to war to take those lands. This left Indian tribes in poverty on desolate lands, while others mined for gold or pumped oil from taken lands. Throughout this period, tribes always fought to preserve tribal self-government. Indian gaming has provided us new hope; 20 million people visit Indian tribes each year. Indian gaming has created 550,000 jobs, where unemployment was 5 or 10 times higher than the national average. It funds essential services. Where diabetes is an epidemic, it funds clinics and wellness centers. Where people had only eighth-grade educations, it funds college scholarships. We have a long way to go, but Indian gaming is rebuilding our communities. No one has more interest in maintaining a strong regulatory system for Indian gaming than Indian tribes. Tribes are dedicated to this because tribal sovereign authority, government operations and resources are at stake. Last year, tribes invested over $290 million to regulate Indian gaming. More than 3,350 expert tribal, State and Federal regulators watch over Indian gaming. Class III gaming is regulated by tribal governments and States through the tribal-State compact process. NIGC has a role. It supports that regulation by approving tribal gaming ordinances, reviewing tribal background checks and licenses, receiving audits and approving management contracts. Congress established the unique tribal-State compact process at least in part because the Federal Government turned down that regulatory role. Under the tribal-State compact process, tribes and States have established strong working relationships over the past 17 years. Tribes have also invested heavily in reliance on the tribal-State compact process. In 1999, NIGC issued a mandatory Federal rule on minimum internal control standards. Tribal governments adopted the rule through tribal law and regulation, while reserving the question of NIGC's authority. Last month in the Colorado River Indian Tribe case, the Federal court held NIGC may not issue mandatory Federal regulations that duplicate tribal-State compacts. NIGC asks you to over turn that court decision. From our perspective, a cornerstone of Federal Indian policy is government-to-government relations. Under the President's directives, we believe NIGC should consult with tribes now and seek the least intrusive alternative to address this issue. Yet, NIGC's request is for new Federal authority over and above the tribal-State compact process, without an effort to harmonize it with existing tribal and State regulatory activities. If NIGC were working directly with States, the proposal would violate the 10th Amendment. The proposal also undermines tribal lawmaking authority. If enacted, it would upset the existing balance of tribal, State and Federal sovereign authority. NIGC should consult with tribes to find a less- intrusive alternative. For example, NIGC could simply ask tribes to maintain existing MICS in their tribal ordinances and regulations. In fact, NIGC included the MICS in its model tribal gaming ordinance. Alternatively, NIGC could consult with tribes about including a MICS provision in IGRA's tribal gaming ordinance requirements. NIGC now has authority to approve tribal ordinances and IGRA provisions harmonize tribal law with tribal-State compacts. Seventeen years of experience under IGRA has shown we have a strong regulatory system for Indian gaming, and that regulation can be done consistent with tribal self- government. We do not think there is any need for a rush to judgment. We think that NIGC has issued guidance to tribes that they should continue to follow the MICS. We have also advised tribes that they should continue to follow their own laws and regulations that incorporate the MICS while this matter is pending. We believe that the NIGC could work within the existing framework of the statute. Look at the tribal ordinance section. They have authority to come out and if there is a violation of tribal ordinances, they have authority to take action already. That approach would preserve tribal lawmaking authority. So we respectfully ask the committee to defer action on this until the NIGC goes out to consult with tribes. We have a meeting coming up in October in Tulsa with the National Congress of American Indians and the National Indian Gaming Association. We have invited them to come out and sit down with tribal leaders. We have another meeting in November. We would like to sit down and talk with them about this issue and find a solution that is in keeping with tribal sovereignty. Thank you very much for the opportunity to testify. [Prepared statement of Mr. Van Norman appears in appendix.] The Chairman. Thank you very much. Professor Washburn. STATEMENT OF KEVIN WASHBURN, ASSOCIATE PROFESSOR OF LAW, UNIVERSITY OF MINNESOTA Mr. Washburn. Thank you, Mr. Chairman and Mr. Vice Chairman, for inviting me to be here today. This is a very important subject and I applaud you for calling an early hearing on it. My sense is that following Cabazon, the Senate and the Congress decided to take action, and they thought that gaming ought to be very well regulated, Indian gaming. The Chairman. Actually, Professor Washburn, we felt that there had to be some kind of structure in light of that decision that would somehow establish a relationship between States and the tribes because of the wording of the decision. Mr. Washburn. I believe that is right, yes, sir. I do think that is right. At the time, bingo was the thing that was mainly going on around the country. So I think you all focused on bingo, primarily, class II gaming. That is where you really focused on NIGC authority. As the charts indicate, that is irrelevant. Bingo to a great degree is much less important now than class III gaming. But what we have, to a large degree, is not a National Indian Gaming Commission. We have a National Indian Bingo Commission nowadays, especially after the CRIT decision of a couple of weeks ago. The question is: Is that what you want? Is that what Congress wants out there? My sense is that the public has great confidence in Indian gaming largely because they believe that there is a strong Federal regulatory presence. I think that Federal regulatory presence is very important. So it is really a question for Congress. Do you want that Federal presence or not? I think that tribal regulators do a lot better with the Federal presence. I think tribal regulators do a fantastic job, by and large, but I think they do a far better job when they have Federal oversight. I think Federal regulators standing behind their back gives