Abstract
During its first full year of operation, the recreational marijuana industry in Nevada generated $400 million in sales and over $69.8 million in tax revenue. So, the state is the largest single benefactor of the new industry.
Marijuana cultivation, sale, and possession, however, are illegal under federal law. Marijuana is a Schedule 1 drug, meaning it is perceived to have no medical value and a high potential for abuse. This is the same category as heroin and is a more restrictive category than Schedule 2 drugs like cocaine and meth. Schedule 2 substances are deemed to have some medicinal value. While the scheduling system does influence criminal penalties, marijuana is treated less strictly than other Schedule 1 drugs. Still, possession of marijuana is punishable by up to one year in jail and a minimum fine of $1,000 for a first conviction.
The Obama administration took a state-friendly approach to marijuana by not interfering with the states permitting recreational and medical use if the states prohibited letting minors have access and interstate transportation.
The Trump administration, however, gave federal U S. attorneys the power to enforce marijuana laws even in states where it is legal and against state-authorized marijuana businesses.
The federal classification of marijuana as a controlled substance has other ramifications for marijuana businesses in states that permit recreational use. Perhaps the most substantial is that these businesses must function as cash-only enterprises since many financial institutions will not deal with businesses that are breaking federal law.
Federal legislation, however, may change the federal/state dynamic. Senators Cory Gardner (R-CO) and Elizabeth Warren (D-MA) proposed the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act, S. 3032, in the 115th United States Congress. The STATES Act would amend drug laws, so marijuana provisions no longer apply to individuals acting in compliance with state or tribal laws. Ed Perlmutter (D-CO) in the House, and Jeff Merkley (D-OR) reintroduced the banking provisions of the STATES Act as the Secure and Fair Enforcement (SAFE) Banking Act of 2019. These and other measures are attracting growing support as the marijuana legalization movement has become more mainstream.
States are also bolstering the regulation of the business. For example, recently passed Assembly Bill 533 in the Nevada legislature creates a Cannabis Advisory Commission and the Cannabis Compliance Board much like the Gaming Commission and Gaming Control Board. The new agency would regulate licensing, dispensary operations, growers, production of cannabis products, and testing.
This panel discussion was recorded on May 24, 2019, to address the many facets of the intersection between the marijuana business and the gaming industry in states where both are legal.
The first area I would like to cover today is the cross-ownership between casinos and marijuana businesses. This is becoming more acute, particularly in states like Nevada and Washington, where they have vibrant casino and marijuana industries. Let's start with Mr. Johnson for an overview of how Nevada has approached this issue.
Second, gaming regulators were concerned that persons involved in marijuana and gaming might be subject to, in a worst-case scenario, prosecution for violating the marijuana laws. We go to great lengths to vet the backgrounds and ensure the qualifications of people that are in the gaming industry for a reason; we want them to be there managing those businesses and making decisions. And if they are not available, for example, through largely preventable reasons such as arrest, that would frustrate our ability to effectively regulate gaming, in our view.
And then third, we wanted to ensure, again stemming from the federal illegality, that no gaming-related assets would be at risk of any type of forfeiture actions in the event of a federal prosecution because that too could hamper our ability to collect gaming tax revenue and regulate the machines and equipment and what have you that are involved in running gaming in the state.
So it was an approach that started about five years ago, and the design and the intent was to take a more conservative than less conservative approach given the role of gaming in the Nevada economy.
We also have the tribal sector, where six of the tribes have compacts with the state for marijuana production and retail sales. I believe there is a seventh being approved later this month or next month. And because they are tribally owned enterprises or government-run facilities, they cross over because the tribes also own and operate their casino facilities.
When they met about a year ago, they took up some of these questions about the ability of gaming licensees to do business with persons involved in the marijuana industry. And they issued a resolution at the conclusion of their deliberations that reiterated the stance that gaming licensees should take caution with regards to some of their financial transactions with marijuana businesses.
In addition to that, at the regulatory level we have taken an analysis on a case-by-case basis, where some of those issues have emerged to evaluate the degree to which there is that commingling and overlapping of interest to safeguard, first and foremost, the economic role of gaming in the state. So it has been the subject of discussion.
Our state legislature is in session now and those topics are still being discussed. I anticipate for the foreseeable future they will be discussed in a different way, especially as it relates to employees. But that position generally has been fairly consistent over the last few years with regard to maintaining that separation between gaming and marijuana.
But they can escalate anyone that they have a concern about, and then, if that concern is shared at the compliance department level, the process is to elevate to our compliance committee for its review, where the vendor would need unanimous approval. And if not, the business unit that is seeking to use the vendor has the option of escalating it to the board of directors for its review.
