Internet Gaming Coming Back to the U.S.?

© Copyright 2009, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GamblingAndTheLaw.com

There is movement on both the federal and state levels to legalize, regulate, and, of course, tax Internet gaming in the United States.

But things are not always what they seem.

The Florida State Legislature’s bill to study Internet poker looks like its an opening for online gaming in the Sunshine State. But since the state and Seminole Tribe have just ended years of dispute over the tribe’s right to run Class III casinos, the goal of the study is actually to find ways to prevent outside competition.

Opponents of California card clubs’ campaign for intra-state Internet poker are painting pictures of the horrors of children gaming online. Who are those opponents, warning about the dangers of evil gambling? Tribes with casinos.

On the federal level, Barney Frank (D.-MA), with a little help from his friends, recently introduced three bills in the U.S. House of Representatives which would seem to put the federal Secretary of the Treasury into the business of licensing and regulating online gaming.

But buried in the proposed “Internet Gambling Regulation, Consumer Protection, and Enforcement Act” is this provision:

Any State or tribal regulatory body with expertise in regulating gambling may–
(i) notify the Secretary of its willingness to review prospective applicants to certify whether any such applicant meets the qualifications established under this subchapter; and
(ii) provide the Secretary with such documentation as the Secretary determines necessary for the Secretary to determine whether such State or tribal regulatory body is qualified to conduct such review and may be relied upon by the Secretary to make any such certification.

The bill then gives the Secretary only 60 days to determine whether he should rely on these state or tribal regulators in issuing licenses for Internet gambling operators:

Any applicant may provide a certification of suitability for licensing made by any State or tribal regulatory body . . . to the Secretary, and any such certification and documentation shall be relied on by the Secretary as evidence that an applicant has met the suitability for licensing requirements under this section.

In other words, Nevada’s State Gaming Control Board sends a packet to the Treasury Secretary showing it is competent to determine whether an operator should be licensed. Since the federal government cannot possibly conduct a thorough evaluation in two months, the Secretary approves the State Board. The Board then starts issuing “certifications,” which are actually licenses, since the Secretary is required to find these applicants are suitable.

In fact, the federal government will end up doing nothing, except for a little unnecessary duplication of effort to make it seem like there is federal oversight:

At the discretion of the Secretary, the Secretary may rely on any State and tribal regulatory body found qualified under this subsection for such other regulatory and enforcement activities as the Secretary finds to be useful and appropriate . . .

Why would Barney Frank write a bill like this? Because he does not care who does the regulation. He wants Internet gaming legalized, not because he is pro-gaming, but because he thinks government should not be interfering with what people do in the privacy of their own homes.

And to get Internet gaming legalized, he has to get the bill through the Senate, where the Majority Leader is Harry Reid (D.-NV), who represents Nevada.

Nevada casino companies are split on what to do about Internet gaming. But the writing is on the wall. Harrah’s just announced a major drive to expand their leading brand name, the World Series of Poker®, to the Internet. They opened an office in Montreal, headed by Mitch Garber, former CEO of PartyGaming, parent of the formerly wildly successful Party Poker.

Frank has 23 co-sponsors as of this writing. Many are Democrats like Robert Wexler (D.-Fl.), who also feel that Internet poker should be made legal. But Frank also managed to include Shelley Berkley (D.-Nev.), the former national director for the American Hotel-Motel Association, who represents the city of Las Vegas and the adjacent Las Vegas Strip. She would not be co-sponsoring a bill that would bring back foreign competitors.

That is the second little secret of the Frank proposals: They would lock out past and present Internet operators.

The bills require the Secretary to deny a license to anyone who failed to file federal or state tax returns. Every Internet gaming site that ever took bets from the U.S., whether or not they stopped when the Unlawful Internet Gambling Enforcement Act was passed, could be found to have done business in the U.S. and be disqualified.

And how many foreign operators are going to agree to be subject to U.S. jurisdiction for all purposes in the future?

The proposals to undo the damage of the UIGEA are colored by political considerations in other ways.

Frank knows how to get bills passed. He gave one of the bills, HR 2266, the imposing name, the “Reasonable Prudence in Regulation Act,” although all it actually does is delay implementation of one minor set of regulations. Under the UIGEA, regulations issued on the last day of the Bush presidency go into effect on December 1, 2009, unless this bill passes, delaying them for one year.