them a great deal of cover when they are negotiating with tribal leaders and casino managers about how to regulate well. Regulating well is expensive. It is hard to do it. It costs a lot of money, but Indian gaming is extremely important and it must be done. You all have the power to ensure the integrity of the resource for Indian tribes by ensuring that it is well regulated. My sense is that is what you should be doing. I have heard several insightful questions already. I think that this really is the answer to them. I think that the NIGC is needed. It ought to be the NIGC and not the NIBC. That is, it ought to be regulating the bulk of Indian gaming, the important parts of Indian gaming, and that they should have that role. I think having national Federal standards creates a common set of information for the entire industry so that regulators can leave one casino and go to another, and still know what the rules are. That gives them greater independence. It also creates this national community of tribal regulators that can talk to one another. I think that that is important. I think, again, it makes the tribal regulator's job a lot easier and it puts them in touch with the national community. So I think it is crucial that at a minimum that the IGRA be amended to ensure that the NIGC has authority to promulgate the minimum internal control standards. [Prepared statement of Mr. Washburn appears in appendix.] The Chairman. Thank you, Professor Washburn. Thank you. I know you spent a long time on this issue, and we appreciate your expertise. This court decision in some respects brought to a head what Senator Dorgan and I were already concerned about, and that is that we needed to review the IGRA in light of the chart that was just taken down of the dramatic increase in Indian gaming to a $19.5-billion a year business, and what it was when we passed the law. As you said, it was bingo. Although we all anticipated growth of Indian gaming, we certainly did not to the level that it has. So with retrospect of now 17 years, that we thought we ought to look at it anyway, and that is why we had hearings before this latest court decision because it needed review. So maybe this court decision may bring our deliberations to some kind of conclusion sooner rather than later. Part of our process will be determined as to whether this case is appealed or not. I do not know if they have made that decision. Mr. Van Norman, I think that consultation ought to be held. I am glad you have invited the Indian Gaming Regulatory Commission out to your meetings. But isn't it true that before these regulations were ever issued, there was extensive consultation with the tribes. Is that true? Mr. Van Norman. There was consultation with tribes as the regulations were developed, but the tribes consistently said, we have a tribal-State compact process and a tribal ordinance process. Those are the processes you should work with. Tribes cooperated with NIGC, but they reserved that question because they felt it was important to tribal lawmaking authority. I will just give you an example. This is the Viejas Band of Kumeyaay Indians tribal ordinance. This is the Seneca Nation's tribal compact. Substantial work goes into these things and we think there is a way to address this without creating new Federal rulemaking authority, but working within the existing structure. We would like NIGC to consult with us about that because it is a less-intrusive alternative to what they are seeking to accomplish. The Chairman. As you know, Congress has a special responsibility for Native Americans under the Constitution of the United States. I have a responsibility as a Federal official, but also as a representative of the people of my State. The Colorado River Indian Tribes reject investigators from the Indian Gaming Regulatory Commission to look at their books and their operations. Then I am supposed to meet with my constituents who patronize that gaming establishment, and say to them, I am sure everything is okay; go on out there and gamble and I can assure you that everything is on the up-and- up, even though this tribe has said that the gaming commission that was put into being by the legislation is not allowed to have a look at their books. How do I do that, Mr. Van Norman? Mr. Van Norman. Well, I think one thing to bear in mind is that the State, the Governor's office and others, work with the tribes to develop a compact that was put forward for a vote of the people. Under that compact, the Arizona Department of Gaming has an important regulatory role. The tribes in Arizona fund Arizona Department of Gaming at over $8 million a year. They have over 100 State regulators and law enforcement officers assigned to Indian gaming. In addition, I think it is a little bit of a straw man to say that there is no role for the NIGC. The Chairman. Is there a role for them to play if the tribe says you cannot come on the reservation? And by the way, I think my State regulatory folks would say that they welcome the involvement of the National Indian Gaming Commission as a valuable tool in helping them oversight. Mr. Van Norman. Frankly, I think that what happened at Colorado River was some of the NIGC folks sat down with the tribes. They started to work on the issues, and things got to a situation where they said, we are here to enforce the MICS. And the Colorado River Tribe said, do you have authority to do that? And so a question was raised. The Chairman. No; they did not say, do you have authority to do that. They said, sorry, you cannot look at our books. Mr. Van Norman. Okay. The Chairman. That is a little different. Mr. Van Norman. I have been involved in discussions with them. I have attended some of the hearings. We feel like it was a tribal sovereignty question. Now, there is authority, we feel, under section 2713 of title 25 for the NIGC to go in and work with tribes and ensure that tribal ordinances are enforced. It provides for civil fines for violations of the tribal ordinances, among other things. So we think that there is a workable system there in place. The problem was that the NIGC was taking on a rulemaking authority that was outside the tribal ordinance process. Tribes felt that that intruded on tribal lawmaking authority. The Chairman. Well, I think the NIGC believed that they were carrying out their responsibilities as mandated by the law. Again, I respect tribal sovereignty and have a clear record of support for tribal sovereignty, sometimes to the dismay perhaps of some of my constituents. But when an operation is in being