Tough laws regulate gambling in NSW - and they're about to be bypassed to help James Packer build his casino. The independence of casino regulation is being challenged. Wendy Bacon reports.

Back in the early 1990s when NSW government decided to set up a large casino in Sydney, parliament passed a tough act to regulate the industry. Two decades later, the O'Farrell government is about to bypass this law and NSW's Independent Liquor and Gaming Authority in favour of giving James Packer the go-ahead for his Barangaroo casino. Wendy Bacon reports.

Casinos have a tendency to attract corruption and crime. They are supposed to be tightly regulated for this reason. The purpose of the NSW Independent Liquor and Gaming Authority (ILGA) is stated clearly in the NSW Casino Control Act: to protect NSW's Star casino from "falling under criminal influence or exploitation", to ensure gambling is "conducted honestly" and to control the potential of the casino to harm individuals and the public interest.

Under the Act, the Minister, currently George Souris, can direct the ILGA to call for expressions of interest for a casino. After a short list is developed, the full tender process begins. Selection criteria can include economic concerns. To get a license, proprietors need to undergo lengthy probity investigations, and if successful, any significant new employee has to be cleared too. No company can take up more than 10 per cent of shares without an investigation. Every five years, there must be a renewal process which involves more checks. A team of government inspectors are employed to manage breaches of the Act or crime at Star Casino. Processes can always become corrupted or ineffective, but at least there is a process.

Packer is very familiar with this process, which is similar to that in other states. As we reported last week, he and his father were outbid for the Sydney license in 1994. He was reported to be close to getting a second casino without a tender in 2007 but Premier Iemma pulled the plug, announcing he was in favour of tenders. This time Packer sees no need for a tender. He told a business dinner last week, he believes he would get it anyway.

He also knows, but does not acknowledge, that if his proposition for a high roller casino hotel and resort on the edge of Sydney Harbour is a sound one, other big international players could well be interested — including those who beat Packer and his partner Lawrence Ho in bids in Singapore. An independent process would also hold his economic claims up to scrutiny.

When operating cleanly, tenders give taxpayers best value and lessen the risk of corruption. Many, including the NSW Greens, Sydney Lord Mayor Clover Moore, ex-premier Morris Iemma and ex-Federal Opposition Leader John Hewson believe there should be a tender if NSW parliament changes the law to allow for a second casino.

When in opposition, Souris urged Labor to hold a tender when it looked like granting a second license to Packer in 2007. Now they're governing, the O'Farrell government says it will get independent advice; it has at any rate already waived the casino proposal through to Stage 2 of its new "unsolicited proposals" legislation. This is the sort of approach Packer likes. He was encouraged by the way O'Farrell said " let's just go for it". Packer added that it was a three stage process and he still have to pass stages two and three. He welcomed the way Labor and Liberals for approaching the issue in a bipartisan way.

How independent is the ILGA?

Chris Sidoti is the Chair of the ILGA. His appointment by the Iemma government was unexpected, as he was known as a long-term activist in NGOs and official human rights organisations and had no previous experience in the gambling industry. His appointment was reported to be part of the Labor government's effort to downplay its reputation for being soft on gambling interests. His job is a big one. The Authority is now responsible for some aspects of liquor licensing as well as poker machine licences. One of Sidoti's latest decisions was to reject Woolworth's subsidiary Dan Murphy's a license in Byron Bay on the grounds that the company's claims that it would not increase amount of alcohol consumed in the community could not be sustained.

When New Matilda interviewed Sidoti in September, he told us he had only read about James Packer's proposal for a second NSW casino at Barangaroo in the media. In the meantime, however, the ILGA was already involved in investigating whether Crown should be allowed to be able lift its shareholding in Echo Entertainment which operates Sydney's sole casino Star and three casinos in Queensland from 10 per cent to up to 25 per cent.

Although he has only one casino to regulate, Sidoti's job has not been an easy one this year. The ILGA has also been dealing with problems at Star casino including its failure to report the resignation of Manager Vaikuna following allegations of sexual harassment. After a public investigation, the ILGA fined Star $100,000 for failing to report the incident. A member of O'Farrell's own office, Peter Grimshaw, who was previously in charge of PR for Star, also resigned after his involvement in the affair became public. ILGA later cleared him of a suggestion that he conspired to damage the casino, with which O'Farrell has had a poor relationship.

Behind the scenes. ILGA has also been working to maintain its independence.

