Video gambling: Georgia jackpot or bust?

June 1, 2015 - The Lottery Corporation maintains a test lab filled with video game machines. In 2013 the Georgia Legislature moved oversight of coin operated amusement machines to the Georgia Lottery Corporation and said that all the machines would need to be connected to a central accounting system. That created a monumental task for the Lottery Corp., which by July is to have most of the machines hooked up. BOB ANDRES / BANDRES@AJC.COM

Combined ShapeCaption
June 1, 2015 - The Lottery Corporation maintains a test lab filled with video game machines. In 2013 the Georgia Legislature moved oversight of coin operated amusement machines to the Georgia Lottery Corporation and said that all the machines would need to be connected to a central accounting system. That created a monumental task for the Lottery Corp., which by July is to have most of the machines hooked up. BOB ANDRES / BANDRES@AJC.COM

Staff intern Jane Hammond and data specialist Jennifer Peebles contributed to this report.

Play at your own risk

Georgians who play so-called coin-operated amusement machines are largely left to the mercy or greed of the machine operators.

That’s because the Legislature hasn't imposed the safeguards other states require for this kind of gambling, the Atlanta Journal-Constitution found.

The state doesn’t certify that the machines play fair. It’s up to the owners to make sure the games aren’t rigged.

Nor do players have any way of knowing what a machine pays out, a common industry practice rebuffed here as too cumbersome. And unlike other states, Georgia doesn’t bar children from playing the games.

Joseph Kim, senior vice president and general counsel for the Lottery Corp., said the state doesn’t regulate who plays and how much the machines pay out because there are no cash prizes for winning — at least there aren’t supposed to be.

“We don’t really consider it payout. It’s prize redemption,” Kim explained. “Once you say you are regulating payout, I think it almost encourages actual payment of something.”

John Heinen, who oversees enforcement for the Lottery Corp., said such regulation is not needed because “the market regulates itself.”

“If the player doesn’t feel like they are winning here, they are going to go somewhere else,” he said.

Other states though have laws setting the payout for similar machines. In Vegas, for example, state law requires slot machines to have a minimum payout of 75 percent of gross revenue. A number of states require the payout rate to be posted, and some average almost 90 percent.

With no such law, payouts for machines in Georgia appear to vary wildly — although there’s no way to know how little or how much. State officials can’t say because they do not track that information nor require it to be reported.

More than 100 state and local law enforcement agents converged on the south Georgia city of Tifton last summer, seizing among other things weapons and money, along with more than 100 clunky black video consoles.

The raid busted up an alleged gaming ring illegally paying winners in cash. Such are the problems bedeviling the state since the Legislature, eager to get a piece of the action, voted to embrace what constitutes the Peach State’s gambling industry.

Lawmakers two years ago imposed a system they said would finally clean up an industry operating what are officially known in Georgia as coin-operated “amusement” machines — slot machines by any other measure. Under the new rules, machine owners and operators have to pass background checks to get licensed. A central accounting system keeps track of machine revenues. Beefed-up enforcement limits payouts to $5 in credits for merchandise.

Yet those arrested in the raid legally owned the machines despite having criminal pasts: The state gave them a license because lawmakers said it was OK to grandfather them in. And most of the nearly 50 people arrested over the past year for similar offenses also had state approval to own or operate the machines that got them in trouble.

It’s a perpetual game of cat and mouse, as the state tries to sort out a mess largely of its own making. State leaders handed new regulatory control of the industry to Georgia Lottery Corp. and it has dramatically ramped up oversight. Yet plans to bring integrity to a shady industry have had mixed results, an Atlanta Journal-Constitution investigation found.

Georgia only has 10 inspectors to check on the more than 5,000 Georgia gas stations, convenience stores, coin laundries and American Legion posts licensed to operate the machines. Some of those operators are adept at dodges, Lottery Corp. officials say. As fast as a store owner might be banned for cash payouts, for example, he may have a relative or friend reapply for a license.

And the AJC investigation found convicted felons who hold coveted master licenses — state authority to actually own the machines and lease them to businesses. The two men arrested in the Tifton raid still hold their licenses, even as they face new charges for failing to report some revenue so they could pay winners in cash, according to state records obtained by the AJC.

