    [Senate Hearing 109-50]
    [From the U.S. Government Publishing Office]

                                                      S. Hrg. 109-50, Pt. 4

                                     GAMING

    =======================================================================

                                    HEARING

                                   BEFORE THE

                          COMMITTEE ON INDIAN AFFAIRS
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 FIRST SESSION

                                       ON

              OVERSIGHT HEARING ON THE REGULATION OF INDIAN GAMING

                                   __________

                               SEPTEMBER 21, 2005
                                 WASHINGTON, DC

                                   __________

                                     PART 4

                                   __________

                        U.S. GOVERNMENT PRINTING OFFICE
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                          COMMITTEE ON INDIAN AFFAIRS

                         JOHN McCAIN, Arizona, Chairman

                  BYRON L. DORGAN, North Dakota, Vice Chairman

    PETE V. DOMENICI, New Mexico         DANIEL K. INOUYE, Hawaii
    CRAIG THOMAS, Wyoming                KENT CONRAD, North Dakota
    GORDON SMITH, Oregon                 DANIEL K. AKAKA, Hawaii
    LISA MURKOWSKI, Alaska               TIM JOHNSON, South Dakota
    MICHAEL D. CRAPO, Idaho              MARIA CANTWELL, Washington
    RICHARD BURR, North Carolina
    TOM COBURN, M.D., Oklahoma

                     Jeanne Bumpus, Majority Staff Director

                    Sara G. Garland, Minority Staff Director

                                      (ii)

                                C O N T E N T S

                                  ----------
                                                                       Page
    Statements:
        Akaka, Hon. Daniel K., U.S. Senator from Hawaii..............     2
        Conrad, Hon. Kent, U.S. Senator from North Dakota............     2
        Dorgan, Hon. Byron L., U.S. Senator from North Dakota, vice
          chairman, Committee on Indian Affairs......................     1
        Hogen, Phil, chairman, National Indian Gaming Commission.....     3
        McCain, Hon. John, U.S. Senator from Arizona, chairman,
          Committee on Indian Affairs................................     1
        Van Norman, Mark, executive director, National Indian Gaming
          Commission.................................................    11
        Washburn, Kevin, associate professor of law, University of
          Minnesota..................................................    13
        .............................................................

                                    Appendix

    Prepared statements:
        Hogen, Phil (with attachment)................................    23
        Van Norman, Mark.............................................    29
        Washburn, Kevin..............................................    38
    Additional material submitted for the record:
        Allen, W. Ron, chairman, Washington Indian Gaming Association
          and tribal chairman, Jamestown S'Klallam Tribe, letter.....    43
        Eddy, Jr., Daniel, tribal council chairman, Colorado River
          Indian Tribes, letter......................................    45

                                     GAMING

                                  ----------

                         WEDNESDAY, SEPTEMBER 21, 2005

                                           U.S. Senate,
                                   Committee on Indian Affairs,
                                                        Washington, DC.
        The committee met, pursuant to notice, at 9:30 a.m. in room
    325 Senate Russell Office Building, Hon. John McCain (chairman
    of the committee), presiding.
        Present: Senators McCain, Akaka, Conrad, Dorgan, and
    Inouye.

       STATEMENT OF HON. JOHN McCAIN, U.S. SENATOR FROM ARIZONA,
                 CHAIRMAN, COMMITTEE ON INDIAN AFFAIRS

        The Chairman. T1Last month, a Federal District Court issued
    a ruling with potentially far-reaching effects on the
    regulation of Indian gaming. In Colorado River Indian Tribes v.
    the National Indian Gaming Commission, the court held that the
    Indian Gaming Regulatory Act as it is now written does not give
    the NIGC authority to issue or enforce regulations which
    address the day to day operations of class III gaming
    facilities, the so-called minimum internal control standards,
    or MICS.
        Class III gaming represents the lion's share of revenue
    created by Indian gaming. The focus of today's hearing is not
    whether or not the court's decision was correct. Instead, the
    question before us today is, among tribes, States, and the
    Federal Government, how do we make sure that there is adequate
    regulation of class III gaming?
        Before we begin the hearing, I have a comment on another
    regulatory matter. In April, I requested that the Department of
    Justice [DOJ] and NIGC put their heads together to see if they
    could come up with a proposal to address the ongoing litigation
    and controversy surrounding class II bingo machines. I
    understand that the DOJ and NIGC have concluded their
    discussions regarding a potential statutory fix. While the
    department has not shared this proposal with the committee, I
    look forward to seeing it in the near future.
        Senator Dorgan.

      STATEMENT OF HON. BYRON L. DORGAN, U.S. SENATOR FROM NORTH
           DAKOTA, VICE CHAIRMAN, COMMITTEE ON INDIAN AFFAIRS

        Senator Dorgan. Mr. Chairman, thank you very much.
        Today, we are going to hear testimony from Federal and
    tribal advocates, along with an independent analysis of what
    roles each government are playing and should be playing with
    respect to class III gaming. I hope this testimony today will
    inform this committee in a significant way as to the practical
    impact of the recent court decision on this matter.
        I think you posed the question implicitly with your opening
    statement with respect to the integrity of Indian gaming. It
    would necessitate a change in Federal law, whether such a
    change should be immediate, whether such a change should in
    fact be made. It is an important issue, and I look forward very
    much to hearing the testimony of the witnesses that have come
    before us today.
        The Chairman. Senator Akaka.

      STATEMENT OF HON. DANIEL K. AKAKA, U.S. SENATOR FROM HAWAII

        Senator Akaka. Thank you very much, Mr. Chairman. Thank you
    for holding this hearing. It is very, very important to our
    country.
        Today's oversight hearing on the regulation of class III
    gaming under the Indian Gaming Regulatory Act follows a recent
    decision by the U.S. District Court for the District of
    Columbia regarding the case of Colorado River Indian Tribes v.
    National Indian Gaming Commission.
        As we address the regulatory authority of NIGC, I believe
    that it is important that we preserve the sovereignty of Indian
    nations and provide them with the necessary support in the
    exercise of their sovereignty. They can help themselves
    economically, politically and governmentally.
        I look forward to the testimony in the hearing, and I thank
    the witnesses here today. I thank the Chairman for holding this
    hearing. Thank you very much.
        The Chairman. Senator Conrad.

     STATEMENT OF HON. KENT CONRAD, U.S. SENATOR FROM NORTH DAKOTA

        Senator Conrad. Thank you, Mr. Chairman. Thank you for
    holding this hearing.
        The court determination obviously raises a whole series of
    issues. I think it is important that this committee attempt to
    address them. At the same time, I think it is important that
    while there is a reaction, there is not an over-reaction. The
    history of regulation throughout Indian country in gaming has
    been quite strong. As I have looked across regulation in my
    State, they really have done a sound job of regulating gaming.
        Now, we may find that there are other places where that is
    not the case. To the extent we find abuses, obviously they need
    to be addressed. But I do hope that we do not have an over-
    reaction to this one court's decision.
        Again Mr. Chairman and Senator Dorgan, as ranking member,
    we appreciate the leadership that you are providing to this
    committee.
        The Chairman. Thank you very much, Senator Conrad.
        Mr. Hogen, welcome.

