Domegate or Casinogate – which do you prefer?

Part 1 – A taxing little question…

Yes, just a little more digging into some of the background to the whole Prescott/Anschutz/Dome/Casino thing – only this time let’s take a look at Anschutz’s partner in the proposed casino development, Kerzner International…

First up, there’s a rather interesting section on Kerzner’s 2004 form 20-F – which, in the US, is the equivalent of filing an annual report/accounts with Companies House in the UK.

United Kingdom

Development of Resort Casinos in London, East Manchester and Glasgow

On July 13, 2004, we announced our appointment as the preferred developer and operator with respect to the development and management of gaming, hotel and entertainment facilities for two sites in two key markets in the United Kingdom. The sites for the projects are the Scottish Exhibition + Conference Centre (“SECC”) in Glasgow and Sportcity in East Manchester. We are negotiating binding agreements for both of these projects. These developments are part of major regional regeneration projects supported by the respective council for each city. Each of these projects was the subject of a competitive bidding process.

In addition, on July 13, 2004, we also announced that we had entered into a binding agreement with affiliates of Anschutz Entertainment Group for the development and operation of a casino and hotel resort facility at the Millennium Dome in London (the “Dome”).

Our development and management of our sites in the United Kingdom is subject to a number of contingencies. First, the United Kingdom needs to pass gambling reform legislation. Second, a special government committee that is expected to be established upon the passage of such legislation then must select eight localities that will be entitled to have a “Resort” or “Regional Casino,” as such criteria are defined by the Department of Culture, Media and Sport and the Parliamentary Joint Committee, which reviewed the draft Gambling Bill. Our sites must be in the selected localities and must further compete for and be awarded a regional casino license by the local authorities.

The three developments are subject to certain conditions, including the receipt of applicable regulatory, municipal, regional and other approvals, and a maximum effective tax on gaming revenue of not more than 25%. If these projects do not proceed, we will be required to write-off certain costs that have been incurred (as of December 31, 2004, we had approximately $10.4 million on our balance sheet with respect to these projects). As noted above, the SECC and Sportcity developments are also subject to the negotiation and execution of binding agreements. If all of the necessary conditions with respect to any of these projects are satisfied, we expect the project to be completed within two years from the date of issuance of a license. In connection with each project, we will be responsible for the financing, development and operation of a casino and hotel.

Now the bit about these projects being contingent on a maximum effective tax on gaming revenue of 25% may be a bit problematic – I can’t be absolutely sure due to the inherent difficulty one inevitably encounters in trying to navigate the tax system, but the current tax regime for casinos is as follows…

Current law and proposed revisions

The new duty bands are as shown below:

The first £546,500 of GGY – 2.5%
The next £1,212,500 of GGY – 12.5%
The next £1,212,500 of GGY – 20%
The next £2,124,000 of GGY – 30%
The remainder – 40%

GGY is ‘Gross Gaming Yield’ which in 2001 was descrbed by the Treasury as being ‘largely the casino’s gross profit from the gaming’ although in 2000, a more precise definition was given – ‘the difference between stakes placed and winnings paid out’.

The distinction here is an important one as ‘gross profit’ allows for operating costs to offset against profit before the Treasury takes it cut in take, where GGY doesn’t.

To confuse matters a little further, it appears that the new unlimited stake/prize machines that will a feature of regional casinos and the one permitted super casino, are taxed a little differently. As best I can make out, it seems these machine will require payment of VAT on receipts from such machines plus a licence fee (per machine?) of what looks to be £5,000 per year.

Whether all this taken together amounts to a maximum effective tax on gaming revenue of 25% is anyone’s guess – I suspect it might not be as most of the structure of these taxes predates consideration of the UK opening up resort casinos, which suggests it might be a good idea to keep an eye on these taxes over the next year or two to see if any significant changes filter through in line with Kernzner’s investment ‘conditions’.

