Online gaming legalization a hot topic. Where does Nevada fit in?

Spencer Holladay

It’s time to retire the phrase “if Internet gambling is legalized.” By now, it’s clear that the approval of online wagering, particularly Internet poker, is not a matter of if but when.

For online poker enthusiasts, the timetable got pushed back in mid-April when 11 owners and founders of three of the largest online gambling sites, PokerStars, Full Tilt Poker and Absolute Poker, were indicted on bank fraud, money laundering and illegal gambling charges.

Speculation has been running wild on what the indictments will mean for the online gambling debate. Some say they will slow approval to a crawl, stopping the momentum that had built up in recent months toward legalization and regulation. Others say it’s just a bump in the road toward eventual approval.

Gaming industry leaders are confident that it’s only a matter of time before Internet gambling is legalized despite the indictments.

The question is whether Nevada will take a leadership role and reap the rewards of being first in line or sit on the sidelines and hope we get a piece of the action.

Based on the sorry state of Nevada’s economy, some think it’s time for the Silver State to cash in and take charge. The state took the bold step of becoming the first state to legalize gambling in 1930. Now, it’s time to decide on cyberspace.

Online gambling began around the turn of the century — yes, that’s the 21st century — with offshore operations on British dependencies and territories and on several Caribbean islands taking the lead.

As use of the Internet became more mainstream, countries worldwide drew their lines in the sand on applying the Internet to gambling. Australia prohibited online gambling companies from setting up there, but allowed citizens to play in 2001. Israel and Russia banned it. So did some states in India.

In the U.S., the debate intensified in 2003 when the Senate Banking Committee took testimony from Deputy Assistant Attorney General John Malcolm about concerns the Justice Department had about money laundering through online casinos. That came on the heels of an appeals court ruling upholding that the federal Wire Act, which prohibited transmission of sports bets by phone, also applied to the Internet.

In 2006, the debate made national headlines when law enforcement agencies apprehended online gaming company executives as they traveled in the U.S.

And then, in September that year, industry executives were surprised when they learned lawmakers had passed legislation making bank transactions between online gambling sites and financial institutions illegal.

The Unlawful Internet Gambling Enforcement Act (UIGEA) “prohibits gambling businesses from knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the Internet and that is unlawful under any federal or state law.”

What irritated industry leaders was that it was attached to unrelated legislation designed to protect the nation’s ports, and had little debate because lawmakers were trying to get out of town to campaign for midterm elections. The bill was added at 9:30 p.m. and a reading of it was waived.

Industry leaders complained the act was vague and full of holes. It exempted fantasy sports games — a nod to the National Football League — allowed intrastate and intertribal transactions, didn’t address state lotteries and left the horse-racing industry wondering whether it was included.

When the regulations mandated by the act were released in November 2008, “unlawful Internet gambling” wasn’t even defined.

Meanwhile, state and federal lawmakers took several swings at codifying their vision of what Internet gambling should look like. And that’s part of the problem. Because the Internet knows no border, most casino industry executives think it best fits the definition of interstate commerce and therefore should be federally regulated instead of by states.

With its reputation for thoroughly understanding the gaming industry, Nevada was the first to approve an Internet gambling law in 2001, but all it did was establish a broad framework for online casinos setting up in the state.

Assembly Bill 466 defined who could be licensed and how much it would cost: $500,000 for the first two years and $250,000 a year thereafter in addition to the state’s standard 6.25 percent gaming tax on gross gaming revenue.

The state Gaming Control Board and the Nevada Gaming Commission were charged with establishing regulations to ensure that online casinos would be hacker-proof and adhere to all state policies on underage gambling, problem gambling and money laundering and that they could be “operated in compliance with all applicable laws.”

But state regulators didn’t want to draft rules until they were convinced that online gambling wouldn’t break any federal laws. State regulators thought they would just be spinning their wheels based on the Justice Department’s interpretation of the Wire Act.

California-based gaming attorney I. Nelson Rose applauded aspects of the Nevada legislation, but noted that lawmakers appeared to be clueless about what they were doing.

“The Legislature spelled out in detail how much tax it wanted to be paid by everyone associated with an Internet casino, even when it did not know exactly what those people actually do,” he wrote. “For example, a ‘manufacturer of interactive gaming systems’ will pay an initial fee of $125,000 for a license, while a ‘manufacturer of equipment associated with interactive gaming’ will pay only $50,000.