where all the patrons are non-Indians, whether it is on a reservation or off a reservation, and we now have movements to have Indian casinos that are off-reservation, then the issue of tribal sovereignty is overridden to some degree by my obligation to protect all citizens. That obligation is to protect them from being involved in a gaming operation that is operated in the most honest and corruption-free activities. We know from experience with non-Indian gaming that if there is not sufficient regulation, then corruption creeps in. That is the history of gaming. So to assert tribal sovereignty over an operation that does not involve Indians, but non- Indians, to me is not a valid enough argument because I have an obligation under the Constitution, Congress does, to a special obligation as far as Native Americans are concerned, but we also have an obligation to all of our citizens, and that is to engage in a corruption-free operation. You and I have had this conversation several times before, Mr. Van Norman. I would be glad to listen to your response again. Mr. Van Norman. Thank you, Mr. Chairman. I appreciate the opportunity to respond. From our point of view, you are right. There already has been some inroad on Indian sovereignty by requiring tribes to work with States through the tribal-State compact process by having a Federal regulatory authority. There is no Federal regulatory authority for State gaming or for commercial gaming in the States. As you know, they fight that vociferously. We feel that there is an existing balance of sovereignty that protects Indian gaming. There is a provision in the act already, a criminal provision that says anyone that steals from an Indian gaming facility is guilty of a Federal felony. The FBI and U.S. attorneys have authority to prosecute that. Tribes work with Treasury's Financial Crimes Enforcement Network on money laundering prevention. We work with the IRS on tax compliance. We work with the Secret Service to prevent counterfeiting. And we work with the NIGC. But the NIGC has a particular role that is consistent with the tribal-State compact. They have a specialized role and it is not ubiquitous and duplicative of the rest of the system. They have a role that they can come in and be supportive, but they do not duplicate all that the tribes do. One of the things that is preserved to the tribes, we feel, is tribal lawmaking under the tribal ordinance. It is not a meaningless thing to have a tribal ordinance. We feel NIGC could come back and work with us and get that done. In fact in the area of environment, public health and safety standards, that is exactly the approach they are taking. They said, under your ordinance you have to have these provisions and we will come out periodically and check and make sure that you are enforcing your own law. So we think that same system could work in relationship to the MICS. The Chairman. Mr. Hogen testifies that after review of the compacts, in some States it is evident that many compacts have internal control provisions not up to the standards required by the NIGC MICS or States such as New Jersey or Nevada. Professor Washburn. Mr. Washburn. I think that the processes for developing the minimum internal control standards have been very good ones. The NIGC has worked very carefully with tribal leaders in developing those MICS. I think that is a good model. To be quite honest with you, the problems sometimes arise because NIGC regulators when they are out there in the casino can be a little heavy-handed. That is the problem with power. Power sometimes gets abused, and that happens now and then. The Chairman. It never happens around here. (Laughter.] Mr. Washburn. Not all the NIGC regulators, Mr. Chairman, are quite as diplomatic and sensitive as U.S. Senators. But that is one of the problems. I think that the NIGC regulators need to be very cognizant of the fact that it is tribes that they are regulating. It is not individual persons. It is not businesses. It is tribes. I think that they can certainly be very sensitive to that. Frankly, in the development of the minimum internal control standards they have been very sensitive to that, and that should be very well applauded. I think Indian gaming really is an exercise of sovereignty. Every tribe is out there exercising its sovereignty, and what the NIGC is interested in, certainly it intrudes on tribal sovereignty to say we are going to regulate that activity. But the problem is, tribes cannot really protect themselves well here, because if one tribe makes a mistake, all tribes will pay. That is just a function of the political nature of the gaming industry. Not all of the public is totally on board with the notion of gaming, so if one tribe makes a serious mistake, other tribes will pay for that mistake. So one tribe's exercise of sovereignty can take away the sovereignty of another tribe. I think we have to recognize that. The entity that can address that problem best is the Federal entity, the National Indian Gaming Commission. The Chairman. Thank you, Professor Washburn. Mr. Van Norman, I want to repeat again that I am one who supports Indian gaming. I believe that the Cabazon decision made it very clear that the Supreme Court correctly reached the conclusion that Indian gaming could take place under certain circumstances. I have done everything that I can to make sure that that right is enshrined in IGRA. But I also have recurring fear that there is going to be some scandal out there, as there is from time to time in non-Indian gaming. It is not that I am worried about Indian gaming. I worry about a scandal out there in Indian gaming, and non-Indian gaming in Nevada is not under this committee's jurisdiction, but Indian gaming is. I do not want to go to my constituents and say there is a scandal and Senator Dorgan and I did not exercise proper oversight. In light of this recent court decision, it seems to me for us to do nothing because that was not envisioned in the original legislation. In the original legislation, the National Indian Gaming Commission had certain responsibilities and we wanted them to carry them out, then I think we would not be carrying out our responsibilities appropriately. Senator Dorgan. Senator Dorgan. Mr. Chairman, thank you very much. I suppose it is important to say as well that I believe Indian sovereignty is very, very important. I have always spoken strongly in opposition to those that would erode that sovereignty. The President in fact at one point said the Indians were given sovereignty. The Indians were not given