Part 2 – Ain’t Gonna Play Sun City…

As a bit of an aside before moving on, if you’d have gone to Labour Party Conference  in 2004, amongst the fringe meetings you could have taken was one arranged by the Social Market Foundation titled:

"Gambling, regeneration, and social responsibility: can everyone be a winner?"

The meeting, so it transpired, was sponsored by Sun International, who operate the Sun City Resort that was, for many years, a real favourite amongst anti-apartheid campaigners like…

…Peter Hain, for example.

The panelists listed for this meeting were…

Lord McIntosh, Minister for Media and Heritage
Sir Cllr Albert Bore, Leader, Birmingham City Council
Peter Collins, Centre for the Study of Gambling, Salford University
Peter Byrne, Executive Director, Sun International
Chair: Lord David Lipsey, Chair, SMF

Yeah, that’s right, one of the panelist was an executive director of Sun International. Meanwhile not one of the panelists represented an anti-gmabling organisation or one involved in treating gambling addiction.

Okay, so you might that Peter Collins, from the Centre for the Study of Gambling, sound like an independent voice on the panel… except that what wasn’t disclosed to delegates was that Sun International’s Peter Byrne wass the Chairman of the Centre’s advisory board and Lord David Lipsey wass also on the Centre’s advisory board.

The link back to Kerzner, here, is Sun City, which was where he made his name in the casino business although he got out of South Africa back in the late 1980’s.

Why?

Well, this might help explain matters…

Stella Sigcau, Minister of Public Works who died this week, cut her teeth on homeland politics and was involved with government from the late 1960s, when I was still at school. At that stage, the Matanzimas ran Transkei…

Stella Sigcau joined Matanzima’s Transkei National Independence Party (TNIP) and served on his cabinet from an early age. She held various portfolios in the homeland cabinet, including minister of the interior; and became TNIP leader and ruled the territory briefly in 1987, before her government was toppled by the Transkei Defence Force (TDF).

The TNIP’s strong-arm tactics in Transkei are well documented, including laws allowing detention without trial and banning liberation parties. Many young Transkeians skipped the country to join the African National Congress or Pan Africanist Congress in exile…

In 1976, Transkei became “independent”, requiring the government to establish departments — and this also provided opportunities. Indeed, Matanzima recruited some exiles back into his government…

A major weakness of the TNIP was the growth of corruption after “independence”. Matanzima wanted to build airports and harbours to prove that the territory was truly independent. In one of a number of similar incidents, a shady Middle Eastern character, Mr Elhajj, managed to cheat the government of R9-million on pledges for a harbour…

We in the TDF decided to force him out. The TNIP then appointed Sigcau as prime minister.

At that stage, she was a respected senior party member who was not associated with corruption. There was general relief that the Matanzimas were no longer running the show and many expected a breath of fresh air to blow through the government.

As defence force commander, I worked closely with her office and the armed services to ensure a smooth transition.

Three months later, however, the Transkei security services showed me [Bantu Holomisa, author of the obituary] and other senior officers documents, including bank statements and transfer records, proving that casino magnate Sol Kerzner had paid George Matanzima’s cabinet R2-million for exclusive gambling rights in Transkei. Unfortunately Sigcau — seen at the time as Transkei’s saviour from corruption — had benefited….

[Kerzner’s explanation was that this money was extorted from  him  by Matanzima]

The Kerzner bribe was referred to a commission of inquiry, which confirmed that the money was paid to Matanzima, who distributed it among his cabinet ministers. Sigcau testified before this commission.

George Matanzima was later sentenced to nine years in prison for his role in this scandal, serving three. The military government also tried to extradite Kerzner and other South Africans to face the music, including directors of JALC Construction. South Africa’s Foreign Affairs Department flatly refused to cooperate.

This fuelled tensions between the two governments, already complicated by our efforts to forge strong links with the liberation movements. It was at this time that Kaizer Matanzima and Sigcau approached South Africa to topple the Transkeian government, militarily or through sanctions. In 1990, Pretoria was involved in an abortive coup attempt in Transkei….