“What’s the difference? The Legislature hasn’t got a clue. AB466 requires the Nevada Gaming Commission to define ‘manufacturer of interactive gaming systems’ and all the rest.”

Other states also stepped into the fray.

In 2005, the North Dakota House approved a bill legalizing and regulating online poker, but the proposal died in the Senate.

Poker seemed to be the likeliest portal to legalized online gambling because it requires skill as well as luck and the players compete with each other and not against a casino. The revenue the casino gets — the rake — is the commission it receives for operating the game and that’s what would be taxed. Some envision player winnings taxed as personal income.

Poker players nationwide mobilized and pushed for the legalization of playing skill games online for money. Lawmakers, many of them poker players, introduced several bills.

In 2007, three pieces of online gambling bills were introduced. Rep. Barney Frank, D-Mass., sought to modify UIGEA with the Internet Gambling Regulation, Consumer Protection and Enforcement Act. Less than two months later, Rep. Robert Wexler, D-Fla., introduced the Skill Game Protection Act specifically addressing the legalization of online poker, chess and bridge, and Rep. Jim McDermott, D-Wash., filed the Internet Gambling Regulation and Tax Enforcement Act to outline a tax structure.

A year later, the first Senate bill appeared when Sen. Robert Menendez, D-N.J., introduced the Internet Skill Game Licensing and Control Act addressing online poker.

The bills have had their requisite committee hearings and votes and have slogged through the process.

The most recent attempt to pass federal legislation came in December when Sen. Harry Reid, the Senate majority leader from Nevada, led an effort to legalize online gambling after some ardent Democratic supporters of online gaming were defeated in November elections and presumably wouldn’t have to answer to constituents in the lame-duck session.

Three Republican House members wrote Reid and Senate Minority Leader Mitch McConnell of Kentucky to express opposition to the bill saying “Congress should not take advantage of the young, the weak and the vulnerable in the name of new revenues to cover more government spending.”

Admittedly, it was a last-ditch effort.

With those Republicans about to take leadership positions in the House, Reid thought he had nothing to lose.

The legislation failed.

If efforts by federal lawmakers haven’t caused confusion, legislators in several more states tried to stimulate the debate by drafting their own proposals. Some industry observers have theorized that states are pressing for Internet gambling legislation to force federal lawmakers to act.

In November, the New Jersey Legislature approved a bill legalizing online poker, casino games and slot machines and left a door open to future sports wagering. New Jersey Gov. Chris Christie this year vetoed the bill and the Legislature didn’t have the votes to override him.

California has two online gambling bills legalizing intrastate poker play. The District of Columbia approved an online gaming bill widely reported as the first one to be approved, even though Nevada had its framework online gaming law on the books in 2001.

The D.C. law allows online poker and “games of chance” and wagering on fantasy sports. The D.C. Lottery would administer it, and officials expect the allowance could raise $13 million in a year.

Also this year, Assemblyman William Horne, D-Las Vegas, introduced an online poker bill. It directs the Gaming Commission to “adopt regulations and shall, to the extent that the applicants are suitable, grant licenses to operators of Internet poker and to manufacturers of interactive gaming systems, manufacturers of equipment associated with interactive gaming and interactive gaming service providers who provide services, software or equipment to operators of Internet poker.”

The Horne bill includes the boilerplate text on underage gambling, technical standards, license and tax fees, money laundering, cheating and collusion and standards governing the location, surveillance and security of all equipment.

The Poker Players Alliance, a nonprofit coalition of an estimated 1 million American online and brick-and-mortar players headed by former New York Sen. Alfonse D’Amato, was quick to back the Horne bill.

“To date, this bill represents the best possible approach to intrastate regulated Internet poker,” said John Pappas, the alliance’s executive director. “It contains many of the elements we have called for in other state and federal proposals. The bill is also geared to maximize economic growth in Nevada ... It will be hard for lawmakers to ignore the potential job creation and tax revenue.”

