The introduction of the machines comes at a time when both casino operators and the coffers of the Mexican government could use a boost. The global economic downturn, the swine flu epidemic and Mexico’s ubiquitous narco-terrorism violence are the root causes of a decline in gaming revenues in the country for calendar year 2009 that is projected in the tens of millions of dollars. The introduction of the new machines comes as welcome news for the fiscal well-being of the US$1 billion gaming industry and as a renewed source of much-needed supply for the country’s tax collectors.
The last several years have been characterized by casino operators struggling under ambiguous regulations that not only created industry-wide confusion but gave rise to maverick gray marketeers who were able to beat the law-abiding and compliant operators to the punch and reap the rewards of operating full-featured, casino-style machines without regard to the law, gaming regulations or the system of taxation. With an estimated 75,000 gaming machines now operating in Mexico, and more and more so-called Class III machines arriving at its ports, the need for order and straightforward standards and regulations has never been more critical.
That the law has been ambiguous might be regarded as a cruel understatement. Mexican gaming interests have been operating under regulations that were originally written in 1947. As a result, the country has held itself to a limited range of legal acceptability in the area of electronic gaming machines. The so-called Class II machine that the country has allowed since the mid-’90s has roots as an electronic platform for multiple-card bingo games. Later, these legally acceptable machines evolved to take on the look and feel of more sophisticated slots while still playing nothing more than bingo.
In Mexico legislative action is required to change gaming regulations. The process is cumbersome. The result has been a series of one-off approvals that lack uniformity and gave rise to even more confusion and frustration for operators and vendors alike.
The industry has steadily been lobbying government officials to broaden the scope of what constitutes legal electronic gaming and introduce new games. Operators have sought approval for the same types of games that are familiar in casinos elsewhere in North America and globally.
Alfonso Pérez, who heads a trade association (Asociación de Permisionarios de Juegos y Sorteos) representing approximately 80 percent of the legal operators, notes, “Technically, the Class III machine was never prohibited. There was no written law that banned the machines. Recently, a series of official letters from the Secretaria de Gobernacion [Ministry of the Interior] to operators across Mexico affirmed that independently operated machines are now regarded as legally acceptable, ‘providing they are installed in specified and authorized locations.’”
The government’s official communications have gone further in updating and articulating what can be considered a legal machine with additional criteria addressing issued concerning integrity, randomness, the ability to allow for administrative audits and the ability to be reviewed by the Ministry of the Interior.
So with legal ambiguity finally morphing into a new and quite welcome clarity, the way has been cleared for the Vegas-style machines to begin arriving.
“I would say that before the year ends we will have several thousands of these machines playing in Mexico,” says Pérez.
Carlos Murguia, director of Gaming Halls for one of Mexico’s larger operators, the Caliente Group, says, “We will now be able to provide our guests with hundreds of attractive and exciting new games. This will let us cater to different kinds of players while providing our regulars with added variety.”
Arturo Alemany, president of MIR International Services, a U.S. company that negotiates on behalf of select legal gaming operators in Mexico, says, “The advent of these machines is good for a number of reasons. The machines will be creating thousands of new jobs. They will be instrumental in helping to grow and further develop Mexican resort areas, and the operators will be able to pay even more of their fair share of taxes to the government.”
As he sees it, “The government has always sought greater taxes from the gambling sector. So, as of now, the gaming regulations are working hand in hand with the Mexican economy.”
THE âRIGHT DECISIONS'What this speaks to is an interesting convergence of interests evidenced at this time in Mexico between the gaming operators, who are anxious to upgrade their parlors with the new machines and reap the cash rewards that can come with new players and a newfound enthusiasm for these slots, and a cash-strapped country that has consistently looked to the gaming operators as an important source of tax revenue.
“With the recent interpretation of the Mexico gaming regulations, the impact to the market will be immediate,” says John Connelly, vice president International for Bally Technologies. “New forms of cabinets, systems, play actions and business models will play a major roll in transforming this market from a Class II bingo environment into a more traditional form of gaming. This potential for improved products and technology will provide a needed increase in performance and revenue for the industry. With this said, how the Mexican market chooses to evolve will be essential to its long-term success. Increased self-regulation and controls will be instrumental in sustaining the recent opportunities provided.”
The operators, represented by Pérez and his association, are in current negotiations with the government to agree on a new tax base. The government is pushing for a 40 percent tax on revenues, which is double the current rate charged.
“We are trying to lower that number,” Pérez says. “I expect that number to stay in the 30s or high 20s. I don’t think I’m going to be successful lowering it more because the Mexican government has huge revenue problems.”
He adds, “On top of that we are paying around for 9 to 10 percent in local and state taxes. In our talks with the federal government we are seeking 100 percent credit for those local and state taxes. If we can get credit for 100 percent of those taxes we will then actually encourage the local governments to charge us even more taxes. With more money from us our relationships with local jurisdictions will be made stronger. Plus, we will have the local authorities, right on the spot, in the same geographic area, to enforce the gaming legislation, unlike the distant federal government that doesn’t know who is operating where and under what circumstances.”
All of this should make it more difficult for the gray market operators. Between higher local tax obligations and the increased scrutiny of local law enforcement, the anticipation is that the illegal operators might feel unwelcome in the cities and towns where they are currently doing business.
Pérez says, “In our current negotiations we are asking the federal government to really make an effort, to do their homework on charging taxes to absolutely everybody in the industry.”
By saying “absolutely everybody” Pérez is taking an obvious swipe at the aggressive gray marketeers who have circumvented the regulations by going to the courts to obtain amparos, which are similar to temporary restraining orders in the United States, allowing them to operate games without the approval of the Ministry of Interior. Thus, many of these operators got the jump on bringing in Class III slots to the country. This activity now accounts for approximately 30 to 35 percent of Mexico’s total casino business. Operating just under the radar of the federal government and likely not paying their fair share of federal taxes, the gray market has been effective in capturing revenue and market share from the legal operations. It is estimated that the illegals are operating as many as 8,000 machines - mostly second- or third-hand devices. In some cases these are in small casino parlors, in others they may show up as a machine or two tucked into a neighborhood grocery. They are part of an informal economy that includes a long and growing list of many kinds of businesses that are not paying federal taxes in Mexico.
But this gray market faces yet more obstacles. They may soon lose access to key vendors. Recently, Pérez’s group has grown stronger with commercial memberships that now include major U.S.-based manufacturers like Bally, Video Gaming Technologies and IGT.
“We are proactively working with local and international officials to ensure the market is positioned for long-term success and provides the tools and regulations necessary to develop a legitimate gaming business for the future,” says Connelly.
“We stand behind legal gaming, tougher controls, centralized systems and transparency,” says Eduardo Hernandez, president and CEO of the Caliente Group. “We will happily pay more taxes if there are greater controls and the gray market is forced out in the process.”
It now appears that everyone with a stake in a legal and well-regulated industry -operators, vendors, government and consumers - has something to cheer. The country’s gambling and betting parlors will be providing a newer, more robust entertainment experience. There’s money to be won, taxes to be paid, increasing clarity on the regulatory front and the potential to eliminate the damaging illegal gaming sector.
“Thus far, all indications show the right decisions are being made,” says Connelly. “All of us at Bally are excited as to what the future in Mexico will offer.”