You might think, given the identity of the author and its publication in an African online newspaper, that this account could be a touch one-sided – in which case maybe this piece from Time Magazine in 2002 is more up your street:

THE AFRICAN CONNECTION. They don’t make them more controversial than Solomon Kerzner. There’s the over-the-top casino he built on a South African homeland, taking advantage of apartheid; the money scandal that linked him to a Prime Minister who had to resign; the succession of wives, including a former Miss World; and these days the Mohegan Sun, a billion-dollar Indian casino in Connecticut that he made happen.

Kerzner, 67, was ideally placed to make a killing as a financier in Indian gaming. He has succeeded in gaming systems with loose rules before. His native South Africa once banned gambling but allowed it in tribal areas carved out by the apartheid-era white government for blacks to inhabit. Kerzner, who began his career as an accountant, opened the first hotel-casino in 1977 in Mmabatho, the capital of the homeland of Bophuthatswana, about 150 miles from Johannesburg. That year he began planning what would become the opulent Sun City resort-casino-entertainment-theme-park complex. When it opened in 1979, Sun City–with four hotels, a 6,000-seat arena and a 46-acre manmade lake for water sports–became a favored destination for whites in Johannesburg and Pretoria who wanted to escape their nation’s moral restrictions and gamble, view soft-porn movies and watch topless showgirls, white and black. Dubbed the richest man in South Africa, Kerzner got into trouble in 1986 when he won permission for a hotel and casino in another homeland, Transkei. To acquire an exclusive gaming license, he had paid more than $900,000 to Transkeian Prime Minister George Matanzima, who was forced to resign and was later jailed for fraud. Kerzner maintained that Matanzima extorted the money, and the South African government declined to prosecute him. Kerzner moved his base of operations to Britain, and from there he expanded his hotel-and-casino empire to France, Morocco and the Bahamas, where he opened the very profitable Atlantis Casino and Resort.

Convinced? No? Well how about a parliamentary bulletin from the African National Congress from 1996…

Sol Kerzner and David Bloomberg were accused of paying R2m in bribes in December 1986 and January 1987 to the former Transkei premier Chief George Matanzima, in exchange for a gambling monopoly in Transkei. In 1988, Kerzner and Bloomberg admitted the payments to the Harms Commission on cross-border irregularities, but claimed they were subject to undue pressure from Chief Matanzima.

In 1990, the Transkei Attorney General began preparations for extradition against Kerzner and Bloomberg, and forwarded extradition applications to the National Party Government in 1991.

In 1993 the National Party Government refused to extradite Kerzner and Bloomberg, on the grounds that there was no case to answer, and the case was shelved. Following the 1994 elections and the reintegration of Transkei into South Africa, the case has again been taken up by the Transkei Attorney General…

This month, the Transkei Attorney General’s report into the case against Kerzner and Bloomberg listed a catalogue of failures and deliberate obstruction by the National Party. The Transkei Attorney General’s report found that:

– the National Party Government delayed progress for almost two and a half years by dodging the extradition application lodged by the Transkei Attorney General

– the National Party Government tried to kill off the case in 1993, by insisting that there was no case to answer

– the National Party Government prevented the prosecution in Transkei by refusing to extradite Kerzner and Bloomberg, despite the Transkei Attorney General’s confidence that there was a case to answer.

The National Party is to blame for the failure to prosecute Kerzner and Bloomberg before 1994.

The ANC has been blamed for the failure to prosecute Kerzner and Bloomberg since 1994. But the Attorney General again laid the blame at the door of the National Party for the delays since the April 1994 elections. He cited:

– the ten-year delay in bringing the case to trial, which means witnesses may now be unclear about their statements, or may no longer be available – one key witness has already died in the interim

– the refusal to extradite Kerzner and Bloomberg in 1993 on the grounds that there was no case to answer, which may make it constitutionally impossible to reinstitute the prosecution

– the point-blank refusal of FW de Klerk to co-operate with the Justice Portfolio Committee’s investigation of this matter.