We use our best efforts, both at security and corporate compliance, to review who these vendors are, what their connections are, their issues, and then make the best determination we can consistent with the guidelines that have come from the Nevada Gaming Commission and the Nevada Gaming Control Board [NGCB] on whether these are vendors that we want to have a business relationship with. And so far, I think that we have a process that is thorough in investigating these. I am comfortable with the attention that we give these matters, and, ultimately, each vendor is viewed based on its history and on its individual merits.
I am not sure it has come up for us much on vendor issues, but it has on source of funds for casino play from businesses that are servicing the marijuana industry and additional industries, which makes the question more complex. And that can be everything from custodial services to financing the agriculture elements of marijuana. We follow the guidance that FinCEN [Financial Crimes Enforcement Network] has issued, but someone who is exclusively involved in the marijuana industry as a vendor isn't something that has come up. We are not going out and seeking to do business with marijuana dispensaries.
There was federal guidance that made it clear as to how you could have this bifurcated system, and then the Cole Memorandum was withdrawn by the current administration. There has not been updated guidance from FinCEN, but I think this is really the heart of it. The state has decided to pursue public policy around the legality of marijuana and the federal government does not follow that. In Nevada, we have the Foreign Gaming Act and it has turned out to be challenging to reconcile federal and state law as it regards marijuana.
However, I think it is going to become increasingly common as the marijuana industry, particularly the recreational marijuana industry, becomes more robust. It's already significant, but there are going to be more common businesses that are doing business with them and also with the gaming industry. It is going to be harder in a place like Las Vegas, perhaps more difficult here than anywhere else given the size and scale of the casino industry and the legal marijuana industry, for every vendor, whether it is custodial services or, perhaps, marketing and advertising firms who service a variety of different businesses. I think it could be resolvable with some additional review and analysis by our security and compliance teams.
Since there would be no product being sold, (licensees can only sell it within their business premises), there would not be any otherwise illegal materials being marketed or sold. It would be all the ancillary businesses to the industry. You may have some of the retailers or the growers establishing a presence for people to know about their brand or their market. But they would not be conducting any business in the convention facility so that would not be a problem.
I noticed the other part of your question was about events being hosted by some of the licensees and that is an interesting one. Concerts, for example, are becoming one of the areas where public use is an issue—and one of the other questions that we discuss later. But again, those events are being allowed and permitted in the convention facilities. In fact, there was one held on April 20th, in a local tribal facility featuring two prominent pro-marijuana counterculture actors/comedians from the ’70s.
I think the bottom line was that there would be no actual federally prohibited product. Nothing that would violate the Controlled Substances Act would be permitted on the premises of a licensed gaming establishment, which would include the convention center, the nightclubs, and so on. So that question did come up and I believe the position was that they could host those types of events but that they were expected to comply with all federal, state, and local laws regarding any controlled substances.
That is why the question was presented initially to the Gaming Commission and then on to the Gaming Policy Committee so that hopefully some consensus could be reached. But I think whether it is B-to-B or B-to-C, so long as there are no violations of the law concerning controlled substances, the enforcement arm of gaming regulation in the state of Nevada, the Gaming Control Board, is not likely, in my view, to take an enforcement position.
I would say overarching all of this has been, whether it is a convention or individual conduct, consistent policy as it regards marijuana: no possession, no use, no paraphernalia. And that is applied to conventions. We have been willing and have hosted B-to-B conventions and meetings for the legal marijuana industry, and those have included large conventions, exhibit space, and selling blocks of hotel rooms to legal marijuana-related groups. If there is a convention, say, at the Las Vegas Convention Center and they are looking for a place to host dinners, MGM Resorts restaurants can be used. But again, no possession, no use, no paraphernalia.
And again, the north star of our policy has got to be no possession, no use, no paraphernalia and that, to my knowledge, has not created any friction with anyone in the industry. That seems to be agreeable. We have a process that when our sales department has an opportunity to book one of these events that the information will be sent to our corporate legal department and corporate compliance for evaluation, and we have an opportunity to dig into it and sign off on whatever the engagement is going to be.
So overly conservative approaches like, for example, saying “no paraphernalia,” if it is not necessary for you to be that conservative, I would caution against it because I think you are opening yourself up to having procurement processes or exclusion processes that are unjust. So I would just caution, given the kind of social justice history of marijuana enforcement.
