Introduction

On May 29, 2023, the Standing Committee on Public Accounts held public hearings on the value-for-money audit of the Ontario Lottery and Gaming Corporation: Casinos, Lotteries and Internet Gaming (2022 Annual Report of the Office of the Auditor General of Ontario). At the time of the audit and hearings, the Ministry of Finance (Ministry) was responsible for overseeing the Ontario Lottery and Gaming Corporation (OLG). The Ministry of Tourism, Culture and Gaming now oversees OLG.

The Committee welcomes the Auditor’s findings and recommendations and now presents its own findings, views, and recommendations. The Committee requests that OLG, the Ministry of Tourism, Culture and Gaming, and the Alcohol and Gaming Commission of Ontario provide the Clerk of the Committee with written responses to the recommendations within 120 calendar days of the tabling of this report with the Speaker of the Legislative Assembly, unless otherwise specified.

Acknowledgements

The Committee extends its appreciation to officials from OLG, the Ministry, and the Alcohol and Gaming Commission of Ontario. The Committee also acknowledges the assistance provided by the Office of the Auditor General, the Clerk of the Committee, and Legislative Research.

Background

The federal Criminal Code prohibits all commercial gambling unless it is conducted and managed by a province. OLG was established as a Crown agency to meet this “conduct and manage” requirement. It operates under the Ontario Lottery and Gaming Corporation Act, 1999.

OLG is responsible for conducting and managing casinos, internet gaming, lotteries, and charitable gaming. It also provides annual funding to the horse-racing industry. OLG’s mission is to generate revenue for the Province, stimulate and enhance economic development, and promote responsible gambling. It has three main lines of business: land-based gaming (including casinos and charitable gaming); internet gaming; and lotteries.

OLG is governed by a Board of Directors (appointed by the Lieutenant Governor in Council) and is responsible to the Minister through its Board Chair. A Memorandum of Understanding between the Minister and OLG sets out the roles and responsibilities of the Minister, the Deputy Minister, OLG’s Board of Directors, OLG’s Board Chair, and OLG’s CEO. OLG is regulated by the Alcohol and Gaming Commission of Ontario (AGCO) – the provincial agency responsible for regulating gaming in Ontario.

Casino Operations

In 2012, OLG began implementing its modernization plan, which included the privatization of casino operations. Except for the Windsor casino, day-to-day operations of casinos are now managed by private sector operators. OLG is still responsible for ensuring that they conduct and manage their operations in accordance with the Criminal Code.

In selecting casino operators, OLG grouped its casino sites into nine regions and followed a specified procurement process. Successful bidders were given the right to operate casinos in a specific geographic area for a minimum of 20 years. Each bidder had to commit to an annual revenue amount that would be guaranteed to OLG based on the bidder’s revenue projections as well as 30% of revenues above the guaranteed amount.

Following the audit report, in April 2023, OLG released a Request for Pre-Qualification (RFPQ) for the Windsor casino. This is the first step in the procurement process to select a service provider to handle the day-to-day operations of that casino.

Audit Objective and Scope

The objective of the audit was to assess whether OLG “has effective oversight and operational procedures in place to:

· conduct and manage lottery games, Internet gaming and casinos fairly (ensuring game integrity), in a socially responsible manner, and in compliance with legislation and corporate policy;

· deploy its resources efficiently and effectively; and

· measure and publicly report on the effectiveness of its operations.”

The audit was conducted between January 2022 and September 2022. The audit did not review OLG’s oversight of charitable gaming or support of the horse-racing industry.

Issues Raised in the Audit and Before the Committee

The Committee heard that OLG is one of the largest, non-tax revenue generators for Ontario. This past year, OLG returned $2.5 billion in profit to the Province. In addition, OLG provided $181 million to communities that host casinos and charitable gaming centres and $123 million to the Ontario First Nations Limited Partnership. OLG also provided $330 million in commissions to lottery retailers. The Ministry works closely with OLG to help it meet its mandate to generate strong returns to the Province safely and responsibly.