       STATEMENT OF PHIL HOGEN, CHAIRMAN, NATIONAL INDIAN GAMING
                               COMMISSION

        Mr. Hogen. Good morning, Chairman McCain, Vice Chairman
    Dorgan, and members of the committee. I am Phil Hogen, chairman
    of the National Indian Gaming Commission. I am an Oglala Sioux
    from South Dakota. I am very delighted to appear here on behalf
    of the commission and appreciative that the committee chose to
    quickly convene this hearing in the wake of the court decision
    that has been mentioned.
        I bring you greetings from my fellow commissioners, Nelson
    Westrin and Chuck Choney. They are on the Coeur d'Alene
    Reservation in Idaho today meeting with the Affiliated Tribes
    of Northwest Indians at a long-scheduled consultation session.
    That is where I would be but for this hearing.
        I expect the committee is familiar with the history of how
    we got to where we are, but let me try and quickly review that.
    Indian gaming is not a Federal program. Indians invented Indian
    gaming. They do it very well.
        The Chairman. Mr. Hogen, could I ask you to take us back
    one step further? The Cabazon decision triggered what action?
    In other words, basically the Cabazon decision by the U.S.
    Supreme Court triggered the Indian Gaming Regulatory Act.
    Right?
        Mr. Hogen. That is correct, Senator.
        The Chairman. Okay.
        And then that gave your commission the authority to
    regulate what classes of gaming under what circumstance? I
    would like to have this for the record. Go ahead.
        Mr. Hogen. Okay. IGRA divided Indian gaming into three
    categories. Class I is traditional or ceremonial gaming. It is
    basically not commercial gaming. That was left exclusively
    within the domain of the tribes. Then there was created class
    II gaming, which was bingo and pull-tabs and games of that
    nature such as poker where you do not play against the house.
    Then the third category was basically everything else, but
    primarily house-bank games and casino-type gaming.
        The Chairman. And there is some gray area concerning,
    because of technology, between class II and class III. Right?
        Mr. Hogen. That is correct. Class II was permitted to use
    computers and electronic and other technologic aids, but there
    was not a real clear definition of where that ended and where
    slot machines and electronic facsimiles of games of chance
    began. So that is a troublesome area that we are dealing with.
        The Chairman. So then the Colorado River Indian Tribe
    decided not to allow the National Indian Gaming Commission
    auditors to look at their books. Is that correct?
        Mr. Hogen. That is correct. That occurred in the context of
    NIGC attempting to conduct an audit of their Colorado River
    Indian Tribe's compliance with the minimum internal control
    standards that NIGC had promulgated.
        The Chairman. Over class III or class II?
        Mr. Hogen. Over all of the gaming operations.
        The Chairman. Okay.
        Mr. Hogen. A reason that we have to look at the whole
    gaming operation is gaming facilities integrate their
    operations. The dollars may come from the bingo hall or they
    may come from the slot machines, but they go into the same
    cage, the same bank, and it is very difficult to look at one
    without looking at the other.
        In any event, we looked at class II at Colorado River and
    we went to go look at class III and they said wait a minute,
    you do not have the jurisdiction to do this. The reason they
    argued we did not, is that IGRA provides for a tribal-State
    compact to frame the class III gaming that will be permissible
    and permits the States and the tribes to negotiate with respect
    to the regulatory structure.
        The Chairman. Arguing that, once the State and the tribes
    have reached this compact, the regulation or oversight of that
    gaming responsibilities now left the NIGC.
        Mr. Hogen. That is what they argued and we disagreed. As a
    result of that disagreement, we found them in violation of not
    giving us access. On account of that violation, we assessed a
    fine. We eventually negotiated an arrangement whereby we could,
    and we did conduct an audit, but the tribe reserved the right
    to challenge that principle: Did we have this jurisdiction.
        The Chairman. And the court's decision said?
        Mr. Hogen. It said NIGC, you have gone too far; you entered
    into an area that was left to the tribes and the States and you
    cannot do what you are doing with respect to class III.
        The Chairman. In other words, right now at this moment if
    you went to any Indian tribe in America that has concluded a
    compact with a State, they could bar you from looking at their
    books?
        Mr. Hogen. We do not view the decision that broadly, but
    the ultimate consequence certainly could be that.
        The Chairman. In other words, you would go out of business
    then?
        Mr. Hogen. Yes; well, we would be out of most of the
    business because 80 percent of the gaming is class III gaming.
    That is where the money is. That is where the action is.
        The Chairman. Do you expect other tribes in light of this
    to challenge your oversight authority?
        Mr. Hogen. We certainly do. We have already had, you might
    call it push-back from tribes; tribes saying we know you have
    an audit scheduled to come out and look at our compliance, but
    do not bother coming because you do not have that authority
    under the Colorado River Indian Tribe's decision. We argue
    that, well, that is still a work in progress. We are trying to
    sort that out. We are going to continue business as usual.
        The Chairman. Does the Administration plan to appeal this
    decision?
        Mr. Hogen. We are in negotiations or we are working with
    our lawyers in the Department of Justice. I expect that we
    will. We will be asking them to appeal. That decision has not
    been finalized yet.
        The Chairman. What was the logic behind this judge's
    decision? Clearly in the law, it is stated that there would be
    a National Indian Gaming Commission to conduct oversight
    responsibilities. What was the judge's logic to say that
    somehow even though NIGC was created in the law, you would have
    no ability to carry out your investigative or oversight
    responsibilities?
        Mr. Hogen. The Indian Gaming Regulatory Act has been a very
    positive piece of legislation, but in some respects it is not a
    model of clarity. For example, it says in terms of findings
    that the tribes have the exclusive right to regulate gaming,
    and then it goes on to assign other roles, a role to the
    Federal Government, a role to States and so forth.
        I think the paradigm at the time it was written, and of
    course you were one of the authors, Senator, Indian gaming then
    was high-stakes bingo. So it was written, okay, this is how we
    are going to class II gaming and then, not necessarily an
    after-thought, but okay, then if you are going to do class III,
    some of these other things apply. Therein, some confusion
    arose, I believe.
        It did give the States the right to negotiate with tribes
    with respect to regulations and we have attached to our
    testimony, which we ask to be included in the record, a chart
    that tries to characterize what States have done and what they
    have not done with respect to getting involved. In many cases,
    there is literally no State involvement. Our audit teams that
    have gone out to do these minimum internal control standards
    audits have never bumped heads with State folks who are out
    there doing what we do. We find that if we are not out there
    doing this, for the most part nobody is going to be playing
    that oversight role.
        The Chairman. I thought it was important for the record to
    establish that history. I thank you. Please proceed.
        Mr. Hogen. You have established it very well, Senator.
        I have a couple of charts here that I think just emphasize
    what you mentioned. The one chart shows the growth of Indian
    gaming. Our minimum internal control standards were written in
    1999 and went into effect in 2000. What this chart
    demonstrates, of course, is how strong the Indian gaming
    industry is and the fact that this system that was developed
    that has not been challenged until just now, has not
    significantly inhibited the growth of Indian gaming. Rather, I
    think it has fostered it.
        The other chart over here, the pie chart, shows that 80
    percent of that $19.4 billion in 2004 was class III revenue.
    That is where the money is. The other 20 percent is divided
    between class II gaming and that other gaming that is using the
    player stations that may be class II or may be class III that
    we are trying to sort out. Where the money is is in class III.
        In connection with the development of these minimum
    internal control standards, NIGC embarked on a very thorough
    consultation process. We formed a tribal advisory committee and
