Mexico’s machine gambling establishments have emerged over the past few years as one of the fastest-growing new markets in the world. To foster the continued growth and health of this dynamic young industry, Mexico’s licensed gaming operators created a new trade group earlier this year, the Association of Gaming and Sweepstakes Licensees (Associación des Permissionarios des Juegos y Sorteos), and appointed Alfonso Perez as chairman. Perez worked for GTECH as a country manager in Mexico for 11 years prior to serving as a consultant for several of Mexico’s largest licensed terminal operators. He recently spoke with IGWB’s Charles Anderer about how the association is creating a new regulatory framework for gaming in Mexico.

Tell us how you became head of this association.

Perez: I left GTECH when it was sold to Lottomatica in 2007. As a consultant, I started working for two companies that are now members of our association, Grupo Caliente and CIE. They had mentioned forming an association, since the market was and is a little out of order because it has grown so fast, and the government has not paid as much attention to the subject as it should have. Caliente proposed to the group of original members of the association that I should be the executive director. … My conditions for accepting the position were the unanimous support among the members, which I had, and No. 2, total freedom to write a code of ethics for the association, which was also accepted and which we have now just finished. Coming from GTECH, dealing with the public sector, a code of ethics is key. I have been able to apply many years of experience to one for the group. If we want to change the nature of the Mexican market to a fully legal market we have to make sure our own group is fully compliant with the highest standards.

What does the code of ethics cover?

The basic value of the code of ethics is that we have to be fully legal. “Fully legal” in Mexico has a few meanings. For instance, in our industry, we have two types of “legal” gaming operators: the ones that were granted a full permit by the Mexican government, which is the case with my members, and second, those who won through a [judicial decision] the right to operate games. The code of ethics also includes other principles, such as the need to be responsible with one’s own employees. The reason is that companies in Mexico that won the right to operate gaming machines through a judicial decision — which our association considers to be gray market companies — do not register each employee with the Social Security Institute. They don’t pay their employees in a transparent manner, to avoid taxes. And they don’t respect the law in many other cases relative to their employees. Another ethical principle is responsibility with the customers. In this business in particular you have to be honest with the customer and honor the prize payment. We also want our associates to be fully transparent. We prefer our members be public companies, which almost all are. Being traded in public markets forces those companies to be more transparently legal. And, finally, be responsible with the community and with society. We also ask our associates to act with strict respect for the law in all matters.

It sounds like one of your goals with this code is to define for government exactly what legal gaming in Mexico should look like.

Yes. We want government to develop a sense of how to look at the gaming activity, generally, in a way that is historically and universally recognized. Gaming has the potential to create negative social impacts, and it should be fully regulated.  And as a consequence of the government taking more time to oversee and regulate the gaming industry the government has the right to extract more revenue from the industry, such as a tax on revenue.

Would you summarize your membership to date?

Our members include: CIE, operators of the Yak brand of establishments, including the Royal Yak at the Hippodrome in Mexico City; they presently have 42 gaming parlors operating with the right to open 65. Caliente Group, which has an unlimited number of establishments that they can open in the state of Baja California, with limits in the rest of the country. Today, Caliente Group has 82 sports books and 63 gaming parlors with terminals. Codere, a Spanish public company which has a company in Mexico called Promo Juegos, and they are partners with both Caliente and CIE. Pringsa, which is owned by Cirsa. Apuestas Internationales, which is Televisa’s company. And a small operator called Juega y Juega. We have also recently invited what we call our “strategic suppliers”. We’ve invited Bally, a major supplier of Caliente and Codere, to join us, as well as IGT, both in the process of joining. Our other supplier members include Multimedia Games, Zitro and Metronia. We went through a compliance check on each of these companies. The terminals that they have working in Mexico are fully complaint with Mexican law.

Are you requiring your supplier members to only do business with operators that your association considers to be legal?

That is correct.

Tell us more about the distinction that you and your association are drawing between operators who have received a license from the government and those that have won the right to operate games through the courts.

We think there is a need for clarity in this area. We have hired two independent law firms that are not associated with any of our members, neither suppliers nor operators, to study the permits of the “amparo” licensees, “amparo” being the term that means “trial of guarantees,” or the process that was used to grant these operators licensed status. We should have in the next 60 days a legal opinion that states whether these licensees are legal or not legal. If these licensees are determined to have legal status we will invite them to join us if they sign our code of ethics.