According to OLG, since the release of the Auditor’s report, OLG has completed or made progress on 76% of actions related to the Auditor’s recommendations. To implement the Auditor’s recommendations related to attracting new customers to lottery play, OLG is rolling out a new three-year lottery strategy. The strategy emphasizes new audience acquisition and cross-promotion, and it includes investment in technology to enhance the overall customer experience.

Among other things, the audit found that lottery retailers win at a 40% greater rate than the general public. To address this finding, OLG plans to commission a study to examine play habits, frequency, and preferences of retailers who play the lottery to understand underlying trends in prize claim data. In addition, by December 2023, OLG said it would complete a review of the effectiveness of controls in place related to retailer participation and prize claims and will strengthen them as required.

The audit also found that anti-money laundering measures at casinos could be improved. The Committee heard that OLG has a robust anti-money laundering program in place and is committed to improving it. OLG said it would implement the Auditor’s recommendations in this area and strengthen collaboration and information exchange with service providers, law enforcement, and regulators. In addition, OLG will require source of funds documentation for all cash buy-ins above $10,000, aligned with new federal requirements. OLG also said it would implement a centralized, province-wide suspicious transactions reporting system by 2025, and update its trespass program by mid-2023.

OLG also said that responsible gambling is a “cornerstone” of its competitive advantage and the long-term sustainability of its business. In November 2022, OLG launched a new three-year responsible gambling plan, which invests over $10 million annually in responsible gambling across all of OLG’s lines of business.

Casino Operating Contracts

As noted above, in 2012, OLG began implementing its modernization plan, which included privatizing the day-to-day operations of casinos. The Committee heard that the objectives of modernization were to bring in private-sector operators, modernize the gaming business, manage competition between facilities, ensure a sustainable and efficient gaming market, and generate revenue for the Province.

According to OLG, modernization has spurred private capital investment of $2 billion across the Province. It has also supported job growth, and increased net profit to the Province. Private sector capital has resulted in new casinos being built, and substantial renovations being made to others, creating jobs and new revenues in those host communities.

The Committee asked about the Auditor’s finding that after casino operators won bids based on revenue projections and guaranteed revenue commitments, three operators later reduced their commitments in re-negotiated contracts, resulting in a reduction of projected net profit for the Province.

OLG said that it is making changes to the contract negotiation process going forward. For the Windsor casino procurement (which is going on now), OLG has taken steps to ensure the responsibility of bids and reduce the risk of excessively high thresholds. As part of the request for proposals (RFP) process, OLG is proposing financial guardrails related to bids to help ensure that the thresholds make sense and OLG does not have to provide financial relief later. While some of the details are commercially sensitive, OLG offered assurances that there are aspects of the procurement process that “will help to ensure reasonability of the proposed thresholds and projected revenues.”

OLG also noted that Windsor is an established gaming market, and OLG knows how the market in the area performs and operates. OLG is also confident that the risk of having to provide financial relief for Windsor is lower than in other areas given that no material new developments will be proposed as part of the bid. (Difficulty obtaining requisite municipal approvals was one reason OLG renegotiated a contract with a casino operator).

The Committee also learned that OLG is working on a process to enhance value-for-money analysis prior to approving contractual amendments for casino operators. This process will include re-procurement as a possible scenario. A tentative target date of 2025 has been set for these changes because the process cannot be executed until a contract amendment of this nature arises.

The Committee also asked whether casino modernization had really maximized profit to OLG and maximized private sector capital investment in casinos. OLG noted that to date, there has been about $2 billion in private sector capital investment across Ontario. This investment has resulted in seven new casinos being built and substantial renovations being made to seven others. In addition, nearly $1 billion is going into a new development at Woodbine, which is expected to open in the coming weeks.

The Committee also heard that it is important to consider what the Province’s returns would have been, had modernization not taken place. The Ministry said that modernization helped create a structure where operators have an incentive to make investments, to grow gaming revenues, and as their profits increase, so will the Province’s profits.

Committee Recommendations:

The Standing Committee on Public Accounts recommends that:

1. Going forward, the Ontario Lottery and Gaming Corporation avoid further reducing contracted revenue and capital commitments made by casino operators.
2. The Ontario Lottery and Gaming Corporation incorporate capital expenditure commitments from operators in any new agreements.