    even at that time, this concern about NIGC's getting beyond its
    jurisdiction was voiced, but the commission then said no, this
    is the right thing to do. We were directed to promulgate
    Federal standards and we are doing that.
        The minimum internal control standards were thoroughly
    reviewed and revisited in 2002. Again, this issue was
    addressed. You will find in the Federal Register a reflection
    of that consultation and that process in the preamble to that
    2002 enactment.
        This is a copy of the minimum internal control standards.
    They are thorough. They are patterned after established gaming
    jurisdiction controls. Tribes have been for the most part very
    accepting of them. When we set out these standards, one of the
    things they require is that when the tribe does their annual
    independent audit of their gaming operation, their auditor look
    at their compliance with their internal control standards and
    do those internal control standards meet what NIGC has
    specified as minimums. We get a copy of that report. After
    screening all of those reports, we select some of those where a
    number of exceptions are noted, and we go out and conduct a
    minimum internal control standards audit.
        This is not a ``gotcha'' deal. That is, we put on our
    website the checklist that we use to identify all of those
    areas we are going to look at. We send the tribe a letter
    saying in 30 days we are going to be out there; we select four
    dates, a date during each quarter of the preceding year, and
    our team of from four to eight auditors will go out and look at
    everything that occurred in that casino on that date to see if
    it complied with the controls.
        When we are done, we then prepare a report and issue that
    report after it is reviewed by our head auditor, Joe Smith, who
    is seated back here. And then we set up an arrangement to meet
    with the tribal leadership, the tribal management of a
    facility, the tribal gaming commission, and we go over that
    list.
        In the Colorado River Tribe situation, the list of
    exceptions was 23 pages long. There were 40 specific
    exceptions. Now, I am not saying they have a terrible
    operation. They do not, but it was not a perfect operation. We
    identified areas where it was deficient.
        One of those areas was the lack of compliance of their
    surveillance system. When we went out there to conduct this
    exit interview, both the management and the gaming commission
    said, well, I will bet you are going to gig us on shortcomings
    on our surveillance system, aren't you? And we said yes, yes,
    we are. And they said, well, that is good because we have been
    trying to get the tribe to spend money to upgrade the system
    and they have not seen fit to do that.
        As a result of our mics audit, they spent $2 million and
    now they have a state of the art surveillance system and they
    solved that problem. Notwithstanding State regulation, tribal
    regulation, they were not moving in that direction. I believe
    that that is the kind of worthwhile service that we perform
    with respect to those audits.
        So that is what we do and generally how we do it. Now we
    are at the point where tribes are pushing back and saying
    because of this District Court decision in the District of
    Columbia, you cannot do this anymore. I think that will be a
    great disservice to this strong, but perhaps fragile structure
    that has been developed since the MICS were put in place in
    1999.
        In a number of instances, Arizona I think being one of
    them, California being another, tribes have pointed with pride
    as a badge of honor, we are the most regulated gaming there is.
    We have tribal regulations. We have State regulations. We have
    Federal oversight. And to now say for 80 percent of that gaming
    we no longer have that arrangement, I think that is a risk.
        Tribes rightfully defend sovereignty. Sovereignty has
    several manifestations. I think the main way you are strong and
    sovereign is by being self-sufficient, being able to provide
    for yourself and your people. I think that if we put at risk
    this structure of strong regulation that involves States,
    tribes and the Federal Government, we put that sovereignty at
    risk.
        With respect to these audits that we go out and do, there
    are some horror stories out there. There are places where we
    found deficiencies and they have not been corrected and we have
    had to in some cases get the tribes to voluntarily close their
    facility. We are considering closing others because they have
    not come around. But by and large for the most part, they are
    success stories. We identify weaknesses. They solve those
    problems. At the end of the day, they have a stronger operation
    and we are happy that we have been able to help that.
        We have conducted 41 audits. Only in one instance, I think,
    did we duplicate what somebody else did. That was at the Avi
    Casino in Nevada. Nevada is an unusual jurisdiction to do
    Indian gaming in because there is really no advantage to the
    Indians. Nevada lets anybody who can get a license do that.
    Their compact provides for integral involvement by the State of
    Nevada. So Nevada does an audit there. Every three years they
    do an audit of everybody and they cover the whole period of
    time.
        There is a little difference in what we require and what
    Nevada requires, so there was some overlap with respect to that
    audit. But in those other 40 audits, nobody else did what we
    did, and as I say, by and large they were success stories. The
    problems identified were solved.
        Again, the nature of the operations is the commingling, the
    intertwining of class II and class III revenues makes it almost
    impossible to say, well, we will go look at one and not the
    other. If in fact we are ejected from this area, we may awaken
    a sleeping giant. That is, States may say, oh, we were asleep
    at the switch; we are going to come back and we want a
    stronger, larger role in the regulation on a day to day basis
    of tribal gaming.
        I do not think that would be good for the tribes. I think
    they would rather deal with the Federal Government than the
    States. And I do not think it would be good for the States
    either because they would be creating another mechanism. The
    tribes would end up paying that bill, too. I do not think that
    would have any advantage over the strong system that we have
    right now.
        So we think we have a vehicle to solve this problem. In
    March of this year we sent a letter to the President of the
    Senate and the Speaker of the House saying this is a
    legislative package that would fix some of the problems we
    perceive with respect to the Indian Gaming Regulatory Act. They
    dealt with our fees and the chairman's power and so forth, but
    the narrow issue here was to add in section 7 with respect to
    the commission's power a clarification that we have authority
    over class II and class III gaming.
        We do not want to expand our powers. We do not want to grow
    a bit. I appreciate Senator Conrad's concern, let's not do
    overkill here if in fact we have to fix this. We just want to
    keep doing what we have been doing successfully, not do more.
    We think with the enactment of the amendment proposed relating
    to clarification of NIGC's authority in class III gaming, that
    problem would be solved.
        We address a number of other things in our written
    testimony, but I think I will conclude here with respect to
    what I have to say and I would be happy to try and respond to
    any questions.
        [Prepared statement of Mr. Hogen appears in appendix.]
        The Chairman. Thank you very much, Mr. Hogen.
        If IGRA is amended to clarify that the NIGC has authority
    to issue class III MICS, will that impact the role that tribal
    governments have as regulators?
        Mr. Hogen. It would not change what has happened for the
    past 5 years.
        The Chairman. Would it impact the roles that States play as
    spelled out in their tribal-State compacts?
        Mr. Hogen. No; they would keep doing what they are doing.
        The Chairman. Are the MICS consistent ``industry
    standards''?
        Mr. Hogen. We attempt to keep them as current as we
    possibly can. Next week, our advisory committee will be meeting
    in Rapid City to again review the MICS and make changes to
    comply with tehnologic advances and technology advances and so
    forth.
        The Chairman. NIGA states in its testimony there is no need
    for a quick fix to the CRIT decision. Do you agree?
        Mr. Hogen. No; I think it is urgent that we have a remedy
    to this problem.
        The Chairman. Because you are already getting pushed back
    from some tribes.
        Mr. Hogen. Yes, Senator; we are.
        The Chairman. The Department of Justice announced last week
    its proposed change to the Johnson Act that would affect Indian
