State Audit Finds Flaws in Colorado Sports-Betting System

In November 2019, a slim majority of Colorado voters approved Proposition DD, a legislature-referred measure that legalized sports gambling in the state and placed a 10 percent tax on sportsbook winnings, with the majority of that money earmarked for the Colorado Water Plan. Since the measure called for the sports-betting market to go live on May 1, 2020, the state Division of Gaming created a temporary licensing process for operators to be able to start taking wagers.

“The entire nation was navigating uncharted waters in the midst of the pandemic. The Division of Gaming was no different. The temporary closure of Colorado casinos, the cessation of professional and collegiate sporting events and internal hiring freezes posed significant challenges in setting up Colorado’s first regulated sports-betting program,” says Dan Hartman, director of the Division of Gaming, which works with the Colorado Limited Gaming Control Commission, a regulatory advisory board.

While the permanent licensing process for sports-betting operators requires stringent background checks, the temporary, two-year license process had minimal requirements. And even then, the Division of Gaming did not properly document its investigatory work, according to the audit.

“What they said they were going to do, we weren’t always seeing documentation that they could support that,” says Michelle Colin, deputy state auditor at the Colorado Office of the State Auditor, which performed the sports betting audit and released its findings on June 13. “Because of the short time that the division had to get the process up and going, the division and then the commission decided, rather than go through the full background investigation process that they had done for casinos with the limited gaming, they decided to go with a temporary license for these operators and abbreviated what steps they were taking. Typically a full background investigation could take up to a year. … The division was like, ‘Let’s do what we can within three weeks.'”

The background investigations are designed to ensure that sports-betting companies, including ones with international footprints, and their operators don’t have disqualifying criminal histories or shady financial pasts.

“Ultimately, the goal is to make sure that these businesses that are operating sports-betting activities are on the up-and-up and that they’re reliable from the sense that if people wager money with them, that it’s going to be handled as expected,” Colin says. “The division’s international check was limited or did not happen in many instances.”

“The licensing process is for us probably the highest risk, because that’s the entry point,” adds Greg Fugate, director of communications for the Office of the State Auditor.

The audit also found wide variations between daily wager reports by sports-betting operators and their monthly reports, and the Division of Gaming didn’t collect proper documentation from operators explaining the variations. “We saw that for this audit, the Division of Gaming was doing limited verification,” says Colin, noting that the variations could easily be explained with evidence of voided bets or withdrawn bets.

But without that documentation, Fugate notes, “you don’t have the complete information to make a determination of appropriateness one way or another.” And that’s important, because the monthly filings help determine how much the operators are taxed.

The last major issue noted by the audit was that sportsbook operators were allowed to write off free bets offered to win new customers from their taxable revenue, then roll over losses into future months. The state collected $6.6 million from the $2.3 billion wagered on sports in the first full year of the legal market in Colorado. If the deduction had not been allowed, the state would have collected an additional $706,600, bringing the total take to $7.3 million.

The Colorado Legislature has already taken action to close that loophole, passing a bill earlier this year that limits how much sports-betting operators using free bets to gain new customers can deduct from their taxable revenues.

The Division of Gaming says it has already started implementing the audit’s recommendations. “The audit highlighted areas for improvement in terms of policy, procedure and documentation,” Hartman notes. “We believe these improvements, especially with a new regulatory structure and an ever-evolving industry, will only make the program stronger.”