Internet Gaming Advertising

The Committee asked about OLG’s responsible gaming mandate and, in particular, the perceived pervasiveness of television advertising for iGaming operators. (iGaming operators are regulated private sector operators of internet gaming and sports betting).      

The Ministry noted that iGaming operators are regulated by the Alcohol and Gaming Commission of Ontario (AGCO). The AGCO sets the standards that all gaming operators must comply with, including advertising. The AGCO is currently looking at those advertising standards with the goal of minimizing potential harms to youth and children.

OLG noted that it does not conduct and manage iGaming operators in the province (iGaming Ontario does), and all of OLG’s advertising, including its online offerings, are produced in alignment with AGCO standards on marketing.

Following Committee hearings, the AGCO announced that it was updating its advertising standards to prohibit the use of athletes in internet gaming advertising, except for the exclusive purpose of advocating responsible gambling practices. The new standards came into effect on February 28, 2024. The standards were also revised to further restrict the use of celebrities and others, including social media influencers, “who would be expected to appeal to minors.” The AGCO also issued a guidance document in February 2024, which aims to provide greater clarity on the requirements in the new standards.

Committee Recommendations:

The Standing Committee on Public Accounts recommends that:

3. The Alcohol and Gaming Commission of Ontario enforce its standards on advertising for internet gaming.
4. The Alcohol and Gaming Commission of Ontario consider requiring pop-up warning messages on internet gaming websites on the risks associated with gaming and addiction.

Relationship with the Ministry

The Committee asked about the day-to-day working relationship between the Ministry and OLG. The Ministry noted that it has a close working relationship with OLG and that OLG is an important asset to the Province in terms of revenue generation. It is important for the Ministry to know what it can expect from OLG in terms of revenue for the Province when putting together its annual budget. However, the Ministry also looks at OLG’s long-term projections.

In terms of oversight and accountability, the Agencies and Appointments Directive (issued by the Management Board of Cabinet) sets out the key governance and oversight requirements, which are then operationalized in a Memorandum of Understanding (MOU). The Chair of OLG’s Board is responsible to the Minister, who is in turn responsible to the Legislature. The Deputy Minister and the CEO of OLG have regular meetings to speak about business and issues that are outlined in the MOU. There is a similar cadence of meetings between the Chair and the Minister. The Ministry and OLG also work together and collaborate in terms of significant policy changes that may impact the agency.

OLG emphasized that the relationship is collaborative, and it interacts frequently with the Ministry. This approach ensures that OLG’s strategy is consistently aligned with government policy.

Host Community Revenue Sharing

The Committee also heard that revenue sharing is an important part of gaming policy in Ontario. In particular, municipalities that host casinos benefit from revenue sharing. Payments to those municipalities are calculated as a share of revenue generated by casinos in host communities and paid quarterly in accordance with municipal contribution agreements. Those funds are then used by municipalities to support municipal services. Approximately 29 communities in Ontario benefit from these agreements.

OLG noted that host communities include the Chippewas of Rama First Nation as well as the Mississaugas of Scugog Island First Nation. Since the first casino opened in Windsor in 1994, OLG has provided nearly $2 billion to host communities. In fiscal year 2022-23, OLG transferred approximately $170 million to host communities. 

Financial Risk Management

The Committee also asked what risks OLG is facing that could challenge the upside of its financial projections. OLG noted that one risk to their program is increased competition. OLG competes with a host of private sector operators in the digital gaming space, and digital gaming is a large source of OLG’s projected growth. As the audit report noted, it is critically important that OLG understands the competition, measures its share in the marketplace, and is responsive to competitors.

In addition, OLG said that changing consumer preferences represent a risk. As the audit report noted, OLG’s lottery base is aging and OLG needs to look for new ways to engage younger players in lottery in a responsible way. OLG is currently finalizing a new three-year lottery strategy that will include the modernization of lottery technology to appeal to a younger audience. The Committee also learned that by mid-2023, OLG will conduct research on the next generation of players and their gaming interests to support the attraction of new customer segments to lottery.

Finally, with respect to casinos, OLG has a significant dependency on the private sector to continue to invest capital and deliver on their commitments. OLG is committed to having them do so and supporting them along the way.