    gaming. Why wasn't it a joint announcement with NIGC?
        Mr. Hogen. They kind of do things their own way there at
    the Department of Justice.
        The Chairman. Did you have any role in developing this
    language?
        Mr. Hogen. We did. We went to many, many negotiating
    sessions with the Department of Justice.
        The Chairman. Do you know when we will get the language?
        Mr. Hogen. Pardon me?
        The Chairman. Do you know when we are supposed to get this
    language?
        Mr. Hogen. Tom Heffelfinger, U.S. Attorney for Minnesota,
    indicated last week in Las Vegas that within 10 days or two
    weeks they would be sending draft language to tribal
    leadership, so I expect it will be arriving at other offices
    here in Washington, DC any day now.
        The Chairman. Thank you. I thank you for your good work and
    I thank you for your very clear and coherent testimony. I thank
    you for the continued good job that you do under very difficult
    circumstances.
        Senator Dorgan.
        Senator Dorgan. Mr. Chairman, thank you very much.
        Mr. Hogen, thank you for being with us once again.
        The court's decision cited a number of facts. Let me just
    run through a couple of them with you. The court says the
    legislative history of IGRA states explicitly that Congress did
    not intend the NIGC to regulate Class III gaming. Any response
    to that?
        Mr. Hogen. We do not read it the same way the court did.
    Our brief submitted to the court by the Justice Department
    states that in greater detail, and points to areas in the
    legislative history where we think this was addressed, and
    clearly indicates as it states in the purpose of IGRA, that
    NIGC was being established in part to establish or to
    promulgate Federal standards. That is what we have done there.
        Senator Dorgan. Over the years, your compliance enforcement
    efforts and audits have routinely included class II and class
    III gaming issues, right?
        Mr. Hogen. Yes; both areas.
        Senator Dorgan. When was this issue first raised? I think
    you stated in your testimony that back some long while ago
    there were discussions about whether you had the authority or
    not. The first court challenge was this particular challenge,
    is that correct?
        Mr. Hogen. That is correct, but from day one when we
    started talking about minimum internal control standards to
    apply to class II and class III, some tribes said you are
    stepping into an area where you do not have any authority, and
    we had that discussion. We decided we did.
        Senator Dorgan. Describe to me a future for your commission
    if as of tomorrow, for example, you have no authority under any
    condition to be involved with respect to class III issues
    enforcement, compliance, auditing and so on. Describe for me
    that future. Is there much left for the commission? Is there
    much of a reason for the commission to exist?
        Mr. Hogen. Well, I think we would need to still exist. We
    would be a toothless tiger. That is, we could go out and look
    things over to the extent tribes would voluntarily show us
    their class III information, and we could point to what we
    perceived as shortcomings, but all we could do is a ``please
    fix this'' and there would be no incentive. Tribes would
    probably cease to have their external auditors analyze the
    minimum internal control standards because that costs a little
    more money, things like that. It would be a very less effective
    role.
        Senator Dorgan. You had indicated that 80 percent of the
    gaming revenue is now class III. Is that correct?
        Mr. Hogen. That is our guess. Nobody knows exactly because
    tribes do not have to designate it, but that is our best guess,
    yes, Senator.
        Senator Dorgan. By far the bulk of the gaming would be
    outside of the purview of the commission's activities for
    enforcement compliance auditing and so on, if that were the
    case.
        Mr. Hogen. The act says that the tribes have to adopt a
    tribal gaming ordinance, and they do. That has to be reviewed
    and approved by the chairman of the commission. Now, that
    ordinance embraces a lot of things such as this is how we are
    going to do our gaming. The chairman of the National Indian
    Gaming Commission has the authority to take enforcement action
    for a violation of that NIGC-approved ordinance.
        So there may be a way we could go in the back door and say,
    well, maybe we do not have class III MICS authority, but your
    ordinance says you have minimum internal control standards; you
    violated those, and consequently we are going to take
    enforcement action. A challenge to such an arrangement would be
    we then have 225 systems out there, rather than one system. I
    think the quality that IGRA sought would be diminished.
        Senator Dorgan. The absence of the Commission being
    involved in class III issues means that the States would be
    involved through the compact and also the tribal regulations
    would be involved. So tell us from your perspective how that
    relates to your enforcement and your audits. Are they up to
    that or are they up to your standards? Do you do a better job?
    Do they do a lesser job? Tell me your assessment of all that.
        Mr. Hogen. There are over 20 States that have compacts with
    tribes, and they are very diverse. Minnesota, for example, got
    in early; cut some perpetual compacts with the tribes, and give
    a very minimal role to the State with respect to regulation.
    Some of the more recent compacts, Oklahoma for example, have a
    more participatory role for the State. The problem with
    Oklahoma is it looks good on paper, but they only have three
    people in their office and they have 30 gaming tribes out
    there. They are, at least not yet, up to that task.
        Senator Dorgan. Sorry for interrupting you, Mr. Hogen. My
    point it, we are going to have others testify that say the
    commission is unnecessary. It is unneeded. With or without the
    question of whether you have the authority to deal with class
    III, it is duplicative and unneeded and the States and the
    tribes will do just fine, thank you. Respond to that.
        Mr. Hogen. Okay. I think one of the most important things
    we bring to the table is we give validity to what the tribes
    and what the States do. As we come along objectively from the
    outside, look at it, and say these are the rules. They either
    are playing by the rules, which we find in most cases, or they
    were not playing by those rules, but they fixed that.
        So we validate that good job that they do, and we have that
    national perspective that gives us the tools to do what needs
    to be done in diverse circumstances.
        Senator Dorgan. Mr. Hogen, thank you for your testimony. As
    always, thanks for your assistance when you appear before the
    committee.
        Mr. Hogen. Thank you, Senator.
        The Chairman. Mr. Hogen, I just want to reiterate, when we
    contemplated the Indian Gaming Regulatory Act, we clearly
    contemplated an Indian Gaming Commission. That is why it was
    created. Perhaps the language is somewhat murky, but I find it
    very difficult to accept the proposition that now that Indian
    gaming has gone from $500 million a year to $19.5 billion, and
    no sign of slowing, that somehow now we do not need a
    regulatory agency. It defies logic. In consultation with
    Senator Dorgan and other members of the committee, I think we
    are going to have to come up with some fix for this.
        I have said a thousand times, and I will say it again, when
    we wrote the act, Senator Inouye and I and others wrote the
    act, if you had told us that by this time it would be a $19.5
    billion a year business, we would have been astonished, to say
    the least.
        I continue to point out to my Native American friends who
    assert this is simply an issue of tribal sovereignty, issues of
    tribal sovereignty not only entails activities on Indian lands,
    that are conducted by Indians; 99 percent of the patrons of
    these Indian gaming activities are non-Indians. So we have an
    obligation to non-Indians as well as Indians to make sure that
    these gaming activities are honest, straightforward and
    adequately regulated.
        I think you and the commission overall over time have done
    a good job at that. To wit, there have been a minimum, an
    absolute minimum of allegations of corruption in Indian gaming
    activities. So it seems to me to want to abandon what has been
    a successful regulatory scheme, I would take some convincing
    before agreeing to that.
        Thank you, Mr. Hogen.
        Mr. Hogen. Thank you, Senator.
        The Chairman. Our next witnesses are Mark Van Norman,
    executive director of the National Indian Gaming Association
    and Kevin Washburn, who is the associate professor of law at
    the University of Minnesota. Welcome to the witnesses.
        We will begin with you, Mr. Van Norman.