sovereignty. Sovereignty is theirs. It is theirs. It is a very important concept. I, too, believe that Indian gaming has been extraordinarily beneficial to some folks in this Country who have lived in the shadow of poverty and who now have an economic activity that provides jobs and opportunity and a revenue stream to address the crisis of health care, education and housing. So I think it is very important to say that. I think it is also, with respect to gaming, gaming is different than most other activities in this country. We have plenty of history in this Country where almost every opportunity for unsavory characters to find a way through the crack or through the crevice to get their hands on money. We have been down this road in lots of ways in this country. My guess is that there is no disagreement in this room about this proposition, that all of us want good government with respect to Indian gaming, good governing. The question is, what government, which government. Tribal government? State government? Federal Government? We all should want the same thing, that is good government. I think the quickest way to ruin or dramatically injure Indian gaming is for us to in some way be lax, relaxed, back away a little, and then have some huge scandal erupt because we did not have good government, good regulatory enforcement capabilities. I refer to the Time magazine big splashy feature story about Indian gaming. There are people who will take great pleasure in pointing out the mistakes and the problems, and especially take great pleasure in piling on a scandal. So Senator McCain made a correct point here. We have to make certain we know what works and then employ what works to this issue. Now, let me ask a couple of questions. Mr. Van Norman, 2 years ago, 4 years ago, 7 years ago, 8 years ago, I assume that the National Indian Gaming Commission was going out around the country doing audits and enforcement visits and so on and looking at class II and class III gaming. Is that correct? Mr. Van Norman. Originally, the National Indian Gaming Commission said very clearly, we are primarily focused on class II and we have a background role on class III. We do not get involved in the tribal-State compact process. I think the Senate committee proposed minimum internal control standards in various bills. The National Indian Gaming Association actually went through a process with a number of experts to develop industry minimum internal control standards. At a certain point, the NIGC came forward, took those standards, ran them past Arthur Andersen, and put them into a mandatory Federal regulation. Senator Dorgan. At what point was that? Mr. Van Norman. That was about 1999. Throughout this time since them, tribes have said, we have tribal lawmaking authority through the tribal ordinance process under the act, and that that should be respected. Tribes are willing to work with the NIGC and frequently collaborate with the NIGC. In S. 1295, we had asked for the NIGC to provide technical assistance to tribes. We are going out next month to South Dakota and doing programs jointly with them on internal auditing. So we have an ongoing working relationship with them. What we want to do is have a relationship that is structured that protects tribal self-governance so that tribes have a distinct role, the State governments have their role, and the Federal Government has a role that is consistent with tribal lawmaking. Senator Dorgan. What does that mean, consistent with tribal lawmaking? Mr. Van Norman. That this could be a section in tribal ordinances, rather than a new Federal regulatory standard. What tribes say is, we know the industry and we are able to develop our MICS, and we are able to do so in a way that reflects our tribal-State compact, reflects our actual operation. We are often more technologically advanced than the National Indian Gaming Commission, so they have to go in and seek a variance to add a new technical standard. Senator Dorgan. Mr. Van Norman, I frankly have not decided what we should do here at this point. That is why I was very interested in this hearing. But you heard the testimony previous to yours. I served in State government for some while. I knew no only what our State government did with respect to enforcement issues in a range of areas, whether it was railroad rates or other things. And I knew what other States did. I knew there were great differences, some aggressive, some not, some highly efficient, some not, some worthwhile, some worthless. So I understand that there are some States that will do a remarkable job and other States that will do a miserable job. You heard some testimony this morning to that effect. What is your response to that? Mr. Van Norman. I think that the act envisioned that the tribes and the States would work together as sovereigns. The legislative history expressly says there is going to be an allocation of responsibility through a sovereign compacting process. So there was a recognition that there would be some variability. Now, tribal governments have detailed ordinances in place, have minimum internal control standards in place. They will keep those in place. So what we can have is a situation where there may be some variability that accommodates particular tribal government interests, but that they can meet an industry standard for effective regulation. Senator Dorgan. Mr. Van Norman, you heard the anecdote about the commission coming into a gaming facility and saying, you need a new surveillance system. And they said, oh man, thanks for making that a part of the recommendation because that will force the tribe then to pony up the money for a new surveillance system. What if there is not a commission around to make that recommendation and the gaming facility knows they need it, but they cannot get the money out of the tribe. How do you respond to that kind of anecdote? I assume it happens. This is not a perfect system, but that kind of anecdote is the kind of anecdote that I think is also important in this discussion. Mr. Van Norman. We are not saying that the NIGC should not have a role. They have a background supportive role. It is already clear in the statute. Senator Dorgan. With respect to class III as well? Mr. Van Norman. They have a supportive role with respect to class III. They do not establish the regulatory framework because that is the tribal-State compact process and that is the tribal ordinance process. But they can come out and review its enforcement under section 2713 of title 25. So we do not say that there is no role for