Enforcement Needed As 'Grey Slot Machines' Have Cost Missouri Lottery $50m

Thousands of retailers who sell Missouri Lottery tickets could face fines or prosecution over illegal slot machines in their stores, according to the lottery’s executive director.

Although it is unknown when county prosecutors will act, lottery executive director May Scheve Reardon said 12 to 14 county prosecutors are investigating the issue of illegal or grey market slot machines.

“I hope they show how serious an issue it is,” Reardon told attendees Friday at the National Council of Legislators from Gaming States (NCLGS) winter meeting in San Diego.

Thousands of the machines have been installed in truck stops, gas stations and convenience stores while Missouri lawmakers have been discussing legalizing video gambling terminals (VGTs) outside the state’s 13 casinos.

State lawmakers have considered regulating VGTs in a way similar to the industry in Illinois.

The tax rate on VGTs in Illinois is 33 percent, and beginning on July 1, an additional 1 percent tax will be added for a total of 34 percent. Any licensed location can operate up to six machines.  

The state has 33,294 machines in 7,180 locations, according to the Illinois Gaming Board (IGB). Gamblers wagered $1.75bn in December, regulators said in a monthly finance report.

Only eight states have legalized video gambling outside casinos: Oregon; South Dakota; West Virginia; Louisiana; Montana; Pennsylvania; Nevada; and Illinois.

The distributors in Missouri claim their terminals are legal.

“Video machines that operate like slot machines are everywhere,” said Howard Glaser, global head of government affairs and special initiatives with Scientific Games.

Glaser said the thousands of VGTs in Missouri did not just fall off the back of a truck.

“It’s a deliberate strategy to take advantage of loop holes in the state laws,” Glaser added.

Missouri attorney general Eric Schmitt has not issued an opinion on the question of the machines’ legality. Schmitt is awaiting the outcome of a Platte County case where five machines were confiscated by local police from two gas stations.

Platte County prosecutor Eric Zahnd took action against Integrity Gaming LLC in October, and both sides are waiting for a judge to rule after a two-day hearing last month. 

Reardon told GamblingCompliance she expects it to take a couple of years for the case to wind its way through the courts.

“These unregulated machines need to be regulated by the lottery,” said Reardon during an hour-long panel discussion on what is working and what is next for U.S. lotteries.

The Missouri Gaming Commission considers the VGTs to be illegal and is opposed to any legislation that would legalize the thousands of machines at retail locations throughout the state.

The Missouri Lottery estimates the devices have already cost the lottery $50m. It is unknown the impact the machines have had on the state’s licensed casinos.

Reardon told GamblingCompliance that she and her team was visiting a lottery retailer when the owner was unplugging a lottery machine to replace it with an illegal slot machine.

A Missouri House Special Interim Committee on Gaming report released in December estimates there are more than 14,000 grey machines operating in the state.

Glaser said the machines are also a problem in North Carolina, Virginia, Texas and Pennsylvania. In Pennsylvania, he estimates there are 40,000 to 60,000 illegal machines in operation.

“Once they are there, they are very hard to get rid of,” said Glaser, adding the problem with illegal VGTs is on the enforcement side where many agencies do not have the resources to deal with the issue.

“You may have never seen these machines but this is coming to your state. Have the rules in place so you are prepared to deal with this,” Glasser warned some 200 state lawmakers and regulators.

Glaser added that lotteries are an $85bn industry that remains far ahead of other entertainment industries, including the $30bn video gaming industry and the $8bn concert business.

“These are all big numbers, but the lottery still dwarfs all of them,” he said. “The good news is the lottery is holding its own.”

Glaser said lottery products are also holding their own against legal sports betting. He noted the handle since the U.S. Supreme Court overturned the federal ban on sports betting 18 months ago is about $166bn, with $140m in net revenue for states.

Since the Supreme Court’s decision, the Pennsylvania Lottery's internet lottery program has reported $640m in net revenue and $50m in tax revenue to the state, Glaser said. 

Both Glaser and Reardon recommended lawmakers consider utilizing their state lotteries to operate sports betting.

Reardon noted the lotteries in Washington, D.C. and Rhode Island operate sports betting, and she believed lawmakers in her state should ask how this model could work in a state like Missouri.

She said the Missouri Lottery has 5,000 retail partners, which are 5,000 touch points in the state.

“We don’t want the whole sports-betting business,” Reardon said. “We’ll offer parlay wagering and leave the sportsbooks to the casinos. I think it’s more fun to go down to a retailer and make a parlay bet.”

“Cutting the lottery out [of sports betting] would be very detrimental,” she said.

Glaser said he has seen that model work very well in Delaware, where Scientific Games is a supplier to the lottery and casinos.

“There is a business deal to be had that grows the whole thing,” Glaser said.