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

On August 6, 2009, Senator Robert Menendez (D.-NJ) introduced his proposal to legalize Internet gambling in the U.S. Senate. The bill, S.1597, is supposed to be a companion bill to the measures introduced by Barney Frank (D.-MA) and friends in the House of Representatives. This is the common way laws are made in Congress: Similar bills are discussed simultaneously and then reconciled in conference committee.

But the Menendez bill is to the Frank bills what a hurricane is to a summer squall. At 91 pages, it is longer, and more comprehensive, than all of the other proposals put together. Yet, it also is more limited, authorizing only poker and other games of skill.

In fact, Menendez expressly exempts games of skill that are now “not regarded as gambling under an applicable provision of State or Federal law . . .” Does this mean poker operators don’t need licenses in states like Colorado, where a trial court jury recently ruled poker was not gambling because it was predominantly skill?

The bill is clear in other areas, such as expressly prohibiting clubs where players go to play poker online.

Both Menendez and Frank appear to be establishing a federal licensing and regulatory system, which will actually be turning power over to the states. True, the U.S. Treasury will be issuing the actual licenses and will be regulating some of the operators. But both bills make it clear that states and tribes can apply to be given the power to certify and regulate applicants, and Treasury has only 60 days to determine whether it will grant that power.

It would be more than a little embarrassing if the federal government said that a well-established regulator, like the Nevada Gambling Control Board, is incompetent. And once a state or tribal regulator is approved, its certification “shall be relied on by the Secretary as evidence that an applicant has met the suitability for licensing . . .” These agencies can also volunteer to do the actual regulation. So state and tribal regulators will be the real deciders when it comes to which of their operators are to be found suitable, and will undoubtedly take over the grunt work of the day-to-day control on online gaming.

What shape that gaming takes depends on whether Menendez or Frank prevail. Both make it clear that there will never be sports betting, and that horse racing is already legal. But Frank’s bills would also allow online casinos, bingo and lotteries. Menendez limits gaming to skill games, “including poker, chess, bridge, mah-jong and backgammon.” Of these, only poker is further defined, in terms that need a lot of work.

The bills entered in the House and Senate both require programs to keep out anyone under 21 and bad guys and protect compulsive gamblers, though the Menendez bill goes into greater detail here. It requires that there be background checks on at least the top five “individuals receiving the most compensation from the applicant.” Menedez, like Frank, puts the burden on applicants to prove by clear and convincing evidence, a tough standard, that they are persons “of good character,” they won’t “pose a threat to the public interest or to the effective regulation and control” of gaming, are competent, adequately financed, etc., to get a five-year license.

The Menendez bill includes the provision in the Frank bills that looks like it was designed to exclude foreign operators who accepted poker players from the U.S. prior to the passage of the Unlawful Internet Gambling Enforcement Act (“UIGEA”) in 2006: No one can be licensed if they failed to file a federal or state tax return that they should have, and there is no provision allowing applicants to cure. But Menendez also provides that an application for a license cannot be denied because the applicant took online poker bets from the U.S.

Menendez makes it clear it is a crime to operate any form of Internet gaming without a license. As with the Frank bills, there would be a tax of 50% of funds on deposit on any operator who takes bets from the U.S. without a license. But Menendez also establishes a detailed structure for imposing costs and fees on applicants and licensees, including fines of up to $100,000.

Both bills allow states a short 90 days to opt out. And there are fairly clear provisions that if the governor of a state fails to send a letter to Treasury opting out, that state’s anti-gambling laws will be pre-empted. In practice, this will mean that licensed operators from a state like Nevada will then be free to operate poker games aimed at players in states that can’t get their acts together, like California.

There are complicated provisions involving tribes and the interrelationship between tribes and states. This is an area that will need to be thought through completely. There are dozens of gaming tribes that can act quickly, licensing themselves and others to take bets from everyone else, while demanding that no other licensees be able to take bets from anyone physically on their land.

Menendez has more details than the Frank bills on requirements imposed on operators, including having to allow problem gamblers to self-exclude, to bar bets from states and tribes that have opted out, to maintain player privacy, to prevent money laundering, and, of course, to pay taxes. Both sets of bills make cheating a crime.

Frank has no limit on what taxes states can impose on operators, but limits the federal government to what is called a fee of 2% on deposits. Menendez is asking for less and more: A Federal Internet gaming license fee of 5% of deposited funds and a State or Indian tribal government gaming license fee of another 5%. This does get over the big problem with the Frank bills, that the big states, like California, where the customers will be, have no incentive to support Internet gambling operated and taxed by Nevada. Under Menendez, California gets that 5% tax (if a player is on Indian land, that tribe gets the full 5%).

Don’t worry about Nevada. There is nothing preventing the state that is recommending and regulating the online poker operator from imposing a state tax on gross gaming revenue, or even another tax on funds on deposit, if the operator has a physical presence in that state.

Interestingly, Menendez does a better job than Frank, Chair of the House Financial Services Committee, in fixing the mess caused by the UIGEA. He requires the Director of the Financial Crimes Enforcement Network to make up a list of every unlicensed website that takes bets from the U.S. All payment processors within reach of the federal government will then be on notice that they cannot transmit any money to these operators.

But overseas poker sites that refuse to be part of this system will have one big advantage. Menendez requires licensed operators to report to the U.S. Treasury detailed information on “each person placing a bet or wager,” including name, address, tax-payer i.d. number, winnings, wagers, etc.

Obviously, many players will not want this information given to the I.R.S. Overseas operators will figure out ways to get around the ban on money transfers, for example, by using foreign payment processors and credit cards from non-U.S. banks. Although the bill makes unlicensed Internet poker a felony, enforcement against foreign operators would still be difficult, and the money to be made is too good to pass up.

Which version of the future of Internet gaming will win — Frank’s or Menendez’s? There will be hearings on both sets of bills. Frank has enough power, and the Democrats have such a large majority, that he can get anything he wants through the House. But nobody in the U.S. Senate really cares about this issue — except for a few anti’s, like Sen. Jon Kyl (R.-AZ); Menendez; and the Majority Leader, Sen. Harry Reid, Democrat, representing Nevada.

So ask yourself what the Nevada casinos want. That’s what is most likely to actually become law.

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© Copyright 2009. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law, and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law (2nd edition just published), Blackjack and the Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.