And then in terms of the behavior, there is a fairly modest body of research on marijuana use and gambling but what it does seem to show is that, particularly among young adults, probably a third of your gamblers are already playing high. 1 Rates across several studies show that particularly among young adults, probably a third of the people in your casinos are either high while they are there or they have been high at some point in the week.
When you look at problematic behavior, people who have gambling problems gamble more frequently, and the likelihood of marijuana use actually increases. 2 It is quite a positively-correlated relationship, so the more likely a young adult is to develop a gambling problem, the more likely they are to be a daily or heavy user of cannabis. 3 So there is definitely a big overlap in the behavior, just the safe and kind of normal behavior of gambling and cannabis use. There is also a stronger overlap in terms of problematic use, but that should not surprise anyone because it is a risk-taking behavior.
But what does that mean for you as operators and regulators? Well, I mean you have been dealing with this issue for a long time and the definition of impairment that you have for your operators probably adequately covers what impairment would look like in cannabis. So I do not think you have to worry too much about that.
In terms of what it means for your players on the floor, there is very mixed evidence about whether or not cannabis use has the impact that some people think it would. There is very conclusive evidence that alcohol use increases risk taking, makes people less sensitive to losses, more likely to overspend, more likely to play longer, play harder, shorter response time after losses before they replay. 4 The evidence on alcohol is very, very clear that it increases risk.
But that is not true for cannabis. In fact, the evidence is quite mixed. There is some research showing that high-potency cannabis, even if used just prior to gambling, did not have any impact on gambling task. 5 There is another study showing that young people who gambled while high were actually more conservative. 6 That would be consistent with the driving findings, which is that cannabis users actually tend to drive more slowly rather than more quickly, although the impact on their reaction time is still quite serious and problematic.
But in terms of gambling, there really is not any evidence that if they are high they are necessarily going to get into more trouble. So I guess my big concern would be, first of all, to say that, probably a third of your young adult customers are already using cannabis and that there really is not much evidence, or certainly not conclusive evidence, that using it puts them at greater risk while they are playing in your facilities.
But from the regulators that I have spoken to here, they are quite comfortable that existing impairment rules are enough to cover patrons who are impaired with cannabis. So you do not really need a new set of regulations around stopping players from putting themselves at too much risk because they have overconsumed weed.
I addressed such concern with the Liquor and Cannabis Enforcement staff at one point and their position was, and I am summarizing here, do the best you can but we are not, as an agency, expecting your security staff to weigh in to the concert floor and create a bigger public safety hazard because someone may be lighting up or otherwise consuming on your premises. In sum, reality sets in at that point, and you do the best you can.
But in terms of possession, since it is legal under state law, as long as they are within their possession limits, there is not much a private stadium facility or casino licensee can even do at that point to remove the product from the patron.
With that said, on the casino side of things, no individual is allowed or should be allowed under state law to operate or play at any gambling activity if they appear to be intoxicated or under the influence of any substance, be it narcotics or even prescription medications. That is under the gambling regulations. Under the liquor license standards, you are not allowed to permit anyone to possess or consume marijuana products on your licensed premises.
Since most of the facilities in Washington State other than tribal casinos are all non-smoking, smoking anything, much less marijuana would be readily discernible. What is more prevalent are the edibles and the consumption where someone may not realize—or your staff may not be aware—that that person snacking on something from a bag is actually a bag of edible marijuana gummies, not just traditional candy gummies or something of that nature. That is where it is harder to police.
What I would say is that the science of impairment testing around cannabis is very far behind where we would like it to be. So even a toxicologist and another toxicologist will not necessarily agree on the criteria for impairment testing. For us to then try to extrapolate that inconclusive science to specialized training for casino staff, I think it may be premature.
And as I said, the regulators I have spoken to have said that they feel the requirements around impairment—which is not as legally restrictive as intoxication which is a much more serious state—but the guidelines around impairment are seen to be sufficient for Canadian regulators and operators. I think trying to weigh into this debate around what is the best way to test for impairment, say, at a roadside, it is too early. The science is not there yet.
We have launched an aggressive responsible gambling program at MGM Resorts called GameSense, which we have licensed from the British Columbia Lottery Corporation, and it addresses a number of issues around gaming and doing so responsibly. Included in that is reinforcing messaging about people not gambling while they are impaired. That is important to us, to ensure that our games are fun and safe. That training does not differ by jurisdiction, whether it is in Nevada, where recreational marijuana is legal, or Mississippi, where no form of marijuana is legal.
