The V.I. Lottery has not kept tight controls over its video lottery terminal operations, resulting in millions of dollars in lost revenues, a gaming industry that lacks integrity, and business and financial records that are impossible to verify, according to an audit released Friday by the U.S. Department of the Interior's Office of the Inspector General.
The audit examined the V.I. Lottery's operations and oversight of the gambling machines between August 2003 and December 2005. The findings were scathing.
"We found serious deficiencies, such as substantial unrealized tax revenues, an overall lack of operational control, a flawed contract and master lease agreement, an absence of monitoring, neglect of payment to special government funds, and insufficiencies in records management," the audit states.
While the video gambling machines have been a fixture on St. Thomas and St. John for four years, the contract that sets up their operation has been in place for nearly a decade. In 1998, even though video lottery terminals were not yet legal, the territory awarded a contract to Southland Gaming of the Virgin Islands - abbreviated SGVI in the audit - to operate the machines commonly known as VLTs. These machines are computerized games that look and play like slot machines but are connected to a central computer system.
After a long battle between the 24th Legislature and Gov. Charles Turnbull, legislation allowing the gambling machines on St. Thomas and St. John was approved in late 2002. While the issue was being debated, supporters argued that the machines would cater to tourists and enhance the territory's revenues. The legislation indicated specific projects that the money would go toward, including education and prescription drug assistance for the elderly.
Pursuant to the contract, Southland Gaming began setting up the video gambling machines throughout St. Thomas and St. John in early 2003. According to the audit, 489 of the machines are operating at resorts, bars, restaurants and gaming centers on St. Thomas and St. John.
Based on figures from Southland Gaming, the audit estimates that in calendar years 2003, 2004 and 2005, the machines took in about $87 million in cash. During that same three-year time period, they paid out about $61 million in winnings, or 70 percent.
Of the $26.1 million in net proceeds, about 46 percent -Â $12 million - went to Southland Gaming; about 22 percent - $5.7 million - went to the businesses where the machines are located; and about 32 percent - $8.4 million - went to the V.I. Lottery.
The audit released Friday found that many of the problems with oversight and control of the machines stem from the contract between the government and Southland Gaming.
The contract lacks key conditions that could protect the government's financial interests, the audit states. It does not require Southland Gaming to submit annual audited financial statements to the Lottery, meaning that the Lottery cannot determine whether its share of net gaming proceeds is based on Southland's actual revenues. Lack of such records also prevents the Lottery from determining whether Southland officials withhold 25 percent of all winnings of more than $5,000 for the V.I. Internal Revenue Bureau, the audit states.
The contract also exempts video gambling revenues from gross receipts taxes by stating that profits from the games will be considered "commissions from the sale of lottery tickets." The audit points out that the law does not enable that tax exemption and questions the legality of the clause. If retailers had paid gross receipts taxes on lottery revenues, the territory would have received at least $3.7 million more in taxes during the three years covered in the audit.
Additionally, the contract does not set a minimum payout rate for the machines. According to the audit, a minimum payout rate is set by contract in other jurisdictions to ensure that gaming is conducted honestly.
Aside from the issues that auditors found with the contract between Southland and the government, the report found several operational and managerial problems in V.I. Lottery offices including unmonitored cash collections, inadequate testing of video lottery terminals and little security.
"The lack of any working system of checks and balances over VLT operations significantly increases the risk of fraud, waste and abuse of VLT revenues and undermines public confidence and trust in VLT operations," the audit states.
Lottery officials do not remove cash receipts or betting and payout data from the machines and they do not monitor those doing so, the audit found. They also do not reconcile the weekly revenue statements from Southland Gaming with payments received by the Lottery to make sure that the government is getting its fair share of the gaming proceeds. Auditors surprised Lottery officials with some errors they found, the report states.
Counters inside each machine provide payment data that Southland downloads each week. With that data, the audit states, Southland manually prepares revenue statements and determines how much the V.I. Lottery is owed. Gambling machines elsewhere utilize data key systems that ensure that funds are properly accounted for.
"Because the Lottery did not monitor cash collections, it was totally dependent on SGVI data and could not verify the accuracy of that data," the audit states.
Auditors also uncovered sloppy record keeping in the Lottery offices for retailers applying to operate the gambling machines in their establishments. Rules and regulations established by Southland and approved by the Lottery require all applicants to complete an application form, submit police records and passport-sized photos, and provide any other pertinent documentation.
The audit states that application files were available only for 35 of the 42 retailers that operate the machines. Of the files that were in the offices, most were not complete, the report states. Only one applicant included a business license. Almost two thirds of the applications showed no approval date from the Lottery. Five applicants never finished the application, and 12 did not include police reports or photographs.
The machines themselves also were not adequately controlled, the audit found. No comprehensive security program exists to protect the system data, there is no contingency plan or backup for data that could be lost in a disaster, and the Lottery cannot remotely shut down machines at locations where the operators are not following guidelines. The computer system that has the data is not even kept secure: it is stored behind an ordinary locked door, the audit states.
"In fact, when interviewed, Lottery officials expressed surprise that they should be concerned about system security," the audit states.
Additionally, the machines - salvaged from a casino on the mainland United States and reconfigured for the Virgin Islands - were not all tested until 2006 to ensure they operated properly.
Several recommendations, most relating to internal controls, are included at the end of the audit. The V.I. Lottery has worked to remedy most, but not all, of them, the audit states. The audit recommends that the Lottery:
- Determine whether gambling proceeds can be assessed gross receipts taxes. Lottery executive director Paul Flemming said that issue is being reviewed.
- Ensure that Southland has withheld money for the IRB, pays its corporate income taxes and pays its annual licensing fees.
- Update its records on applications, establish procedures to ensure that Southland is paying accurately, test all machines on an ongoing and regular basis, establish cash collection and security procedures, obtain audited statements for gambling machine operations and revise the government's contract with Southland to give the government more control over operations.
Flemming said that the contract with Southland will be up for renewal next year and that he hopes it can be renegotiated to give the government more control. Other control-related issues are likely to be addressed in new detailed rules and regulations for the machines, which are being reviewed by legal counsel, he said.
"The government should take full control of regulating the industry," Flemming said. "There's no ifs, ands or buts about it. The contract needs to be adjusted."
Flemming described the audit as not wholly fair. He claimed that the VLT's central computer keeps many of the records that the audit found lacking, yet auditors never wanted to know about that data. Flemming said that aspects of the audit just reinforce the perception that the Lottery cannot keep its affairs in order.
Hannibal Ware, field office supervisor for the Interior Department Inspector General's Office, could not be reached for comment on Friday. |
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