Committee Recommendation:

The Standing Committee on Public Accounts recommends that:

5. The Ontario Lottery and Gaming Corporation (OLG) report back to the Committee on the results of its research on attracting the next generation of players to lottery, including how OLG can ensure that its promotional efforts do not target children and minors.

Anti-money Laundering

The Committee also asked about the concerns expressed by the Auditor about OLG’s anti-money laundering efforts and what OLG is doing to ensure that money laundering is rooted out.

The Committee heard that the Ministry takes anti-money laundering very seriously and the risk of money laundering is one of the reasons the gaming sector is highly regulated. The AGCO is the key regulator in terms of setting standards. It has an embedded enforcement unit staffed by Ontario Provincial Police (OPP) officers who work with casino operators in respect of anti-money laundering investigations and enforcement. The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) also plays a role. (FINTRAC is a federal agency whose mandate includes detecting, preventing, and deterring money laundering.)

OLG said that the Auditor’s recommendations in terms of anti-money laundering were helpful, and it is going to use them to continue to strengthen its oversight of casino operators for anti-money laundering compliance. Anti-money laundering and responsible gaming are key priorities for the Minister, the Board, and OLG’s CEO.

The Committee also heard that OLG has a strict anti-money laundering program in place for all gaming sites in Ontario and that it files information reports with FINTRAC as required. Since 2022, suspicious transaction reports have provided more detailed transaction history, which has increased information going to FINTRAC. This change was important for OLG and law enforcement as the reports provide valuable intelligence information. However, the analysis of suspicious transaction reports does take a bit of time before OLG can act on them.

In terms of specific measures, OLG is expanding requirements to ensure that proof of source of funds is obtained for all cash buy-ins above $10,000 by October 2023. This aligns with new federal requirements set out by FINTRAC. In addition, OLG carefully monitors the requirements for service providers to verify play before issuing cheques. The Committee also learned that OLG is procuring and will implement a centralized province-wide suspicious transaction reporting system by 2025.

The Committee heard that OLG agrees with the Auditor’s recommendation that it should continue to strengthen its oversight of casino operators for anti-money laundering compliance, including the issuance of casino cheques, and OLG is working with service providers to develop enhanced controls for cheque issuance.

OLG has also worked closely with partners such as the AGCO, the OPP, and casino operators on enhanced anti-money laundering risk measures. In coordination with these partners, measures have been developed to improve information sharing and targeted customer analysis, introduce targeted source of funds reviews, enhance training, and invest in new resources and technology to identify risk.

For example, in OLG’s compliance testing plan for this year, OLG has included a cross-section of sites—small, big, and new sites—to test for compliance with its anti-money laundering program. In addition, OLG’s site risk assessments were provided to the AGCO, who is conducting its own risk assessments and reviews. If there are any significant findings coming out of testing, OLG will engage with the AGCO, review them collaboratively, and discuss potential next steps or changes.

Committee Recommendations:

The Standing Committee on Public Accounts recommends that:

6. The Ontario Lottery and Gaming Corporation implement a requirement for casinos to obtain sources of funds documentation for all cash buy-ins above $10,000 as planned.
7. The Ontario Lottery and Gaming Corporation continue to work with casino operators to evaluate cheque issuance requirements to ensure that casino cheques are only issued when funds are verified as a casino win.
8. The Ontario Lottery and Gaming Corporation report back to the Committee on the status of its efforts to procure and implement a centralized province-wide suspicious transaction reporting system.
9. The Ministry of Tourism, Culture and Gaming and the Ontario Lottery and Gaming Corporation consider anti-money laundering experience an asset in future appointments to its Board of Directors.

Competition in Online Gaming

The Committee asked about the competition OLG has faced with the recent introduction of private sector online gaming operators. (Since April 2022, private operators have been permitted to enter into agreements with iGaming Ontario – a subsidiary of the AGCO – to offer online casino and sports betting in Ontario. Prior to that time, OLG was the only legal and authorized provider of internet sports betting and online gambling in Ontario.)