The bill, which has been approved by the Assembly Judiciary Committee and will go to the full Assembly, went through some heavy editing in April after it was learned that Horne and other lawmakers were flown to London by international web poker giant PokerStars. Legislative lawyers said the trip didn’t run afoul of state ethics laws, but Horne’s original proposal was modified to level the playing field for all companies interested in being licensed and established in Nevada and not to favor PokerStars, which had teamed up locally with gaming mogul Steve Wynn.

Then came Black Friday on April 15.

Justice Department prosecutors filed a money laundering complaint that seeks $3 billion being held by the companies.

The indictment indicated that owners of the poker websites in question found ways to get around restrictions placed on U.S. banks in UIGEA that prohibited them from handling online wagering transactions.

As soon as the indictment was announced, Wynn dissolved his alliance with PokerStars. So did Las Vegas locals giant Station Casinos, which had teamed up with Full Tilt Poker.

Many industry insiders don’t think Horne’s bill stands a chance of passage because it’s opposed by industry titans Caesars Entertainment and MGM Resorts International, which prefer federal legislation to the prospect of a patchwork of state laws.

But even Caesars and MGM have limits to their patience when the gravy train is at the station. Representatives say that if federal lawmakers can’t pass legislation, it must be left up to the states, and Nevada’s regulators are up to the task of setting the rules.

“The Internet’s is an interstate activity,” said Jan Jones, Caesars senior vice president of communications and government relations.

Part of the company’s strategy will be to show lawmakers how many companies operate illegally and how they’re affecting existing licensed properties in several states.

“People are just now beginning to understand the size of this illegal market,” she said.

Alan Feldman, Jones’ counterpart at MGM, envisions the federal government enabling states to put their own regulations in place or opting out if they choose to prohibit their citizens from gambling online.

“There’s no jurisdiction in the world that has the experience Nevada has,” Feldman said. “New Jersey has been doing it for a long time. Mississippi would be close by. But Nevada has a long and successful history of regulating gambling.”

The point man at the state Gaming Control Board is Mark Lipparelli, who was appointed chairman in December after serving as a member for two years. Earlier in his career, he was an executive at Bally Technologies and Shuffle Master Inc., so he gets technology.

Lipparelli said regardless of the state’s financial decline, it’s still one of the leading gaming markets of the world.

“I think that gets lost on people,” he said. “Everybody is always talking about how much Macau has grown and how much more dominant New Jersey and tribal gaming has become.”

Gaming regulators from around the world routinely seek Nevada’s expertise, but Lipparelli said it’s a two-way street and that his team also learns from counterparts in Alderney, the Isle of Man and Gibraltar where British regulators have overseen online gambling for years.

So what is driving the most recent burst of interest in legalizing online poker? Lipparelli said a big part of it is that big American companies are lining up partnerships with companies that have experience and expertise.

“You have to take these recent relationships as a pretty significant signal that something’s changed,” he said.

VEGAS INC, a sister publication of the Sun, is a sponsor of this week’s iGaming North America 2011 Spring Conference at the Monte Carlo. The conference, targeted at gaming industry leaders as well as law firms, financial institutions, regulators and technologists, is designed to present the most recent information on online gambling.

And Caesars Entertainment is on the online doorstep in its relationship with PokerStars rival 888 Holdings. The public got its first glimpse at how Nevada regulators view Internet gambling in March meetings of the Gaming Control Board and the Gaming Commission where regulators unanimously approved the suitability of the relationship.

The Control Board, the investigative half of Nevada’s two-tiered regulatory process, and the commission, the public-policy side, spent more than four hours questioning executives of Tel Aviv, Israel-based 888, which operates subsidiaries Cassava Enterprises (Gibraltar) Ltd. and Fordart Ltd. in British territories and protectorates.

Caesars hasn’t spelled out what it plans to do with the relationship, but it’s clear that it has an outlet to market its World Series of Poker and is partnering with a company with the know-how, computer software and relationships to easily cater to U.S.-based online gamblers once its legal.

Mitch Garber, CEO of Caesars Interactive Entertainment, told regulators the company would use its World Series of Poker and Caesars brands in overseas markets through its relationship with 888. He added that Caesars chose to partner with 888 because it has online gaming hardware and software and that his company wouldn’t be writing its own programs.

After the Control Board meeting, Garber said it’s an important step toward the eventual legalization of Internet gambling in the United States.