So I think that is similar to what some other states have done but that is what Nevada did specifically to put licensees on notice that they should take care to ensure that persons are not impaired by marijuana as well. There was nothing that set impairment levels or what have you. As this discussion has indicated, that is often a moving target but in general, the onus has been placed on the licensees to ensure responsible gaming on their premises.
This is from a state supreme court decision that predates the recreational marijuana initiative, which said that if you were taking medicinal marijuana, even pursuant to your duly authorized medical diagnosis, that positive test was grounds for termination. I have not seen anything come up on that lately. But again, the anecdotal reports are some entities are revising some of their drug testing policies.
Also, THC metabolizes at what is called an exponentially declining rate while alcohol metabolizes at a steady rate. X number of hours after consumption you can be sure that from one person to another the metabolization of alcohol is pretty steady. With THC, it is quite different when you smoke it; it is exponentially declining so if you test someone an hour after use versus three hours after use, you will get very different results.
And then there is also a very poor correlation between THC levels in the blood and actual impairment. Much more so than alcohol, because regular use of cannabis results in very high tolerance, so someone who shows high levels of THC beside another person with similar levels of THC might have dramatically different levels of impairment based on whether or not one is a daily user or not. So it is a very different drug. It stays in the system a lot longer and it metabolizes differently. But it stays in the system long after it would have any impact on someone's performance.
In other areas, we have objected to employment if there were aggravating circumstances in their marijuana use. For example, if it was marijuana use coupled with or derived from drug trafficking or domestic violence or any other aggravating circumstances, we have objected in those instances.
And so, I will state my individual viewpoint because I want to be careful that that is not imputed to the entirety of the Gaming Control Board or the Gaming Commission in Nevada. My individual position has been that we will object if a person uses, possesses, or is impaired by marijuana while they are employed on the premises of a licensed gaming establishment or while on duty in service to a gaming licensee.
That is where I have drawn the line and I have tried to strike that balance between the will of the voters on these questions and the interest of gaming regulators on these questions as well. And this session, as we speak, the Nevada legislature is contemplating a bill, Assembly Bill 132, I believe it is, that would clarify that an employee may not be sanctioned for off-duty, off-premises use of a substance that is lawful in the state. And so, my hope is that as that bill advances, which it appears to be doing, that would provide some additional clarity, if not parameters, with regards to gaming regulation and gaming employment. (Governor Sisolak signed A.B. 132 into law May 14, 2019.)
And along those lines, the governor just signed, it was last week or the week before, Senate Bill 5605, which will allow, effective July 28th of this year, anyone that was convicted for a misdemeanor of mere possession and if they were 21 or over at the time of their conviction, they can apply to have that vacated across the board. That goes back all the way I think to—violations going back to 1971.
When we have had owners and executives come before the Gaming Control Board and Gaming Commission, I would note that, to date, no one has been denied a gaming license as an individual because of their consumption of marijuana. There have been some that have been warned not to partake in marijuana in the future, given the illegality at the federal level. But we have had a handful of applications of executives, owners, what have you, that have come forward and no one has been denied a license.
Throughout those incidences, my position has been consistent that I am more concerned with what happens while they are on duty or on premises, particularly with medical marijuana. I just have some discomfort with gaming regulators injecting themselves in a matter between a physician and a businessperson about their individual medical needs. And so, I have just tried to strike that balance between ensuring that there are no compromising circumstances that occur at the gaming establishment while respecting the privacy and medical needs of those individuals.
If it is politically impossible to take marijuana off of the Schedule I list, I think it would be enormously helpful if the federal government at least provided banking opportunities for the industry. Casinos are considered financial institutions under the Bank Secrecy Act. It really creates a lot of risk and a lot of activity that has to be reported.
As I mentioned earlier, even though the Cole Memorandum was withdrawn by the previous attorney general in January 2018, FinCEN has not revised any of its guidance regarding financial transactions involving marijuana. We continue to follow those, where appropriate, filing marijuana-limited SARs [Suspicious Activity Reports] where we identify people's source of funds as coming from the legal marijuana industry.
But this ongoing conflict between state public policy and federal public policy is really at the root of all this. I think a lot of our discussion today would still be open for discussion and for reasonable regulation about usage, involving how background investigations are going to be done for employees, but a lot of the financial interactions would be simplified if the federal government and states could get in alignment around issues such as banking.
So once that legal hurdle is cleared via the STATES Act, I think that a lot of these issues that we talked about would be looked at very differently. Casinos might be looking at consumption lounges. You know, there is a lot of opportunity here. You have a highly structured, highly regulated environment. It is, frankly, in my view a good fit.