Temptations are great in an industry that may generate anywhere from $200 million to more than $600 million a year in revenue. Lottery officials cannot say how much money the industry actually makes, in part because machine operators for years dramatically under-reported their income.

‘One bite at a time’

Until 2013, coin-operated amusement machines largely operated in the shadows in Georgia. Then state lawmakers, at Gov. Nathan Deal's behest, brought the machines from the back room to the front.

Deal downplayed the gambling angle and played up the idea of a new stream of revenue. He said the money would go toward the state's sagging HOPE Scholarship program, which helps thousands of Georgians pay for college. Legislators described the machines as games of skill and stressed that players would not be allowed to win cash — something they associated with seedier parts of the gaming industry.

No one at Lottery quite knew what they were getting into when they took on responsibility for making the system — with more than 25,000 machines in the state — work.

“We’re eating this elephant one bite at the time,” said Joseph Kim, senior vice president and general counsel for the Lottery Corp.

A two-year phase-in of the new law went fully into effect this month when — as of July 8 — the new centralized data reporting system began completely tracking revenue from each machine.

The new reporting system itself indicates how questionable the industry can be. In April 2014, when location licensees self-reported revenue from games, each machine averaged about $42 a day, according to John Heinen, who heads the Lottery Corp.’s efforts to police the machines.

This past April, after the Lottery had begun hooking machines up to the central accounting system, the amount nearly doubled to $82. Nobody thinks more people played the games. Rather, Lottery officials said, they believe the operators were cheating by not fully reporting their income to the state.

Industry boosters acknowledge that gaining compliance with the new regulations has been a Herculean task, but they say the oversight measures are bringing honesty to the games.

“Everyone has coalesced around the mission of regulating the industry,” said Lee Hunter, a second-generation industry leader who runs Midtown Vending, a Mableton-based business that has one of the largest stables of machines in the state. “We know there are marginal and fringe players. I’m not going to sit here and deny that. We know there are problematic retailers. We know there are problematic master license holders.”

But, he said, “Sunlight is the greatest antiseptic, and it is getting brighter and brighter every day.”

From outlaw to regulated

About 14 years ago, then-Gov. Roy Barnes and a Legislature shocked by the rapid proliferation of video poker terminals nearly drove the coin-operated amusement machine industry from the state. What saved it was a 2010 ruling by the state Supreme Court that certain machines were not illegal gambling devices (video poker, however, remains banned).

The industry since has been trying to claw its way back to respectability. The 2013 law was touted as the giant step in that direction.

The law allows “amusement” games as long as they require some “skill” — a restriction meant to outlaw pure gambling. But the only skill required for the games to be legal is human intervention — pushing a button one time when the colorful reels stop spinning. State law also states that machines must only pay out credits that can be redeemed for nominally priced merchandise, ranging from Cokes and gas cards to lottery tickets. Payouts are limited to $5 in merchandise per spin, but there’s no limit on how high payouts can accumulate.

Violations of the ban on cash payouts are a constant irritation for police and prosecutors, since they are common but require expensive, time-consuming undercover work to prove.

“They don’t have enough safeguards in there to stop it,” said Tift County Sheriff Gene Scarbrough.

For players such as Marvin White, who on a recent weekday quietly played a machine at a Shell gas station on DeKalb Industrial Way, it’s a way to kill time.

“I buy tickets but try not to play these machines too much; it’s way too easy to lose,” White said.

Typically, players feed cash or a redemption card into the machine, press play and touch the screen to stop the spinning reels flashing across the video screen. Little “luck” games on the machines also allow players to win by matching three of a certain symbol, such as pineapples. Hit the right symbol, tap a letter on the screen, reveal the dollar amount and color underneath, and then try to find more to match it.

On this day, White fed $10 into the machine and “won” as much as $80 in redemption credit — only to lose it all before giving up.

“Happens all the time,” he said. “You keep playing and then it’s all gone.”

Scarbrough said he sees this story play out every payday in his county. The state, he says, never should have embraced an industry that he says does harm.

“It is worth it for the Lottery commission to have that black mark against them?” he said. “To see families go in and spend their damn paycheck and then not have food? And believe me, that happens every Friday.”

An ‘enforcement nightmare’

Scarbrough would not discuss the case against Jerry Macri and Danny White, owners of the machines seized in last summer’s raid, because the case is still pending. But he described the attempt to regulate the video gambling industry as “a law enforcement nightmare.”