The Ministry said that competition in this sector is not entirely new; prior to April 2022, Ontarians were already placing bets using websites that were not legal, so OLG was competing with those websites already. In addition, those illegal gaming websites offered no benefit to the public purse. Under the new legalized framework, revenue is shared between iGaming operators and the Province; private sector operators keep 80% of revenues and 20% goes to the Province, although the Province’s expenses are paid out of that 20%. (According to the Auditor, after expenses, such as HST and payments to First Nations, this arrangement leaves the Province with 5.7% of revenues as net profit). In the illegal market, there was no revenue sharing in place and there were no standards or regulations in place in terms of responsible gaming (such as self-exclusion programs).

The Committee also heard that remaining competitive in digital gaming is a priority for OLG. In October 2020, OLG launched OLG.ca, a new online gambling platform. It combines OLG’s digital offerings on its website to leverage the significant traffic that the website receives from both online gamers and lottery customers. OLG is also updating its iGaming strategy to include more comprehensive information on market share. OLG will monitor market share quarterly and adjust its strategy as required.

Excluding iLottery products, OLG estimates that it accounts for approximately 20% of the current Ontario online gaming market, which makes it a major competitor. OLG’s online gaming platform has grown to 1.6 million registrants and more than 314,000 active players each month. In addition, OLG’s online platform is high margin. Approximately 45% of proceeds translate into the net profit for the Province. OLG noted that its ability to remain competitive in online gaming is going to be critical.

The Committee also heard that OLG is a well-established brand that is trusted by Ontarians. It is also known to look out for the interests of players with its responsible gambling program. The fact the OLG offers lottery products through its digital channel to complement other gaming is also core to OLG’s success.

Responsible Gambling Program

The Committee asked how OLG can work to grow its business without targeting young people and what protective measures it will put in place. OLG noted that it operates a world class responsible gambling program, which is critical to the long-term sustainability of its business.

For instance, OLG’s PlaySmart program cuts across lottery, digital, casino, and charitable gaming. OLG is also investing $19 million in its commitment to player health in fiscal year 2024. Further, all employees and service providers are required to complete PlaySmart training, and all management and designated front-line staff are required to complete advanced-level training co-developed with the Centre for Addiction and Mental Health.

Further, OLG is the first Canadian operator to adopt facial recognition in casinos. With respect to online gaming, OLG validates all players who register online; they must have proof of age when they register.

Board Governance

The audit found that OLG’s Board of Directors has not retained direct independent advice on any matter over the last five years. Instead, the Board relies on management and advisers retained by management for advice.

The Committee heard that the Board has been looking at matters such as executive compensation and agrees it is important that it not just get the advice and guidance of management, but that it also gets some outside, independent advice. The Board has implemented a new procurement process to do so, which is supported by a business case.

Consolidated List of Committee Recommendations

The Standing Committee on Public Accounts recommends that:

1. Going forward, the Ontario Lottery and Gaming Corporation avoid further reducing contracted revenue and capital commitments made by casino operators.
2. The Ontario Lottery and Gaming Corporation incorporate capital expenditure commitments from operators in any new agreements.
3. The Alcohol and Gaming Commission of Ontario enforce its standards on advertising for internet gaming.
4. The Alcohol and Gaming Commission of Ontario consider requiring pop-up warning messages on internet gaming websites on the risks associated with gaming and addiction.
5. The Ontario Lottery and Gaming Corporation (OLG) report back to the Committee on the results of its research on attracting the next generation of players to lottery, including how OLG can ensure that its promotional efforts do not target children and minors.
6. The Ontario Lottery and Gaming Corporation implement a requirement for casinos to obtain sources of funds documentation for all cash buy-ins above $10,000 as planned.
7. The Ontario Lottery and Gaming Corporation continue to work with casino operators to evaluate cheque issuance requirements to ensure that casino cheques are only issued when funds are verified as a casino win.
8. The Ontario Lottery and Gaming Corporation report back to the Committee on the status of its efforts to procure and implement a centralized province-wide suspicious transaction reporting system.
9. The Ministry of Tourism, Culture and Gaming and the Ontario Lottery and Gaming Corporation consider anti-money laundering experience an asset in future appointments to its Board of Directors.