      STATEMENT OF MARK VAN NORMAN, EXECUTIVE DIRECTOR, NATIONAL
                        INDIAN GAMING COMMISSION

        Mr. Van Norman. Thank you, Mr. Chairman.
        Thank you, Senator Dorgan.
        NIGA appreciates the opportunity to testify here today. I
    am Mark Van Norman, the executive director of NIGA. Previously,
    I worked for the Justice Department and as an attorney for my
    tribe.
        As you know, tribes generally oppose amending the Indian
    Gaming Regulatory Act because we are concerned about
    undermining Indian sovereignty. We believe that amendments to
    the act should be considered in consultation with tribal
    governments. If after consultation the committee determines to
    move forward, we ask that you move forward in regular order and
    protect IGRA from negative amendments.
        We also ask that you include timely access to secretarial
    procedures in lieu of compacts once States raise an 11th
    Amendment defense to the tribal-State compact process.
        Indian gaming has been a tremendous success story for
    tribes. Historically, the United States signed treaties
    guaranteeing Indian lands as permanent homes, and a few years
    later went to war to take those lands. This left Indian tribes
    in poverty on desolate lands, while others mined for gold or
    pumped oil from taken lands. Throughout this period, tribes
    always fought to preserve tribal self-government.
        Indian gaming has provided us new hope; 20 million people
    visit Indian tribes each year. Indian gaming has created
    550,000 jobs, where unemployment was 5 or 10 times higher than
    the national average. It funds essential services. Where
    diabetes is an epidemic, it funds clinics and wellness centers.
    Where people had only eighth-grade educations, it funds college
    scholarships.
        We have a long way to go, but Indian gaming is rebuilding
    our communities. No one has more interest in maintaining a
    strong regulatory system for Indian gaming than Indian tribes.
    Tribes are dedicated to this because tribal sovereign
    authority, government operations and resources are at stake.
    Last year, tribes invested over $290 million to regulate Indian
    gaming. More than 3,350 expert tribal, State and Federal
    regulators watch over Indian gaming.
        Class III gaming is regulated by tribal governments and
    States through the tribal-State compact process. NIGC has a
    role. It supports that regulation by approving tribal gaming
    ordinances, reviewing tribal background checks and licenses,
    receiving audits and approving management contracts. Congress
    established the unique tribal-State compact process at least in
    part because the Federal Government turned down that regulatory
    role. Under the tribal-State compact process, tribes and States
    have established strong working relationships over the past 17
    years. Tribes have also invested heavily in reliance on the
    tribal-State compact process.
        In 1999, NIGC issued a mandatory Federal rule on minimum
    internal control standards. Tribal governments adopted the rule
    through tribal law and regulation, while reserving the question
    of NIGC's authority. Last month in the Colorado River Indian
    Tribe case, the Federal court held NIGC may not issue mandatory
    Federal regulations that duplicate tribal-State compacts. NIGC
    asks you to over turn that court decision. From our
    perspective, a cornerstone of Federal Indian policy is
    government-to-government relations. Under the President's
    directives, we believe NIGC should consult with tribes now and
    seek the least intrusive alternative to address this issue.
    Yet, NIGC's request is for new Federal authority over and above
    the tribal-State compact process, without an effort to
    harmonize it with existing tribal and State regulatory
    activities.
        If NIGC were working directly with States, the proposal
    would violate the 10th Amendment. The proposal also undermines
    tribal lawmaking authority. If enacted, it would upset the
    existing balance of tribal, State and Federal sovereign
    authority. NIGC should consult with tribes to find a less-
    intrusive alternative.
        For example, NIGC could simply ask tribes to maintain
    existing MICS in their tribal ordinances and regulations. In
    fact, NIGC included the MICS in its model tribal gaming
    ordinance. Alternatively, NIGC could consult with tribes about
    including a MICS provision in IGRA's tribal gaming ordinance
    requirements. NIGC now has authority to approve tribal
    ordinances and IGRA provisions harmonize tribal law with
    tribal-State compacts. Seventeen years of experience under IGRA
    has shown we have a strong regulatory system for Indian gaming,
    and that regulation can be done consistent with tribal self-
    government.
        We do not think there is any need for a rush to judgment.
    We think that NIGC has issued guidance to tribes that they
    should continue to follow the MICS. We have also advised tribes
    that they should continue to follow their own laws and
    regulations that incorporate the MICS while this matter is
    pending. We believe that the NIGC could work within the
    existing framework of the statute. Look at the tribal ordinance
    section. They have authority to come out and if there is a
    violation of tribal ordinances, they have authority to take
    action already. That approach would preserve tribal lawmaking
    authority.
        So we respectfully ask the committee to defer action on
    this until the NIGC goes out to consult with tribes. We have a
    meeting coming up in October in Tulsa with the National
    Congress of American Indians and the National Indian Gaming
    Association. We have invited them to come out and sit down with
    tribal leaders. We have another meeting in November. We would
    like to sit down and talk with them about this issue and find a
    solution that is in keeping with tribal sovereignty.
        Thank you very much for the opportunity to testify.
        [Prepared statement of Mr. Van Norman appears in appendix.]
        The Chairman. Thank you very much.
        Professor Washburn.