Your members were subject to a federal tax for the first time earlier this year. How much are your members paying and how is the process working?

This is a complicated issue. The Mexican Ministry of Finance negotiated a tax law with us. Here we have a general tax law, and every year new additions and addendums to the law. Last year, we negotiated and accepted a Special Tax on Products and Services, and that tax was agreed to be 20 percent of net gaming revenue. The government agreed that they would impose that tax on every company that is involved in gaming. They also agreed to two other things: to get the cooperation of states and cities to recognize this taxation rate, and force illegal establishments to become legal and, therefore, taxed. Our companies and associates are paying the tax, but we are also challenging it. We are still paying the tax in the meantime — that is what Mexican law requires us to do — and the amount that our associates will pay this year will be around US$200 million. But we challenged the tax for two reasons. The government did not do what they agreed to do by either forcing the illegals to close or requiring from them a legal permit to operate games and being complaint with the law; and, second, the government agreed to work with the states and the cities to accept a maximum payment of 20 percent, which they did not do. … At the moment, we are meeting with the government’s tax authorities and revisiting last year’s agreement. The association and our members have agreed to not challenge the law again. In return we are asking the government to pay attention to the illegal operators and re-coordinate with states and cities about the tax rate. Right now, you have states and cities that are trying to impose tax rates of up to 40 percent, which is ridiculous and unworkable.  We have one city that asked two of our members to pay US$150,000 per parlor per month, regardless of the revenue those establishments generate. So we are trying to establish order in the tax system and transparency in the process. The federal government in Mexico is the only branch that has the right to regulate gaming, but you have states and municipalities that are trying to impose their own rules, which can involve absurd levels of taxation. This is the biggest challenge that our association has right now.

How are you trying to resolve it?

We have proposed the following breakout: 12 percent for the federal government, 6 percent to state governments and 2 percent to city governments. We would pay city and state governments directly and credit the money toward our 20 percent rate. We are also asking that prize winners be taxed at a 2 percent rate. Right now the rate on prize payouts is between 6 percent and 8 percent.

What is the general attitude of Mexicans to this emerging sector of gaming establishments?

Gaming and gambling has been in Mexico forever, but it is still socially not well looked upon. But Mexicans like to gamble. We calculate that our establishments attract between 4 and 5 million people who regularly gamble. But they don’t say they gamble. We commissioned a study that asked 100 of our customers if they were coming to our establishments to gamble, and 82 percent said, “No, I’m not here to gamble, I’m here to play.” But with so many customers, and the number of establishments growing, our gaming product is becoming part of the Mexican culture. I expect we will add another 50 percent to 60 percent more parlors in the coming years and grow to 400 around the country. Between legal and illegal gaming parlors, we have around 70,000 terminals in the country now. This will grow to 120,000. Once we get to that number I don’t know if the market will accept more.

Will we see any more new licenses granted?

I would expect the government not to grant more permits during President Calderon’s administration [which ends in 2012]. I would expect the government to only honor the permits that have been granted. … In the case of gaming parlors, which are called “salas de sorteos de numeros,” there are 343 permits that have been granted. Of those, 164 are being operated by fully legal companies. There are 16 operating what the government considers to be legal establishments and that we are presently evaluating through our legal experts, and 83 parlors that are operating illegally. The government recently changed 17 of these to the status of “legal”. This is the special case of the company that operates under the name of “Palmas.” They have been operating under the “amparo” or “trial by guarantee” process. They have now been determined to be legal by operating through a permit granted in 2005 to a company called Entrentimiento de Mexico.

Palmas has mostly been operating full casino-style machines. Will they have to change out their equipment now?

We assume that they will be forced to go to so-called Class II games.

Your association has also been active in the area of game certification and the issue of what constitutes an acceptable terminal under the law in Mexico.

We are working with NYCE (Normalización y Certificación Electronica) to become the GLI of Mexico. We have come to an agreement with the Mexican government whereby we are fully paying for the development of a game certification process, and the government has agreed with us that NYCE, the largest certifying institution in the country, will become the certification institution. The government is already using them for computers, software and technology. So NYCE will be considered by us as the only valid certifier of games, and the government has agreed to that.

When will this new certification process be in place?

It will take the rest of this year and probably begin next year. One of the reasons why we invited suppliers to join us is because we wanted them to add value to this certification process based on their experience and expertise in jurisdictions around the world.