the NIGC to play, but they should play a role that is consistent with what the tribal governments are already doing. You have 2,800 tribal regulators out there. They are former FBI. They are former Nevada, New Jersey State regulators. There are tribal law enforcement officers with 17 years of experience. Senator Dorgan. Is it your testimony that there is a standardization and a pretty consistent level out there that does not have weaknesses, tribe-by-tribe, State-by-State? Mr. Van Norman. In general, we believe that there is a very strong system. Senator Dorgan. That was not my question, though. I was asking a different question. Mr. Van Norman. I think in fairness, I have worked for the Federal Government. I have worked for State government. I have worked for tribal government. Governments have similar foibles. I would say that the tribal governments have worked very hard to put in place a good system. We have very accomplished people. Where there is a problem, the tribal governments have often reached out and been the ones to reach out to the Federal Government and say, we have a problem here and help identify those problems. Senator Dorgan. I must say, it would be hard for me to make the case, especially with the last several weeks, that the Federal Government does not have its weaknesses. All governments have weaknesses. I expect that that is the case. First of all, Mr. Van Norman, your testimony is helpful to us. You come to this committee and testify and work with us. We appreciate your input and your thoughts about this. You have obviously spent a lot of time thinking about it. You work in the field and know a lot about what is happening in the country. So I appreciate your being here and the thoughts you have expressed today. Mr. Washburn, in your testimony on page 2, I think you make the case, I guess, with respect to the question I was trying to ask Mr. Van Norman about the different kinds of regulatory or the different kinds of enforcement strategies that exist with a State system in which the National Commission would not have much of a role. Can you expand on that just for 1 moment? Mr. Washburn. I think that there needs to be a clear Federal role. I think it cannot be just an advisory role. There needs to be an opportunity to enforce in the worst-case scenario. I think Mr. Van Norman is right that by and large we get good regulation from tribal gaming commissions. The problem is the stakes are so high that when we get irresponsible action by one commission at some small tribe in some location, it hurts all the rest of the tribes in the country, or it could potentially. It is that big scandal that is the thing that we are all worried about. The best way to keep the big scandal from rising up is to keep a strong Federal oversight role overall. To be quite honest, most of the NIGC resources do not go toward the well-regulated tribes. They end up getting expended on the least well-regulated tribes. So the NIGC is serving an advisory role in helping them get their regulatory structures in better operation. Senator Dorgan. Mr. Washburn, excuse me for interrupting you, but can you just expand on, you say ``least well regulated tribes.'' Are there least well regulated tribes? If so, describe the prevalence of that. Mr. Washburn. Again, it is not something that happens every day, but now and then you get a problem. I do not want to stand up here and give you a parade of horribles, but now and then. It is expensive to do internal controls. It is expensive to do regulation. Tribal leaders and casino managers often chafe at that. Every regulated industry chafes at being regulated. What they would like is usually to reduce the regulations. Well, sometimes it happens. Sometimes those people win that argument and the regulators have to back off. If we have strong Federal structure in place, they will not be able to back off. They will have to enforce this strong regulation nationwide. I think that that is the problem. In my last testimony in April, I used the word ``regulatory capture.'' That is the problem. Some regulators are captured by the entities they regulate. If you buy all the academic literature on regulatory capture, Indian tribes are particularly at risk for it because typically you have one casino and one regulator. There are repeat players working every day together. So you have a significant risk for that. So again, it does not happen every day. It does not happen often, but the stakes are so high and Indian gaming is so important that it makes sense to get the best insurance we can that we get to keep it around for a long time and it is well regulated. Senator Dorgan. Thank you as well. I think the goal for all of us in this room, to the extent there has been some disagreement perhaps here and there, the goal for all of us is to preserve the opportunity for Indian gaming to exist and to do that through good government. The question is, what is good government and which levels of government can work best to accomplish that. Mr. Van Norman made a very important point about consultation. I think that issue of consultation is a very important part of what this committee is about as well. This is a special committee in the U.S. Senate that understands and believes strongly in the responsibility to work with and consult with the first Americans and the tribes that we work with. So I think this testimony has been really interesting. This court case causes some concerns. The question is now what do we do about those concerns. Mr Chairman, I think holding a hearing rather rapidly on this is the right thing to do as well in order for us to begin to understand all of the consequences of this, and what we do in the end to try to protect and preserve the opportunities that Indian gaming offers to Native Americans. That is the end goal for all of us, I believe. Mr. Chairman, thank you. Mr. Van Norman. Mr. Chairman. The Chairman. Go ahead please. Mr. Van Norman. Thank you. I would just say it is probably in many circumstances easier to have a Federal rule. There is one rule. But we live in a country that is divided into 50 States, and there is some genius to the Constitution that says the folks that are closer to the people have an ability to make rules that fit them better. The Chairman. You sound like a good Republican, Mr. Van Norman. [Laughter.] Mr. Van Norman. Thank you. I feel I am in good company. We think that preserving the tribal lawmaking authority gives the tribes the flexibility to meet their needs, while still meeting some level of Federal approval because the NIGC