       STATEMENT OF KEVIN WASHBURN, ASSOCIATE PROFESSOR OF LAW,
                        UNIVERSITY OF MINNESOTA

        Mr. Washburn. Thank you, Mr. Chairman and Mr. Vice
    Chairman, for inviting me to be here today. This is a very
    important subject and I applaud you for calling an early
    hearing on it.
        My sense is that following Cabazon, the Senate and the
    Congress decided to take action, and they thought that gaming
    ought to be very well regulated, Indian gaming.
        The Chairman. Actually, Professor Washburn, we felt that
    there had to be some kind of structure in light of that
    decision that would somehow establish a relationship between
    States and the tribes because of the wording of the decision.
        Mr. Washburn. I believe that is right, yes, sir. I do think
    that is right. At the time, bingo was the thing that was mainly
    going on around the country. So I think you all focused on
    bingo, primarily, class II gaming. That is where you really
    focused on NIGC authority.
        As the charts indicate, that is irrelevant. Bingo to a
    great degree is much less important now than class III gaming.
    But what we have, to a large degree, is not a National Indian
    Gaming Commission. We have a National Indian Bingo Commission
    nowadays, especially after the CRIT decision of a couple of
    weeks ago. The question is: Is that what you want? Is that what
    Congress wants out there? My sense is that the public has great
    confidence in Indian gaming largely because they believe that
    there is a strong Federal regulatory presence. I think that
    Federal regulatory presence is very important.
        So it is really a question for Congress. Do you want that
    Federal presence or not? I think that tribal regulators do a
    lot better with the Federal presence. I think tribal regulators
    do a fantastic job, by and large, but I think they do a far
    better job when they have Federal oversight. I think Federal
    regulators standing behind their back gives them a great deal
    of cover when they are negotiating with tribal leaders and
    casino managers about how to regulate well.
        Regulating well is expensive. It is hard to do it. It costs
    a lot of money, but Indian gaming is extremely important and it
    must be done. You all have the power to ensure the integrity of
    the resource for Indian tribes by ensuring that it is well
    regulated. My sense is that is what you should be doing.
        I have heard several insightful questions already. I think
    that this really is the answer to them. I think that the NIGC
    is needed. It ought to be the NIGC and not the NIBC. That is,
    it ought to be regulating the bulk of Indian gaming, the
    important parts of Indian gaming, and that they should have
    that role.
        I think having national Federal standards creates a common
    set of information for the entire industry so that regulators
    can leave one casino and go to another, and still know what the
    rules are. That gives them greater independence. It also
    creates this national community of tribal regulators that can
    talk to one another. I think that that is important. I think,
    again, it makes the tribal regulator's job a lot easier and it
    puts them in touch with the national community.
        So I think it is crucial that at a minimum that the IGRA be
    amended to ensure that the NIGC has authority to promulgate the
    minimum internal control standards.
        [Prepared statement of Mr. Washburn appears in appendix.]
        The Chairman. Thank you, Professor Washburn. Thank you. I
    know you spent a long time on this issue, and we appreciate
    your expertise.
        This court decision in some respects brought to a head what
    Senator Dorgan and I were already concerned about, and that is
    that we needed to review the IGRA in light of the chart that
    was just taken down of the dramatic increase in Indian gaming
    to a $19.5-billion a year business, and what it was when we
    passed the law. As you said, it was bingo.
        Although we all anticipated growth of Indian gaming, we
    certainly did not to the level that it has. So with retrospect
    of now 17 years, that we thought we ought to look at it anyway,
    and that is why we had hearings before this latest court
    decision because it needed review.
        So maybe this court decision may bring our deliberations to
    some kind of conclusion sooner rather than later. Part of our
    process will be determined as to whether this case is appealed
    or not. I do not know if they have made that decision.
        Mr. Van Norman, I think that consultation ought to be held.
    I am glad you have invited the Indian Gaming Regulatory
    Commission out to your meetings. But isn't it true that before
    these regulations were ever issued, there was extensive
    consultation with the tribes. Is that true?
        Mr. Van Norman. There was consultation with tribes as the
    regulations were developed, but the tribes consistently said,
    we have a tribal-State compact process and a tribal ordinance
    process. Those are the processes you should work with. Tribes
    cooperated with NIGC, but they reserved that question because
    they felt it was important to tribal lawmaking authority.
        I will just give you an example. This is the Viejas Band of
    Kumeyaay Indians tribal ordinance. This is the Seneca Nation's
    tribal compact. Substantial work goes into these things and we
    think there is a way to address this without creating new
    Federal rulemaking authority, but working within the existing
    structure. We would like NIGC to consult with us about that
    because it is a less-intrusive alternative to what they are
    seeking to accomplish.
        The Chairman. As you know, Congress has a special
    responsibility for Native Americans under the Constitution of
    the United States. I have a responsibility as a Federal
    official, but also as a representative of the people of my
    State. The Colorado River Indian Tribes reject investigators
    from the Indian Gaming Regulatory Commission to look at their
    books and their operations. Then I am supposed to meet with my
    constituents who patronize that gaming establishment, and say
    to them, I am sure everything is okay; go on out there and
    gamble and I can assure you that everything is on the up-and-
    up, even though this tribe has said that the gaming commission
    that was put into being by the legislation is not allowed to
    have a look at their books. How do I do that, Mr. Van Norman?
        Mr. Van Norman. Well, I think one thing to bear in mind is
    that the State, the Governor's office and others, work with the
    tribes to develop a compact that was put forward for a vote of
    the people. Under that compact, the Arizona Department of
    Gaming has an important regulatory role. The tribes in Arizona
    fund Arizona Department of Gaming at over $8 million a year.
    They have over 100 State regulators and law enforcement
    officers assigned to Indian gaming.
        In addition, I think it is a little bit of a straw man to
    say that there is no role for the NIGC.
        The Chairman. Is there a role for them to play if the tribe
    says you cannot come on the reservation? And by the way, I
    think my State regulatory folks would say that they welcome the
    involvement of the National Indian Gaming Commission as a
    valuable tool in helping them oversight.
        Mr. Van Norman. Frankly, I think that what happened at
    Colorado River was some of the NIGC folks sat down with the
    tribes. They started to work on the issues, and things got to a
    situation where they said, we are here to enforce the MICS. And
    the Colorado River Tribe said, do you have authority to do
    that? And so a question was raised.
        The Chairman. No; they did not say, do you have authority
    to do that. They said, sorry, you cannot look at our books.
        Mr. Van Norman. Okay.
        The Chairman. That is a little different.
        Mr. Van Norman. I have been involved in discussions with
    them. I have attended some of the hearings. We feel like it was
    a tribal sovereignty question. Now, there is authority, we
    feel, under section 2713 of title 25 for the NIGC to go in and
    work with tribes and ensure that tribal ordinances are
    enforced. It provides for civil fines for violations of the
    tribal ordinances, among other things. So we think that there
    is a workable system there in place.
        The problem was that the NIGC was taking on a rulemaking
    authority that was outside the tribal ordinance process. Tribes
    felt that that intruded on tribal lawmaking authority.
        The Chairman. Well, I think the NIGC believed that they
    were carrying out their responsibilities as mandated by the
    law. Again, I respect tribal sovereignty and have a clear
    record of support for tribal sovereignty, sometimes to the
    dismay perhaps of some of my constituents.
        But when an operation is in being where all the patrons are
    non-Indians, whether it is on a reservation or off a
    reservation, and we now have movements to have Indian casinos
    that are off-reservation, then the issue of tribal sovereignty
    is overridden to some degree by my obligation to protect all
    citizens. That obligation is to protect them from being
    involved in a gaming operation that is operated in the most
    honest and corruption-free activities.
        We know from experience with non-Indian gaming that if
    there is not sufficient regulation, then corruption creeps in.
    That is the history of gaming. So to assert tribal sovereignty
    over an operation that does not involve Indians, but non-
    Indians, to me is not a valid enough argument because I have an
    obligation under the Constitution, Congress does, to a special
    obligation as far as Native Americans are concerned, but we
    also have an obligation to all of our citizens, and that is to
    engage in a corruption-free operation.
        You and I have had this conversation several times before,
    Mr. Van Norman. I would be glad to listen to your response
    again.
        Mr. Van Norman. Thank you, Mr. Chairman. I appreciate the
    opportunity to respond.
        From our point of view, you are right. There already has
    been some inroad on Indian sovereignty by requiring tribes to
    work with States through the tribal-State compact process by
    having a Federal regulatory authority. There is no Federal
    regulatory authority for State gaming or for commercial gaming
    in the States. As you know, they fight that vociferously.
        We feel that there is an existing balance of sovereignty
    that protects Indian gaming. There is a provision in the act
    already, a criminal provision that says anyone that steals from
    an Indian gaming facility is guilty of a Federal felony. The
    FBI and U.S. attorneys have authority to prosecute that.
        Tribes work with Treasury's Financial Crimes Enforcement