It’s also been a huge headache for the Lottery Corp.

Too often, some operators eluded enforcement by claiming that rogue employees were responsible for illegal payouts. To block that dodge, about six months ago the Lottery Corp. adopted a rule assuming that anyone who does illegal activities does so on behalf of the owners, the Lottery’s Kim said.

Using the state’s share of revenue from the games, Lottery helps pay for 10 GBI agents, plus a forensic auditor, an intelligence analyst and an investigative assistant, to help with gambling oversight. In partnership with Lottery, the GBI and other law enforcement have made at least 48 arrests of video gambling license holders and their accomplices. That includes large stings of organized crime rings like the operation alleged to have existed in Tifton and simultaneous raids across Thomaston June 30 at seven of the city’s approximately 20 licensed locations.

The agency has also contracted with the GBI for the law enforcement agency to run background checks on everyone who applies for a license. And it has set up an inter-agency fraud team, a tip line for people who see violations and a hearing officer to adjudicate cases. It’s already paying dividends, said Heinen, who is a former GBI agent.

Since September, the Lottery has issued some $994,000 worth of fines, when the agency took over from the Department of Revenue a hearings system that metes out punishment for breaking the rules.

Lottery also depends on the Georgia Department of Audits and Accounts to handle key aspects of the new law. One is to make sure that location licensees aren’t deriving more than half of their income from the machines, a provision aimed at preventing casino-like operations. The Audit Department declined to publicly release the reports, which they said were confidential by an arrangement between the Lottery and licensees.

Heinen said Lottery has made strides to publicize its efforts to reign in scofflaws and outlaws alike. Those who don’t heed the warnings will face the consequences, he said.

“A year ago, if you walked into a store machines would be in a back room, there would be no signage, there would be no decals. By and large every place you walk into — almost 5,000 — has come to the compliance side of that,” Heinen said.

“On the bigger things, we would love for people to play by the rules, but we know in real life that doesn’t happen,” he said.

Slipping through the cracks

The challenge is apparent by the checkered pasts of many of the most prominent people in the industry in Georgia.

Consider Josh Askew, president of Allstar Amusement Games in Griffin, who is among the state’s largest master license holders. According to state records, he was convicted of cocaine and marijuana possession in 2001 and then, while on probation, was convicted of ectasy possession two years later and sentenced to prison.

Askew would not have been eligible for a master license if he had not been granted a pardon in 2013, which restored his civil rights but did not erase the convictions.

Why he got the pardon is unknown. Steve Hayes, spokesman for the State Board of Pardons and Paroles, said Askew completed his sentence and did not commit another crime in the five years following his release, which made him eligible to apply for a pardon.

The AJC asked the board to release Askew’s file, which is confidential unless the board deems releasing the information is in the public’s interest. The board declined the request.

Askew went back to the board this year and asked them to restore his right to own a firearm. The board agreed.

Askew said he inherited the business from his father, who died in 2010, and that he has been conscientious about his behavior since his release from prison. "I had a great family. My dad was making money," he said. "It was easy for me as long as I was willing to make the right decisions. It's been a long work in progress."

Other examples found by the AJC include a master license holder with drug convictions in Tennessee. The Lottery has no record of that person being pardoned.

Welcome to the new regime

For all the headaches, the HOPE fund has benefited and could see a big return in the future.

The law requires that a percentage of machine revenues — starting at 5 percent last year and increasing by 1 percent each year until it hits a maximum of 10 percent — would go to the state.

The Lottery in the fiscal year that ended June 30 expected to take in more than $13 million between machine revenues and fees, but less than half that amount will go to the HOPE Scholarship. The state’s share of the money must also pay for the administrative costs of overseeing the machines, leaving $5.4 million for HOPE.

Lottery officials,however, currently project that number to jump to more than $20 million in 2016 — a year after their centralized system will have become fully operational.

They report a noticeable increase in the past year of license requests to either locate machines in a business or to own and lease them. Officials said they believe the increase is due to the new rules.

Hunter said the industry has an interest in cleaning itself up, and that he and other industry leaders welcome the new regime.

“We’re on the cusp of doing something that’s never been done before” in Georgia, Hunter said. “It’s a story worth telling. It’s one for the ages.”