has the authority to approve those ordinances. So we hope that you will give that consideration, and we certainly appreciate the opportunity to come here and testify. The Chairman. We will, Mr. Van Norman. I think you represent your organization quite well. We appreciate the continued dialog with you and with other members. Professor, thank you very much for traveling all this way. Mr. Washburn. Thank you. The Chairman. We appreciate your continued in-depth examination of these issues. This hearing is adjourned. [Whereupon, at 10:47 a.m., the committee was adjourned, to reconvene at the call of the chair.] ======================================================================= A P P E N D I X ---------- Additional Material Submitted for the Record ======================================================================= Prepared Statement of Philip N. Hogen, Chairman, National Indian Gaming Commission Good morning Chairman McCain, Vice Chairman Dorgan, members of the committee and staff. My name is Philip Hogen. I am the chairman of the National Indian Gaming Commission [NIGC or Commission] and a member of the Oglala Sioux Tribe of the Pine Ridge Indian Reservation in South Dakota. Thank you for the opportunity to discuss a matter of grave concern to the NIGC. As you are aware, a decision recently issued by the Washington, DC. District Court found unlawful the NIGC's Minimum Internal Control Standards [MICS] regulations as applied to class III gaming. Although the decision applies solely to the Colorado River Indian Tribes, the language of the decision is broadly worded and could be used in other forums to argue for the elimination of the NIGC's entire regulatory role in class III gaming. While the challenge was with respect to the MICS regulations specifically, the District Court opinion contains language that appears to apply to all regulation of class III gaming. One particularly troubling quotation from the opinion bears mention. The court stated, ``[t]he [Indian Gaming Regulatory Act] not only lacks language giving the NIGC a role in the regulation of class III gaming, but it contains several provisions that are inconsistent with such a role.'' Colorado River Indian Tribes v. Nat'l Indian Gaming Comm'n, No. 1:04-cv-00010-JDB, 2005 U.S. Dist. LEXIS 17722, at *34 (D.D.C. August 24, 2005). This statement by the court is troubling because it rejects the very clear ``Declaration of Policy'' that this committee and Congress provided in IGRA. In particular, IGRA's policy provision found that existing Federal law in 1988 did not provide clear standards or regulations for Indian gaming, 25 U.S.C. Sec. 2701. To address this and other congressional concerns regarding tribal gaming and to protect such gaming as a means of generating revenue to promote tribal economic development, self-sufficiency, and strong tribal government, this committee and Congress went on to expressly declare in IGRA that it was necessary to establish both Federal standards and the NIGC as an independent Federal regulatory authority for Indian gaming, 25 U.S.C. Sec. 2702. Needless to say, the Colorado River Indian Tribes decision has the potential to seriously compromise our ability to effectively regulate Indian gaming in the manner Congress expected and expressed in its ``Declaration of Policy'' in IGRA. The NIGC considers the MICS to be one of the most effective regulatory tools available to protect Indian gaming. We appear before the committee today to seek congressional action clarifying the NIGC's authority to regulate class III gaming generally, and to promulgate and enforce our MICS regulations for class III gaming specifically. The NIGC has submitted to Congress on March 23, 2005, a draft bill that, among other things, would amend IGRA to clarify the NIGC's authority to regulate class III gaming generally, and to promulgate and enforce its MICS regulations for class III gaming specifically. Although the NIGC and the Department of Justice are considering an appeal in this case, we believe the best way to resolve this question and prevent a potentially serious lapse in regulatory authority created by this court decision is by way of a legislative fix--language that makes absolutely clear the NIGC's authority with respect to class III gaming. In this connection, let me be crystal-clear. We are not asking Congress to expand the role NIGC has played in the past regarding class III gaming. We merely ask that the law be clarified so that we may continue what has proved to be a very successful coordination of tribal, State, and Federal participation in the oversight of class III gaming. This gaming produces four-fifths of overall tribal gaming revenue. i. A HISTORY AND EXPLANATION OF MINIMUM INTERNAL CONTROL STANDARDS In the years since the Indian Gaming Regulatory Act [IGRA], 25 U.S.C. Sec. 2701 et seq., was passed, Indian gaming has grown exponentially from $100 million in revenue to over $19.4 billion in 2004. Approximately 80 percent of this revenue comes from the higher stakes class III gaming. Revenues from Indian gaming have built roads, schools, and health centers on reservations across the country, and greatly reduced reservation unemployment in many areas. As knowledge and expertise of gaming regulation grew, tribes recognized the need for internal controls. The National Indian Gaming Association [NIGA] and the National Congress of American Indians formed a task force which evaluated the minimum internal control standards of established gaming jurisdictions such as Nevada and New Jersey. The task force then created a set of internal control standards which tribes could choose to adopt. These standards became known as the ``NIGA MICS.'' Throughout the country, tribal gaming operations and tribal gaining commissions benefited from this effort, but it was a voluntary arrangement. Many tribes either did not adopt or enact the NIGA MICS or equivalent internal controls, or if they did, did not require strict adherence to them. Of course, even before the NIGA MICS, there were a number of tribal gaming operations that had utilized and enforced very sophisticated minimum internal control standards which likely were more stringent than and exceeded those promulgated by the associations. However, as the NIGC monitored tribal gaming operations and observed the imposition of standards by States and tribes, it became apparent that, for many tribes, actual operation did not always comport with the internal control standards adopted by the tribe. The NIGC noted there were a number of places in Indian country where not