**PHILIP N. HOGEN**

**CHAIRMAN, NATIONAL INDIAN GAMING COMMISSION**

**BEFORE THE**

**SENATE COMMITTEE ON INDIAN AFFAIRS**

**September 21, 2005**

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 D.C.
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]{.underline}, 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. § 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. § 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. §
2701 *et seq.*, was passed, Indian gaming has grown exponentially from
\$100 million in revenue to over \$19.4 billion in 2004. Approximately
80% 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 gaming
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 gaming jurisdiction, there is an oversight
role for an entity that is separate from management of the gaming, 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 gaming 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 gaming 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 six 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 D.C. District Court in January of
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 Tribe, 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 fourteen
(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 a billion dollars 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 noncompliance 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
twenty-two (22) states that have entered into compacts with tribes for
Class III gaming. Of these compacts, four (4) do not address internal
control requirements at all. Six (6) 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 (1) state
provides for tribal internal controls reviewed by that state, and in one
(1) other state, compacts specify different levels of internal controls.
Compacts in two (2) states require the adoption of state standards or
their equivalent, and compacts in four (4) 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 (4) 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 carry out 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.