    Network on money laundering prevention. We work with the IRS on
    tax compliance. We work with the Secret Service to prevent
    counterfeiting. And we work with the NIGC. But the NIGC has a
    particular role that is consistent with the tribal-State
    compact. They have a specialized role and it is not ubiquitous
    and duplicative of the rest of the system. They have a role
    that they can come in and be supportive, but they do not
    duplicate all that the tribes do.
        One of the things that is preserved to the tribes, we feel,
    is tribal lawmaking under the tribal ordinance. It is not a
    meaningless thing to have a tribal ordinance. We feel NIGC
    could come back and work with us and get that done. In fact in
    the area of environment, public health and safety standards,
    that is exactly the approach they are taking. They said, under
    your ordinance you have to have these provisions and we will
    come out periodically and check and make sure that you are
    enforcing your own law.
        So we think that same system could work in relationship to
    the MICS.
        The Chairman. Mr. Hogen testifies that after review of the
    compacts, in some States 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.
        Professor Washburn.
        Mr. Washburn. I think that the processes for developing the
    minimum internal control standards have been very good ones.
    The NIGC has worked very carefully with tribal leaders in
    developing those MICS. I think that is a good model.
        To be quite honest with you, the problems sometimes arise
    because NIGC regulators when they are out there in the casino
    can be a little heavy-handed. That is the problem with power.
    Power sometimes gets abused, and that happens now and then.
        The Chairman. It never happens around here. (Laughter.]
        Mr. Washburn. Not all the NIGC regulators, Mr. Chairman,
    are quite as diplomatic and sensitive as U.S. Senators. But
    that is one of the problems. I think that the NIGC regulators
    need to be very cognizant of the fact that it is tribes that
    they are regulating. It is not individual persons. It is not
    businesses. It is tribes. I think that they can certainly be
    very sensitive to that. Frankly, in the development of the
    minimum internal control standards they have been very
    sensitive to that, and that should be very well applauded.
        I think Indian gaming really is an exercise of sovereignty.
    Every tribe is out there exercising its sovereignty, and what
    the NIGC is interested in, certainly it intrudes on tribal
    sovereignty to say we are going to regulate that activity. But
    the problem is, tribes cannot really protect themselves well
    here, because if one tribe makes a mistake, all tribes will
    pay. That is just a function of the political nature of the
    gaming industry. Not all of the public is totally on board with
    the notion of gaming, so if one tribe makes a serious mistake,
    other tribes will pay for that mistake.
        So one tribe's exercise of sovereignty can take away the
    sovereignty of another tribe. I think we have to recognize
    that. The entity that can address that problem best is the
    Federal entity, the National Indian Gaming Commission.
        The Chairman. Thank you, Professor Washburn.
        Mr. Van Norman, I want to repeat again that I am one who
    supports Indian gaming. I believe that the Cabazon decision
    made it very clear that the Supreme Court correctly reached the
    conclusion that Indian gaming could take place under certain
    circumstances. I have done everything that I can to make sure
    that that right is enshrined in IGRA. But I also have recurring
    fear that there is going to be some scandal out there, as there
    is from time to time in non-Indian gaming. It is not that I am
    worried about Indian gaming. I worry about a scandal out there
    in Indian gaming, and non-Indian gaming in Nevada is not under
    this committee's jurisdiction, but Indian gaming is.
        I do not want to go to my constituents and say there is a
    scandal and Senator Dorgan and I did not exercise proper
    oversight. In light of this recent court decision, it seems to
    me for us to do nothing because that was not envisioned in the
    original legislation. In the original legislation, the National
    Indian Gaming Commission had certain responsibilities and we
    wanted them to carry them out, then I think we would not be
    carrying out our responsibilities appropriately.
        Senator Dorgan.
        Senator Dorgan. Mr. Chairman, thank you very much.
        I suppose it is important to say as well that I believe
    Indian sovereignty is very, very important. I have always
    spoken strongly in opposition to those that would erode that
    sovereignty. The President in fact at one point said the
    Indians were given sovereignty. The Indians were not given
    sovereignty. Sovereignty is theirs. It is theirs. It is a very
    important concept.
        I, too, believe that Indian gaming has been extraordinarily
    beneficial to some folks in this Country who have lived in the
    shadow of poverty and who now have an economic activity that
    provides jobs and opportunity and a revenue stream to address
    the crisis of health care, education and housing. So I think it
    is very important to say that.
        I think it is also, with respect to gaming, gaming is
    different than most other activities in this country. We have
    plenty of history in this Country where almost every
    opportunity for unsavory characters to find a way through the
    crack or through the crevice to get their hands on money. We
    have been down this road in lots of ways in this country.
        My guess is that there is no disagreement in this room
    about this proposition, that all of us want good government
    with respect to Indian gaming, good governing. The question is,
    what government, which government. Tribal government? State
    government? Federal Government? We all should want the same
    thing, that is good government.
        I think the quickest way to ruin or dramatically injure
    Indian gaming is for us to in some way be lax, relaxed, back
    away a little, and then have some huge scandal erupt because we
    did not have good government, good regulatory enforcement
    capabilities. I refer to the Time magazine big splashy feature
    story about Indian gaming. There are people who will take great
    pleasure in pointing out the mistakes and the problems, and
    especially take great pleasure in piling on a scandal.
        So Senator McCain made a correct point here. We have to
    make certain we know what works and then employ what works to
    this issue.
        Now, let me ask a couple of questions. Mr. Van Norman, 2
    years ago, 4 years ago, 7 years ago, 8 years ago, I assume that
    the National Indian Gaming Commission was going out around the
    country doing audits and enforcement visits and so on and
    looking at class II and class III gaming. Is that correct?
        Mr. Van Norman. Originally, the National Indian Gaming
    Commission said very clearly, we are primarily focused on class
    II and we have a background role on class III. We do not get
    involved in the tribal-State compact process. I think the
    Senate committee proposed minimum internal control standards in
    various bills. The National Indian Gaming Association actually
    went through a process with a number of experts to develop
    industry minimum internal control standards. At a certain
    point, the NIGC came forward, took those standards, ran them
    past Arthur Andersen, and put them into a mandatory Federal
    regulation.
        Senator Dorgan. At what point was that?
        Mr. Van Norman. That was about 1999.
        Throughout this time since them, tribes have said, we have
    tribal lawmaking authority through the tribal ordinance process
    under the act, and that that should be respected. Tribes are
    willing to work with the NIGC and frequently collaborate with
    the NIGC. In S. 1295, we had asked for the NIGC to provide
    technical assistance to tribes. We are going out next month to
    South Dakota and doing programs jointly with them on internal
    auditing. So we have an ongoing working relationship with them.
        What we want to do is have a relationship that is
    structured that protects tribal self-governance so that tribes
    have a distinct role, the State governments have their role,
    and the Federal Government has a role that is consistent with
    tribal lawmaking.
        Senator Dorgan. What does that mean, consistent with tribal
    lawmaking?
        Mr. Van Norman. That this could be a section in tribal
    ordinances, rather than a new Federal regulatory standard. What
    tribes say is, we know the industry and we are able to develop
    our MICS, and we are able to do so in a way that reflects our
    tribal-State compact, reflects our actual operation. We are
    often more technologically advanced than the National Indian
    Gaming Commission, so they have to go in and seek a variance to
    add a new technical standard.
        Senator Dorgan. Mr. Van Norman, I frankly have not decided
    what we should do here at this point. That is why I was very
    interested in this hearing. But you heard the testimony
    previous to yours. I served in State government for some while.
    I knew no only what our State government did with respect to
    enforcement issues in a range of areas, whether it was railroad
    rates or other things. And I knew what other States did. I knew
    there were great differences, some aggressive, some not, some
    highly efficient, some not, some worthwhile, some worthless.
        So I understand that there are some States that will do a
    remarkable job and other States that will do a miserable job.
    You heard some testimony this morning to that effect. What is
    your response to that?
        Mr. Van Norman. I think that the act envisioned that the
    tribes and the States would work together as sovereigns. The
    legislative history expressly says there is going to be an
    allocation of responsibility through a sovereign compacting
    process. So there was a recognition that there would be some
    variability.
        Now, tribal governments have detailed ordinances in place,
    have minimum internal control standards in place. They will
    keep those in place. So what we can have is a situation where
    there may be some variability that accommodates particular
    tribal government interests, but that they can meet an industry
    standard for effective regulation.
        Senator Dorgan. Mr. Van Norman, you heard the anecdote
    about the commission coming into a gaming facility and saying,
    you need a new surveillance system. And they said, oh man,
    thanks for making that a part of the recommendation because
    that will force the tribe then to pony up the money for a new
    surveillance system. What if there is not a commission around
