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Two high-profile reforms of land-based and online gambling in Ontario have come under scrutiny after an Auditor General report criticized the province’s lottery corporation for accepting reduced revenue commitments from private casino operators and the Attorney General faces litigation seeking to upend a new iGaming regulatory regime.
Auditor General Bonnie Lysyk on Wednesday (November 30) released a 71-page “value-for-money audit” on the Ontario Lottery and Gaming Corporation (OLG), which manages Ontario’s land-based casino and lottery markets and until April was the sole legal operator of online gambling in Canada’s most populous province.
The highly critical report took aim at “significantly reduced revenue commitments” now in place for certain land-based casinos under OLG’s so-called modernization plan to privatize the day-to-day operations of land-based casinos across the province, which was first announced in 2012.
The audit found that three casino operators were given approval by OLG even prior to the pandemic to adjust the minimum revenue commitments included in their original contracts.
This enabled Hard Rock Ottawa to reduce the projected revenues under its contract by 25 percent, after its minimum guaranteed share to OLG actually reached 75 percent of total revenue, rather than an initially forecasted 40 to 50 percent.
Similarly, Great Canadian Gaming Corporation was permitted to reduce its guaranteed minimum annual commitment from a bundle of four casinos to the west of Toronto by C$70m, according to Lysyk's report.
The auditor said that “while OLG had no obligation to accept these reductions, they provided the requested relief to Great Canadian and Hard Rock because OLG told us that not doing so could have led these casino operators to enter bankruptcy protection, resulting in a lengthy and complicated court process.
“However, OLG assessed the financial viability of these operators based solely on the regional operations without considering the overall financial health of the casino operator and their parent companies.”
Overall, updated revenue projections from partly privatized casinos across eight regions of Ontario have been reduced by some C$9.1bn for their first ten years of operations relative to the initial bids made by operators, costing the province some C$320m annually.
OLG, in addition, did not include capital investments proposed by operators as conditions in their actual contracts, with several operators since not following through with their initial plans.
“By agreeing to lower financial projections that negatively impacts OLG’s revenue share, OLG weakened its ability to achieve the government’s objectives of maximizing provincial profits and private sector capital investments,” the Ontario auditor said.
“It also failed to hold casino operators to the contracts they signed and in one case, another casino operator would have won the contract if the unreasonableness of the successful casino operator’s bid had been seriously considered during the competitive bid process.”
The auditor called on OLG to avoid any further changes to the commitments made by operators, and to re-procure new operators if any “are unable to deliver on the revenue and capital investment commitments included in their existing contracts.”
Elsewhere, the report criticized OLG for not being proactive in enforcing anti-money laundering (AML) compliance and failing to aggregate casinos’ AML reports for filing with federal regulators. It also recommended that OLG introduce new requirements to verify the source of funds of all patrons for cash transactions of C$10,000 or more.
The auditor’s report further expressed concern that OLG’s PlayOLG internet gambling offering was now facing increased opposition for private operators partnered with a separate government entity, iGaming Ontario.
Bolstering OLG’s market share would be a “significant revenue advantage” for the province, as the Ontario government retains around 45 percent of iGaming revenue from OLG versus just 5.7 percent of the 20 percent share paid by private operators.
The auditor called on OLG to develop a clear strategy to introduce new online products, including more real-time games in collaboration with other provinces, and leverage its ongoing monopoly on online lottery products.
In a formal response to the Auditor General report, OLG said it welcomed the recommendations regarding its casino modernization program that “has resulted in $1.7 billion in capital infrastructure investments made by the private sector.”
OLG said it would expand its efforts on AML compliance and agreed that casino operators should be held accountable for their contractual commitments. Regarding online gambling, OLG said it was actively expanding PlayOLG’s live dealer games category and exploring the introduction of a poker product.
Legal Challenge Launched Against Ontario Online Regime
Publication of the Auditor General report regarding OLG came just two days after the Mohawk Council of Kahnawake (MCK) filed a notice to challenge iGaming Ontario and the province’s Attorney General before the Ontario Superior Court, on grounds that the province’s new regulatory system for private internet gambling operators fails to comply with a requirement of the Canadian Criminal Code for provincial governments to directly “conduct and manage” all gambling within their jurisdictions.
Although unrelated to the OLG audit, Lysyk did raise such a challenge as a potential legal risk in a similar report last year.
The MCK filing alleges that Ontario’s online regime falls foul of the Criminal Code as private operators, not the province, own and operate their own proprietary platforms, procure their own suppliers, are responsible for “key decision-making activities” and meeting compliance obligations, and are the “primary beneficiaries of revenue generated.”
The application before the Superior Court seeks an order either quashing the iGaming Ontario regime or rendering it inoperative, along with a declaration that Ontario’s government does not conduct and manage the gambling activities of private operators.
Ontario’s Ministry of the Attorney General told VIXIO GamblingCompliance that it was reviewing the MCK application but “as this matter is before the Courts, it would be inappropriate to comment further.”
Still, legal experts believe that the province should be well prepared for the challenge brought by the Mohawk Council of Kahnawake as the Criminal Code question is far from an obscure one.
That the province’s iGaming regime complies with the conduct-and-manage requirement has been very carefully evaluated by lawyers in the Attorney General’s office, as well as by those representing the industry, said Don Bourgeois, counsel at Fogler Rubinoff law firm and former Alcohol and Gaming Commission of Ontario general counsel.
The province has also applied various measures to meet the requirement, such as by ensuring iGaming Ontario controls the monies generated through internet gambling, the range of games permitted, and the AML processes that all operators must follow.
Further, if Ontario’s iGaming regime does not comply with the Criminal Code, then that would also threaten the comparable “modernization” structure of OLG and its multiple contracted operators of land-based casinos in Ontario, along with casino and charitable gaming structures in other provinces such as Alberta, British Columbia and Saskatchewan.
“If the model is so offside of the Criminal Code, then the bulk of gambling in Canada is offside of the Criminal Code,” Bourgeois told VIXIO.
In a press conference announcing the legal challenge, MCK chief Mike Delisle said Ontario’s model was not only hurting the Mohawk Council of Kahnawake economically, but also “alienating us from an industry, I wouldn’t say we’ve spearheaded, but definitely played a major role in globally since 1999/2000.”
