The U.S. Congress passed the Indian Gaming Regulatory Act in 1988. This act allows only federally recognized Indian tribes to open gambling establishments on their reservations if the state in which they are located already permits legalized gambling. It set up a regulatory system and three classes of gambling activities:

• Class I—Social gaming for minimal prizes and traditional gaming (for example, in tribal ceremonies or celebrations)
• Class II—Bingo and bingolike games, lotto, pull tabs (two-ply laminated paper tickets with perforated windows concealing symbols or numbers), tip jars (lottery-like games played with preprinted tickets), punch boards (thick cardboard drilled with holes, each of which is covered with foil and contains paper imprinted with symbols or numbers), and nonbanking card games (such as poker, which is played against other players instead of the house)
• Class III—Banking card games, casino games, slot machines, pari-mutuel betting, horse and dog racing, jai alai, electronic facsimiles of any game of chance, and any other forms of gaming not included in Class I or II

Class I gaming is regulated exclusively by the tribes and requires no financial reporting to other authorities. Class II games are allowed only if the state in which the tribe is located permits such gaming for any purpose by anyone. Class III games are allowed only if such games are already permitted in the state where the tribe is located. According to the U.S. General Accounting Office (GAO), the investigatory branch of Congress, court rulings have maintained that tribes can operate casinos in states that only offer state-run lotteries and charitable casino nights.

Both Class II and III operations require that the tribe adopt a gaming ordinance that is approved by the National Indian Gaming Commission (NIGC). In addition, Class III gaming requires that the tribe and state have an agreement, called a tribal-state compact (or treaty), that is approved by the secretary of the interior. A compact is supposed to balance the interests of the state and the tribe in regard to standards for operation and maintenance, the applicability of state and tribal laws and regulations, and the amount needed by the state to defray its regulatory costs. Tribes may have compacts with more than one state and may have different compacts for different types of gambling operations.