Fox News and a few right-wing Republicans decried the Frank bill as allowing “the Treasury Secretary to license and revoke licenses of Internet gambling Web sites under the guise of protection [sic] Americans’ personal freedoms to gamble and consumer protection concerns.” If anything, this will help the bill pass. Is there really anyone in the U.S. who thinks that gambling should not be regulated?

Although Frank needs the support of Nevada politicians, he could not give casino operators everything they wanted. The professional and college sports organizations have the political power to kill bills they don’t like. So Frank put an express prohibition on sports betting into his Internet gambling legislation.

The sports organizations apparently have lobbyists who are not lawyers. The leagues sent Frank’s Committee a letter stating the proposal “reverses nearly 50 years of clear federal policy against sports betting and it opens the door wide to sports gambling on the Internet.”

Except it doesn’t.

The only exceptions in the bills to the complete ban on sports betting are those states that are already grandfathered-in under the Professional and Amateur Sports Protection Act, and fantasy sports which is already allowed under the detailed requirements of the UIGEA.

I expect that once the sports organizations get their lobbyists’ bills and figure out that they have already won this battle, they will leave the field.

Politics also drove Frank to include provisions that treat Indian tribes exactly the same as states for all purposes. But tribes are not states. There are a lot more of them, they can act much faster, and they own all the legal gambling being conducted on their land.

So the Frank bills would open tremendous opportunities for tribes, starting with the right to license and regulate Internet gambling operations, including setting up their own.

Who will be the patrons of these new federally licensed online gaming sites? The residents of every other state and tribe.

The bill creates a federal preemption, protecting operators from other states’ anti-gambling laws: “A licensee may accept bets or wagers from persons located in the United States, subject to the limitations set forth in this subchapter, so long as its license remains in good standing.” This means a licensed operator can take bets from every state and tribe, except those that have notified the Secretary they want to opt out.

The bill gives state governors only 90 days to opt out. There is a complicated provision allowing another opportunity, but it involves waiting at least until January 1 of the next year. If a governor notifies the Secretary in time, licensed operators cannot knowingly accept bets from players in that state. A handful of states like Utah will be able to send the Secretary the required statement. Others, like California, won’t even begin debating the issue before the deadline passes.

Why put in a provision like this? Who benefits? The bigger, more diverse the state, the less chance it will have of meeting the 90 day cut-off. So again a state like Nevada, which wants to license Internet casinos, will be able to react in time, and find tens of millions of patrons in its much larger sister states.

There are a large number of other provisions, including standard language about protecting underage and problem gamblers. The bills clarify that unlicensed operators who accept Internet poker players from the U.S. are violating federal law, although they do not explain how prosecutors are supposed to go after a website in another country. And they make cheating at gambling a federal crime.

There is a federal fee of 2% of the money deposited by players. Of course, operators don’t make any revenue off of deposits, only from wagers. And there is no limit on what taxes the states can impose on operators.

But if the states and federal government don’t get greedy, these bills can be made to work. The federal 2% fee should be on gross gaming revenue, not deposits. And the Australian model could work for the states: A licensed operator in one state would have to send tax revenue, at a reasonable rate, back to the state where the player is located. So Harrah’s, for example, in Nevada would send some portion of the money it earned from Californian poker players back to California.

That may be the only way to get the other states not to opt out.

And the low tax rate has to be written into the federal statute. Because every state that has ever legalized gambling has raised its taxes or fees once the money started pouring in.

I believe there is a good chance the bills will pass, although not exactly as they are now written. There will first be hearings. Bills like this tend to pass in the second year of the two-year Congressional sessions, which means sometime in 2010. It will then take another year for there to be federal rules and states applying for the right to issue certifications and regulate operators.

In the end, gamblers in states like Utah will still not be able to make bets online. But residents of California, New York and probably even Texas may once again have the right to play poker for real money on the Internet, without having to worry whether they, or the operators, are breaking federal law.

END
© Copyright 2009, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose. Harvard Law School educated, Prof. Rose is recognized as one of the world’s leading experts on gambling law. He is an internationally known public speaker and a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (1st & 2nd editions), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.