    to make that recommendation and the gaming facility knows they
    need it, but they cannot get the money out of the tribe.
        How do you respond to that kind of anecdote? I assume it
    happens. This is not a perfect system, but that kind of
    anecdote is the kind of anecdote that I think is also important
    in this discussion.
        Mr. Van Norman. We are not saying that the NIGC should not
    have a role. They have a background supportive role. It is
    already clear in the statute.
        Senator Dorgan. With respect to class III as well?
        Mr. Van Norman. They have a supportive role with respect to
    class III. They do not establish the regulatory framework
    because that is the tribal-State compact process and that is
    the tribal ordinance process. But they can come out and review
    its enforcement under section 2713 of title 25.
        So we do not say that there is no role for the NIGC to
    play, but they should play a role that is consistent with what
    the tribal governments are already doing. You have 2,800 tribal
    regulators out there. They are former FBI. They are former
    Nevada, New Jersey State regulators. There are tribal law
    enforcement officers with 17 years of experience.
        Senator Dorgan. Is it your testimony that there is a
    standardization and a pretty consistent level out there that
    does not have weaknesses, tribe-by-tribe, State-by-State?
        Mr. Van Norman. In general, we believe that there is a very
    strong system.
        Senator Dorgan. That was not my question, though. I was
    asking a different question.
        Mr. Van Norman. I think in fairness, I have worked for the
    Federal Government. I have worked for State government. I have
    worked for tribal government. Governments have similar foibles.
    I would say that the tribal governments have worked very hard
    to put in place a good system. We have very accomplished
    people. Where there is a problem, the tribal governments have
    often reached out and been the ones to reach out to the Federal
    Government and say, we have a problem here and help identify
    those problems.
        Senator Dorgan. I must say, it would be hard for me to make
    the case, especially with the last several weeks, that the
    Federal Government does not have its weaknesses. All
    governments have weaknesses. I expect that that is the case.
        First of all, Mr. Van Norman, your testimony is helpful to
    us. You come to this committee and testify and work with us. We
    appreciate your input and your thoughts about this. You have
    obviously spent a lot of time thinking about it. You work in
    the field and know a lot about what is happening in the
    country. So I appreciate your being here and the thoughts you
    have expressed today.
        Mr. Washburn, in your testimony on page 2, I think you make
    the case, I guess, with respect to the question I was trying to
    ask Mr. Van Norman about the different kinds of regulatory or
    the different kinds of enforcement strategies that exist with a
    State system in which the National Commission would not have
    much of a role. Can you expand on that just for 1 moment?
        Mr. Washburn. I think that there needs to be a clear
    Federal role. I think it cannot be just an advisory role. There
    needs to be an opportunity to enforce in the worst-case
    scenario. I think Mr. Van Norman is right that by and large we
    get good regulation from tribal gaming commissions.
        The problem is the stakes are so high that when we get
    irresponsible action by one commission at some small tribe in
    some location, it hurts all the rest of the tribes in the
    country, or it could potentially. It is that big scandal that
    is the thing that we are all worried about. The best way to
    keep the big scandal from rising up is to keep a strong Federal
    oversight role overall.
        To be quite honest, most of the NIGC resources do not go
    toward the well-regulated tribes. They end up getting expended
    on the least well-regulated tribes. So the NIGC is serving an
    advisory role in helping them get their regulatory structures
    in better operation.
        Senator Dorgan. Mr. Washburn, excuse me for interrupting
    you, but can you just expand on, you say ``least well regulated
    tribes.'' Are there least well regulated tribes? If so,
    describe the prevalence of that.
        Mr. Washburn. Again, it is not something that happens every
    day, but now and then you get a problem. I do not want to stand
    up here and give you a parade of horribles, but now and then.
    It is expensive to do internal controls. It is expensive to do
    regulation. Tribal leaders and casino managers often chafe at
    that. Every regulated industry chafes at being regulated. What
    they would like is usually to reduce the regulations.
        Well, sometimes it happens. Sometimes those people win that
    argument and the regulators have to back off. If we have strong
    Federal structure in place, they will not be able to back off.
    They will have to enforce this strong regulation nationwide. I
    think that that is the problem.
        In my last testimony in April, I used the word ``regulatory
    capture.'' That is the problem. Some regulators are captured by
    the entities they regulate. If you buy all the academic
    literature on regulatory capture, Indian tribes are
    particularly at risk for it because typically you have one
    casino and one regulator. There are repeat players working
    every day together. So you have a significant risk for that.
        So again, it does not happen every day. It does not happen
    often, but the stakes are so high and Indian gaming is so
    important that it makes sense to get the best insurance we can
    that we get to keep it around for a long time and it is well
    regulated.
        Senator Dorgan. Thank you as well. I think the goal for all
    of us in this room, to the extent there has been some
    disagreement perhaps here and there, the goal for all of us is
    to preserve the opportunity for Indian gaming to exist and to
    do that through good government. The question is, what is good
    government and which levels of government can work best to
    accomplish that.
        Mr. Van Norman made a very important point about
    consultation. I think that issue of consultation is a very
    important part of what this committee is about as well. This is
    a special committee in the U.S. Senate that understands and
    believes strongly in the responsibility to work with and
    consult with the first Americans and the tribes that we work
    with.
        So I think this testimony has been really interesting. This
    court case causes some concerns. The question is now what do we
    do about those concerns. Mr Chairman, I think holding a hearing
    rather rapidly on this is the right thing to do as well in
    order for us to begin to understand all of the consequences of
    this, and what we do in the end to try to protect and preserve
    the opportunities that Indian gaming offers to Native
    Americans. That is the end goal for all of us, I believe.
        Mr. Chairman, thank you.
        Mr. Van Norman. Mr. Chairman.
        The Chairman. Go ahead please.
        Mr. Van Norman. Thank you.
        I would just say it is probably in many circumstances
    easier to have a Federal rule. There is one rule. But we live
    in a country that is divided into 50 States, and there is some
    genius to the Constitution that says the folks that are closer
    to the people have an ability to make rules that fit them
    better.
        The Chairman. You sound like a good Republican, Mr. Van
    Norman. [Laughter.]
        Mr. Van Norman. Thank you. I feel I am in good company.
        We think that preserving the tribal lawmaking authority
    gives the tribes the flexibility to meet their needs, while
    still meeting some level of Federal approval because the NIGC
    has the authority to approve those ordinances.
        So we hope that you will give that consideration, and we
    certainly appreciate the opportunity to come here and testify.
        The Chairman. We will, Mr. Van Norman. I think you
    represent your organization quite well. We appreciate the
    continued dialog with you and with other members.
        Professor, thank you very much for traveling all this way.
        Mr. Washburn. Thank you.
        The Chairman. We appreciate your continued in-depth
    examination of these issues.
        This hearing is adjourned.
        [Whereupon, at 10:47 a.m., the committee was adjourned, to
    reconvene at the call of the chair.]

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                                A P P E N D I X

                                  ----------

                  Additional Material Submitted for the Record

    =======================================================================

    Prepared Statement of Philip N. Hogen, Chairman, National Indian Gaming
                                   Commission

        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
    Washington, DC. 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, 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.
    Sec. 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. Sec. 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. Sec. 2701 et seq., was passed, Indian gaming has grown
    exponentially from $100 million in revenue to over $19.4 billion in
    2004. Approximately 80 percent 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 gaining
    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 gaining jurisdiction, there is an oversight role
    for an entity that is separate from management of the gaining, 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 gaining 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 gaining 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 6-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 Washington, DC District
    Court in January 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, 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 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 $1 billion 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 non-compliance 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 22 States that have entered into compacts with tribes for class III
    gaming. Of these compacts, four do not address internal control
    requirements at all. Six 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 State provides for tribal
    internal controls reviewed by that State, and in one other State,
    compacts specify different levels of internal controls. Compacts in two
    States require the adoption of State standards or their equivalent, and
    compacts in four 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 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 carryout 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.

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