Until until five years ago, the Casino Control Authority was able to hire its own staff and hold them accountable. But in 2007, while the Labor government was still in power, a new Act was passed that brought the Authority into a government department from which it would second its staff and resources. Currently this is the Department of Trade and Investment, within which stands a number of minor departments including the Office of Liquor and Gaming.

However, the new Act was never properly implemented, nor was an agreement reached about how the Office and the Authority would divide the work and to whom staff would be accountable. This potentially threatened the independence of the ILGA. Sidoti was sufficiently worried to write in his 2011 annual report that concluding an agreement "proved more difficult than I had anticipated at the time" although the government was "in the process of resolving the difficulties".

After these comments were reported in the media, It was agreed that there would be an independent review by global services firm Ernst and Young (E&Y). It was an odd choice; the firm is heavily involved in auditing Australia's casino industry. It audits Echo Entertainment, which has a clear interest in NSW casino regulation. It also has a close relationship with Packer's companies from which it earnt more than $7.5 million in 2011/2012. But, the Department pointed out, E&Y is a "pre-approved government supplier" and that "global services firms typically deal with a large range of clients across a large range of industries" and have protocols in places to deal with perceived conflicts of interest.

The agreement reached means that existing public servants will seconded as needed to the Authority and will be accountable to it. New Matilda wanted to see a copy of the final Memorandum of Understanding between the Department and the Authority. Sidoti was happy to show it to us — provided the Department agreed. It declined on grounds that the review and the agreement were "internal working documents" and not for public release.

Sidoti said the final agreement "is a good result" although "obviously we have to make some allowances for flexibility, some issues had to be talked through".But as one source at the Authority told New Matilda, there is still confusion, including about the ongoing membership of the Authority.

Chris Sidoti's five-year term expires at the end of December. The terms of two other members are also due to expire, one of whom is Sharryn Brownlees, whose appointment ends today. She was recently extended but only for 12 months rather than 5 years.

We asked Sidoti in September what was happening with the appointments. He explained that the appointments process had "barely started." He told us: "I mentioned it to the Minister. I just wanted to make sure whether I wanted to be appointed or not, he was reminded." Sidoti is overseas until mid-November and is unable to answer further questions.

The ILGA has been down one member since August 2011, when, O'Farrell appointed a former chief executive of the NSW Hotels Association Brian Ross. O'Farrell made the appointment only weeks after Ross had secretly lobbied him to reject legislation that would see a hotel could lose its license if it breached liquor laws repeatedly. Ross said that he had known O'Farrell for 20 years. After this became public, Ross resigned only eight days into his term. While acknowledging that he knew Ross, O'Farrell denied he had done anything wrong. Ross was not replaced on the Authority.

ILGA's Investigates Crown's Application

Since March this year, the ILGA has been quietly dealing with moves by Crown which began accumulating shares in Echo last year. Crown reached the threshold of 10 per cent around the time it announced plans for a casino at Barangaroo in February. While keeping everyone guessing about whether he intended to mount a takeover or form a partnership with Echo, Packer needs permission from the ILGA to go further. This means an investigation involving police checks, inquiries into its management both in Australia and overseas, financial analysis of Crown's own books and an analysis of whether its involvement in Echo could threaten the management or financial viability of Echo.

Because Echo operates in both NSW and QLD, the QLD's Office of Liquor and Gaming is investigating applications from both Crown and Genting, the world's third biggest casino company which has made a similar application to increase its shareholding in Echo.

For a start, the ILGA had to get a team in place. Although he did not comment on the particular inquiry, Sidoti explained that "sometimes it is a challenge to find one (major accounting firm) that does not have as association with an applicant. Some of these companies are enormous." (Crown, for example has connections with E&Y, and financial associations with UBS and Macquarie Bank. Genting uses Price Waterhouse and others).

These type of inquiries happen in secret to protect commercial information and sources and are expensive processes. Under NSW law, Crown and Genting will have to cover costs, while in Queensland the taxpayer pays. Asked how the Queensland regulator was coping with the extra work, Sidoti said we would have to talk to them, but he could say "they were under pressure." Despite a number of attempts New Matilda was unable to talk to the Queensland regulator.

It is also difficult to tell how deep the inquiries will go or whether the investigators will merely look for a clean bill of financial health and rely heavily on existing Crown approvals. Questions have been asked about whether Crown could be overextending itself financially, with its plans for Macau, Philippines, Melbourne and Perth, although these issues could be cleared up now the company is selling Consolidated Media Holdings for $2 billion to its friendly media partner News Ltd.