“It was a historic moment,” Garber said. “It confirms that Internet gaming is a reality. It should allow us to look more and more at a federally regulated environment in the United States.”

Control Board members took great pains to explain that they only were approving Caesars’ relationship with the 888 subsidiaries and not recommending licensing them and that the end result wouldn’t have any effect on American consumers.

How 888 and its subsidiaries reacted to the eleventh-hour passage of UIGEA was a key part of testimony, which included closed-circuit televised comments from 888 CEO Gigi Levy from Tel Aviv.

Levy and 888 Nonexecutive Chairman Richard Kilsby explained to board members that before UIGEA was passed, company executives thought they could take bets from U.S. gamblers because the location where the bet was placed in Gibraltar was regulated and the U.S. had no laws in place banning the taking of wagers.

Levy and Kilsby told the Control Board that the 888 board of directors and compliance officers met the Sunday after the House passed the legislation and before President George W. Bush signed it into law to consider what to do about the company’s online presence in the U.S.

The board opted to announce a decision the next day to remove access to U.S. customers, resulting in an immediate drop in revenue and causing the company’s stock to plummet.

“The words and actions of 888 were clear,” company attorney Michael Horowitz said. “The company has a commitment to doing what is right and doing what is legal” despite the damage to revenue generation.

The company also trumpeted the efforts of its compliance team and its technologists in developing software to assure identities and locations of online users and for its stances on addressing problem and underage gambling.

Regulators asked whether the easy accessibility of Internet casinos would increase of addictive gambling behavior. The two sides of that debate, with proponents of “gaming is entertainment” on one side and problem gambling awareness advocates on the other, will certainly play out the same way it has been played out for decades.

That’s where the battle lines will be drawn when the Internet debate reaches the U.S. House and Senate.

Is it bad public policy — even immoral — for the government to sanction an activity that has a destructive effect on 5 percent of the population believed to suffer from compulsive gambling disorders? Is it, as Mitch McConnell said, that the passage of online gaming would prey on “the young, the weak and the vulnerable in the name of new revenues to cover more government spending?”

Then there’s the argument isn’t it also bad public policy — possibly immoral — for the government to ban an activity that 95 percent of the population can responsibly enjoy or passively ignore and could generate revenue that would help solve the many problems the government can’t afford? Is it any different from the many state lotteries that have helped build libraries, rec and senior citizen centers and schools and purchased textbooks and paid teachers across the country?

Bet on it being a nasty fight.

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  1. The realities are clear. Legalizing online gambling should have been a Nevada lead, but instead, we drop the ball and let the lobbyist and special interest drive the debate and control the process. The Federal government made it crystal clear that online poker is illegal! What part of illegal is not understood by people like Steve Wynn, Senate Reid, and Harrah's? Now the tail is wagging the dog. The Federal Government is now in the drivers seat! Steve Wynn, what happen to you man, you were so beautiful once before?

    Steve Wynn recent interview with the RJ suggest he drop the ball, words indirectly from him, Steve. We all talk about big government, then we shoot ourselves in the foot and partnership with companies our government said are illegal! What part of illegal do you all not understand? By us, our top gaming companies, and our Senate Reid (what the hell were you thinking Harry?) making deals with companies that are illegal in the USA, we allowed the Federal government to take the lead on online gambling. We screwed up big time!

    The online poker companies did a Jedi Mind Trick on our State Law makers, our US Senate, are own magic boy Wynn (the Jimi Hendricks of gaming :)), and Harrah's, by having them take action and partnershipsto advance the interest of online poker which is illegal in the United State of American. Do the poker advocators really believe a Republician congress is going to past a bill to legalize online poker in the USA when it is clear the poker companies violated US law! Get real people! This issue is dead, for now. There is another stratgey in place that will take away the power from the online poker companies. Wanna bet?

  2. "Pokerislegal", thanks for your response. Again, the power structure of online poker companies have will be diluted and spread out to a select few. Sorry your not wanting to hear this information. You mention the billions wagered, your thinking, but not deep enough. Because of the billions involved, the handful of offshore companies will lose the fight to control the growth, and regulate the growing online market.

    The Federal government will not allow a handful of offshore companies to control this market. Wanna bet? The Federal government will be my collector. Stay positive my friend