only were these standards not being met, but such good practices were plainly ignored. In addition, even for the tribes gaming pursuant to tribal-State compacts, the NIGC observed that details of the operations of tribal gaming and its regulation was often absent from the negotiated compacts; that in many instances the States' assigned role was minimal; and that in even more instances the actual participation of the States in regulatory oversight of tribal gaming operations was even less significant. This is not to say that an arrangement whereby a tribe has the sole responsibility for the regulation of its own gaming is unworkable. However, when no other entity has any significant oversight role, there develops the perception that the fox is watching the hen house. This perception can lead to a public distrust of the integrity of Indian gaming. In every other gaining jurisdiction, there is an oversight role for an entity that is separate from management of the gaining, and we believe that is what was intended and required under IGRA, and what has worked remarkably well since the implementation of the NIGC MICS. It is human nature to tend to do a better job when one knows that independent eyes occasionally fall on one's work. This is true in Indian gaming as well. In response to its observations, the NIGC embarked on an effort to promulgate a comprehensive set of internal control standards for tribal gaming operations in accordance with accepted gaming industry good practices and pursuant to the authority vested in the Commission by the IGRA. In close consultation with tribes and with the assistance of a Tribal Advisory Committee, in 1999 the NIGC promulgated the MICS. The MICS provide a comprehensive system of checks and balances to ensure control of all gaming revenues and gaming resources. The MICS are detailed internal procedures that tribes must meet both for the games offered for play and for support activities of the gaming. The internal controls thus cover cash handling and counting; internal audits; camera surveillance; the offering of credit; and information technology as well as the games themselves. They offer uniformity and consistency on an industry-wide basis while allowing variances to meet the specific needs of each tribe. In this way, the MICS protect the integrity of the gaming operation and ensure that gaining revenue is not lost through theft or embezzlement. Many tribes have adopted NIGC's MICS verbatim and others have adopted even more stringent standards. However, while development and adoption of these standards is vital to protecting the assets of a gaming operation, MICS are only truly effective if the employees and management of a gaining operation properly implement and consistently follow them. Therefore, it is necessary for each tribal gaming operation to have proper auditing procedures as this ensures that the internal controls are properly implemented and allows the tribe to discover methods of improving them. In addition to the internal audit requirements, the NIGC also conducts periodic ``MICS compliance audits'' of Indian gaming operations. The MICS audit ensures that the tribe has developed internal controls at least as stringent as the NIGC's MICS, and that the gaming operation complies with them. Exceptions are noted and communicated to both management and the tribe. A subsequent visit to the audited gaming facility is then scheduled, and the NIGC returns to verify that the requested corrections were made. In most cases, both the NIGC and tribe are pleased with the progress made because of the improved protection for tribal gaming revenues and assets. Recent NIGC MICS audits have revealed significant internal control weaknesses at a number of tribal casinos. At a facility in the Great Plains, we discovered that the tribe was not performing statistical analysis of actual to expected results; that access keys and information technology were not adequately protected; and that the people handling the money were accountable only to themselves. Another facility in the Southern Plains had failed to segregate duties such that the same individuals were both counting funds removed from the gaming machines and maintaining the accountability and physical possession of these funds. This serious lapse in security of the tribal gaming revenues was compounded by the lack of an internal audit system. At some operations we have discovered so many internal control deficiencies that we have convinced the tribes to voluntarily close the facilities until the problems can be corrected. In other instances we are prepared to close facilities without the tribe's cooperation due to the seriousness of the situation. The closing of a tribal gaming facility is, fortunately, a final option we have had to invoke only rarely. We always begin by working with the tribe to correct the weaknesses found, usually with great success. NIGC auditors found problems at a facility in the Southwest that included an ineffective internal audit department, surveillance problems, lack of statistical game analysis, and missing documentation for cashier cage accountability. This tribe submitted a plan outlining how it intended to fix the deficiencies within a 6-month period and the NIGC confirmed through follow-up testing that the tribe had successfully remedied the deficiencies in its internal controls. Similarly, the NIGC and a tribe in the West used the same method to remedy NIGC audit findings that included surveillance problems; computer network security lapses; cashier cage documentation lacking employee signatures and independent verification of transactions; and soft count sheets filled out and signed prior to the count of funds. Comparable success stories exist throughout the Nation which illustrate the extent to which the NIGC MICS regulatory program has benefited tribal gaming. II. THE CRIT DECISION AND ITS THREAT TO THE EFFECTIVE REGULATION OF CLASS III GAMING The reason I am here today is that a tribe engaged in class III gaming pursuant to a compact challenged the NIGC's regulatory authority to impose the MICS on class III gaming operations and received a district court decision in its favor. The CRIT decision resulted from an appeal of an NIGC Final Commission Decision and Order, issued in July 2003, which concluded that the Colorado River Indian Tribes [tribe or CRIT] violated NIGC regulations when it denied Commission representatives access to the tribe's gaming facility to conduct a MICS audit of the tribe's class III gaming activities. The tribe filed suit in Washington, DC