But if the investigators do take any notice of one submission, it could have gone much deeper than that.

Stephen Mayne, the original owner of and a recently elected Melbourne City Councillor, represented the Australian Shareholders Association at the Echo Enterainment general meeting last week. He called the events surrounding the support for the Barangaroo casino proposal as one of the worst examples of "crony capitalism" he had witnessed and made a submission to the ILGA on his own behalf.

Mayne's knowledge of casino licensing goes back a long way to 1993, when Crown was first awarded Victoria's monopoly casino licence and he was working as press secretary for then Premier Jeff Kennett. When he resigned in 1994, he had concerns about the Crown tendering process. Later during the 1999 Victorian election, he published a long essay on, which partly deals with the relationship between Packer, Crown and Kennett. As he wrote in his submission, his account has never been challenged.

Mayne's concerns about Packer's moves on Echo were triggered by his campaign to remove Echo's Chairman John Story and install former Victorian Premier Jeff Kennett instead. As Mayne wrote after hearing that news, he found it hard to know "whether to laugh or cry.".

Kennett is a friend of Packer's and was one of the few to defend him in 2009 when he lost $2 billion on a Las Vegas casino venture. At the time he told Paul Barry that after "tough times he would make a substantial contribution in the next decade". He supported Packer's new casino proposal. Story was ultimately forced to resign, ex-football executive John O'Neill stepped up as Chairman and Packer was unable to install Kennett.

In his submission, Mayne asked the NSW ILGA to investigate claims in the 1990s that an application by Crown to triple the size of its hotel was a "done deal" in return for specific favours to people involved with the government handling of the casino, well before it was approved by the Victorian Casino and Gaming Authority.

Mayne also raises the circumstances of a payment Kennett received after he was mistakenly defamed by Channel Nine. The payment was confidential and its amount has never been confirmed. Four years later, Kennett resigned from the government's Casino sub-committee citing a perceived conflict of interest with Crown.

"But weren't those conflicts there all along?" Mayne asks. "Shouldn't they have been avoided from the start? The Premier should not have been simultaneously negotiating a personal payment from one part of the Packer empire, Channel Nine, while adjudicating on regulatory changes for another part, namely Crown." Mayne acknowledges that he has raised concerns about Packer and Kennett's relationship with the Victorian regulator previously without success, but argues they should examined again in the light of Packer's move to install Kennett at Echo.

Mayne also refers to the Packer family's long history of "inappropriate" relationships with political figures that distort regulatory decisions. He argues that this is particularly inappropriate for the gambling industry, citing how similar relationships with consultants like Graham Richardson delayed the introduction of Pay TV in Australia and boosted the profits of Channel Nine.

One of Mayne's key concerns is the campaign of destabilisation against Echo which Packer has been conducting all year. "There is a strong argument that this type of conduct could damage its reputation and share price in a way that the threatens Echo's viability," Mayne wrote to the ILGA. "Mr Packer's media commentary and interventions during the recent inquiry into The Star were also quite inappropriate for a potential licensee."

Even last week, when he was celebrating his success, Packer continued to bag Star, including its recent $900 facelift, a point raised by Mayne at the Echo meeting. During the year, Packing placed 20 full page advertisements attacking Echo's management , accused it incompetence and of breaching its code of conduct.

Packer's onslaught was so bad that even Premier O'Farrell felt the need to distance himself by saying that it was "starting to look like a political campaign", which it most certainly was. O'Farrell then promptly undermined his previous statements by declaring Packer to be a "shrewd and successful businessman. I don't own shares... but I am sure that shareholders are impressed with the success that Crown has had in recent times."

Another matter that the ILGA and Queensland investigators may have explored is Stanley Ho's donations to Labor in 2007 when Packer was pushing for a second casino. Stanley Ho had earlier been banned from holding a license in NSW. Crown preserved its Victorian and Western Australian licences by ending its plan to go into joint operations with Stanley Ho, who has been found by investigators in other countries to be associated with organised crime. Investigators will recheck the current relationships between the Packer and Ho families to make sure that the only management connection is with son Lawrence Ho and not his father, especially given more recent findings against the Ho family by New Jersey regulators in 2010.

The financial press has been reporting that the ILGA go ahead for Crown is due any day. Even if he gets the all clear from the ILGA, it is not clear if Packer is still interested in Echo with whom he has broken off communication. He feels increasingly confident of getting a second license in 2019 when Star's exclusive agreement runs out.