To be absolutely clear, Kerzner was never convicted of bribery in the case, but he was also never put on trial either, so one cannot say anything conclusive here, just present the information as it is…

What one can say, here, though, is that I doubt very much that Kerzner is overly keen on stories like this one from the Providence Journal, in which one of his casino resorts, the Mohegan Sun, features

Chris Armentano accompanied a woman to court a few weeks ago. She had stolen $500,000 from her employer to cover gambling debts.

Armentano does things like that as director of problem gambling services for the Connecticut Department of Mental Health. He sees the side of gambling not seen in the Foxwoods and Mohegan Sun commercials.

The woman who stole the money has a 12-year-old son who was looking at spending some crucial growing-up years without his mother. The woman’s husband was looking ahead to years of debt because of the money she stole to gamble at the casinos…

One case that did make the papers was that of former Middletown, Conn., Mayor Stephen Gionfriddo. He pleaded guilty to stealing hundreds of thousands of dollars from clients of his law firm. Prosecutors said he began stealing to cover gambling losses at Mohegan Sun.

I talked last week with Armentano and Marvin Steinberg, executive director of the Connecticut Council on Problem Gambling, to get some sense of what Rhode Island will have to deal with if a casino is eventually built here.

It will have to deal with more problem gamblers than it has now because a casino creates problem gamblers. It will have to provide mental health services that aren’t available now.

And it just might have to face up to the social costs of gambling. For too many years, Rhode Island has been a state in denial about the damage gambling does. It provides a pathetically small amount of money to deal with problem gambling considering the huge profits it reaps from its lottery and slot machine dens. And in the tortured debate over the West Warwick casino proposed by Harrah’s and the Narragansett Indians, there has been virtually no mention of what the casino would do to deal with the problems it creates…

"Proximity is a big issue," says Steinberg, who compares the impact of a casino to that of a bar opened just down the street. "A casino will increase problem gambling in Rhode Island. For the first time, it will be 10 minutes away instead of an hour."

Steinberg says the Connecticut casinos provide a large amount of money to The Council on Problem Gambling. They also accept a simple truth about their presence in the state:

"They know their presence has created significant problems," says Greenberg.

We have not heard that from Harrah’s and the Narragansetts. We have not heard their take on the obvious: that a casino brings with it a temptation that can ruin lives.

"You have broken families, family stress," says Armentano. "There’s loss of homes, loss of jobs, an increase in domestic violence, neglect of kids."

He says that states have to recognize that gambling is the one enterprise they promote that causes people harm.

"States have a responsibility to provide services," he says.

But Rhode Island doesn’t. Even without a casino, it is a state drenched in gambling, and yet it does little or nothing to deal with the ugly underside.

"You already need services," says Armentano. "You’re a gambling state. But without a constituency that’s really interested and willing to push for services, problem gamblers and their family members remain a neglected group."

Connecticut had gambling before Foxwoods and Mohegan Sun. It had jai-alai, off-track betting, a state lottery, dog tracks. But the number of people being treated for gambling problems multiplied more than 10 times when the casinos opened, says Armentano. And the number of women treated for gambling problems increased from near zero to about 40 percent of the total.

The new regional casinos, especially the much coveted super casino licence, are supposed to serve as the ‘suck it see’ phase for the liberalisation of gambling laws in the UK, and yet one has to wonder if, as this report suggests, we see a similar effect to that claimed for Connecticut, will the government really be able to pull back from further expansion when there are clearly so many vested interests at work already.

Eithe way, from what can be found in the public domain about both Phil Anschutz and, now, Sol Kerzner, there will be plenty of people question just who it is that their elected representatives have been doing business with, and on quite what terms these deals have been struck…

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