District Court in January 2004, alleging that the NIGC exceeded its statutory authority under the IGRA. Recently, on August 24, 2005, the District Court issued an order finding that the NIGC exceeded its statutory powers in promulgating and enforcing the MICS for class III gaming. In issuing its decision, the court reviewed the text, structure, purpose, and legislative history of the IGRA. Despite our belief that the MICS are fundamental to the integrity of Indian gaming, tribes have long questioned our authority to regulate the class III gaming that accounts for most of the revenue in the industry. As the NIGC continues to attempt to enforce class III MICS on all but the CRIT, it will face the threat of multiple lawsuits. The NIGC has many ongoing MICS compliance efforts that are already hindered by the threat of litigation. For instance, there are at present 14 ongoing NIGC MICS compliance audits that are at various stages of completion. The gaming operations in question range from an operation conducting less than $5 million in gross gaming revenue to one producing over $1 billion in gross gaming revenue. Several of the tribes in question have already expressed their position that, because of the District Court's opinion, completed audits are now moot and those tribes do not need to remedy any non-compliance with class III MICS. Also, several other tribes are questioning the NIGC's authority to conduct MICS audits at their operations. Yet other tribes have already indicated their intent to forego some MICS requirements, such as the independent annual audit of internal controls. The District Court opinion addressed only our authority with respect to class III gaming, not class II gaming. However, the MICS are not class specific, and from a practical standpoint it is impossible to separate class II from class III revenues for the entire movement of money through the gaming operation. The MICS dictate procedures, not only for each game, but for cash handling, surveillance, and accounting. Most tribal gaming operations offer both class II and class III games in their facilities. Once the revenues have been collected from each game, they are necessarily commingled. It is not possible or practical to segregate and maintain class II gaming revenues separately. Thus, because the MICS relating to cash handling and accounting would necessarily infringe on the class III activities of the gaming operation, strict adherence to the District Court decision could force a total removal of the MICS from most gaming operations. Although the IGRA is replete with examples of NIGC's clear statutory authority over class III gaming, the District Court interpreted other sections of IGRA to mean that class II gaming is to be regulated by tribes and the NIGC and that class III gaming is to be regulated solely by tribes and States. Even if this were a proper interpretation, however, the reality is that, by and large, States have not taken an active role in the regulation of Indian gaming. As illustrated by the chart attached to my written testimony, there are 22 States that have entered into compacts with tribes for class III gaming. Of these compacts, four do not address internal control requirements at all. Six of them require very limited controls, such as the display of rules of play, maintenance of lists of barred persons, or minimal surveillance. A compact in one State provides for tribal internal controls reviewed by that State, and in one other State, compacts specify different levels of internal controls. Compacts in two States require the adoption of State standards or their equivalent, and compacts in four States set forth thorough, comprehensive internal controls. Additionally, in several States, the compact terms detailing casino controls would be eviscerated without the NIGC's MICS: compacts in four States expressly adopt the NIGC MICS or standards at least as stringent. From this review it is evident that many compacts have internal control provisions not up to the standards required by the NIGC MICS or States such as New Jersey or Nevada. As is clear from the chart, strict application of the District Court decision would remove internal control requirements, where a party independent from the ownership and management of the tribal gaming plays a role, in several States. Further, even when compacts contain adequate internal control provisions, not all States make enforcement of violations a priority. In fact, there are several States with compacts that take no appreciable role in the regulation of class III tribal gaming within their borders. Thus, without NIGC MICS and their supporting audits, there will effectively be no oversight regulation in those States. Some tribes have asserted that the NIGC's authority to promulgate and monitor compliance with standards for class III gaming intrudes upon tribal sovereignty. The act recognizes and balances tribal, Federal, and State interests. The IGRA as written requires tribes to debate whether they wish to cede a small portion of their sovereignty in order to game and thereby increase tribal funding to carryout other sovereign tasks. If a tribe opts to invest in gaming it must protect itself and its assets. The Federal Government also seeks to protect this investment in tribal sovereignty by ensuring tribal gaming succeeds, for a scandal at one gaming facility has the ability to negatively affect all operations. The vast majority of visitors to the gaming facilities are non-Indian and these visitors will only continue to patronize tribal gaming operations if the hard-won reputation for integrity and well-regulated gaming is maintained. The most effective measure of any nation's sovereignty is its ability to provide for its needs and the needs of its people. Self-sufficiency for tribal nations is a stated goal of the IGRA. Weakening the strong regulation of class III gaming thus works against tribal sovereignty and self-sufficiency. III. CONCLUSION As I have previously noted, there is a long history of tribal challenges to our class III authority. These challenges have prompted us to appear before this committee in the past to ask for legislation clarifying our authority. Now that a court has spoken to the issue we must again, and with renewed vigor, ask this committee to support legislation that eliminates any question regarding our legal authority to monitor and regulate class III gaming and that clarifies that NIGC authority over class III gaming is as broad as it is over class II gaming. 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