International Masters of Gaming Law

On May 6, 2009, Representative Barney Frank (D-Mass.), with a little help from his friends, introduced three bills in Congress that would legalize, regulate and tax Internet gambling. They would allow licensed operators to run online poker games, casinos, lotteries, parimutuel racing and bingo, but not sports betting. Bets could be accepted from players from every state in the U.S., unless the governor of a state sends a notice to opt out within 90 days of the bills becoming law. The bills appear to create a federally regulatory system under the Secretary of the Treasury, but the reality is that operators will licensed and controlled by a single state.

Optimistic investors foresee the return of foreign online poker operators, who abandoned the U.S. market after the passage of the Unlawful Internet Gambling Enforcement Act ("UIGEA") in 2006. What the bills are actually designed to do is allow Nevada casino companies to take bets from almost all other states, while keeping out their foreign competition.

It has been said that politics is the art of the possible, or the art of compromise. This reminds us that laws are made by men and women, and committees.

The truth is that almost no one in Congress cares about Internet gambling. So, decisions about what to do about it are not often the result of reasoned conclusions made after careful study.

The UIGEA is the worst example. This bill was rammed through Congress by a failed politician, then Majority Leader of the U.S. Senate Bill Frist (R.-TN). Frist planned to run for President and wanted to gain points with a then-powerful Congressman from Iowa, Jim Leach (R.-IA), who actively opposed Internet gambling. Because almost no one else in the Senate cared either way about the issue, Frist had a problem. He couldn't get a prohibition bill to the floor for a vote. So, Frist added his Internet gambling Act to a completely unrelated bill dealing with port security. In a cynical move, he risked the safety of the U.S. in its war against Islamist terrorists to show his right-wing religious base that he opposed gambling.
The House of Representatives had already passed the port bill. Frist hand-picked a Senate-House Conference Committee to add his pet Internet gaming bill as an amendment. According to Sen. Frank R. Lautenberg (D-NJ), who, of course, has an interest in bills affecting gaming, Frist refused to let any Democrat on the Senate-House Conference Committee see the final language of the bill. Conference reports cannot be amended, so members of Congress could only vote against this ban on Internet gaming by voting against the SAFE Port Act. The vote came up at literally the last minute, right before Congress recessed for the 2006 elections.

The irony is that Frist couldn’t even keep both houses of Congress from falling to the Democrats, and never came close to getting the Republican nomination for President. And Leach lost his seat in a surprise upset to a Democrat, the slim margin could have come from online poker players, motivated to vote against Leach for taking away their favorite activity.

Today, there are few people left in Congress who even follow online gaming. Jon Kyl (R.-AZ), the most consistent opponent, is still in the Senate and still opposes Internet gambling. However, Kyl is from Arizona, where Indian casinos have grown very rich and politically powerful; so Kyl is not against all gambling, which makes his position look hypocritical.

There are a couple of conservative Republicans, like Rep. Frank Wolf (R.-VA), who still feel strongly that all gambling should be outlawed. But the elections of 2006 and 2008 have changed the political dynamics of Congress. Being opposed by the far right can now actually help a bill get votes.

For example, Fox News came out the day after Frank introduced his bills to attack them 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.” This will help the bills pass, since few members of Congress today want to be seen as being in favor of letting anything financial go unregulated, let alone gambling.

For at least the next two years, the federal government belongs to the Democrats. President Obama may be personally opposed to legal gambling, although he plays poker, but he knows he needs states like Nevada to win elections. He certainly would never veto a bill to regulate and tax gambling passed by the Democratic Congress. But he isn’t really interested in Internet gambling.

In fact, almost no one in a position of power cares about the issue. As a strange coincidence, two of those are in positions of great power: Barney Frank is the powerful chairman of the House Financial Services Committee, and Harry Reid (D.-NV), who represents Nevada, is the Majority Leader of the Senate.

Frank, one of the first openly gay members of Congress, is viewed as a left-wing liberal. But he is really a libertarian when it comes to government intervention in private lives. He feels the federal government in particular should not be deciding what people do in the privacy of their own homes.

Frank has so much seniority, and the Democrats have such an overwhelming majority, that he can get any bill he wants through the House of Representatives. But to become law, the bill also has to pass the Senate.
Harry Reid claims he is personally opposed to Internet gambling. But what do Nevada casinos want? Most want to run the games themselves.

Frank's 19 co-sponsors in the House include people like Robert Wexler (D.-Fl.), who feel that Internet poker should be made legal. But they also 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.

So, the bills will pass, although not exactly as they are now written. First there will be hearings; bills like this tend to come up for a vote in the even year of America’s two-year Congress. It will thus be 2010 years before the bills become law; then many months more before implementing regulations are promulgated. After that happens, 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 and other games for real money on the Internet, without having to worry whether they, or the operators, are breaking federal law.

The proposals, in numerical order, start with HR 2266. Frank knows how to get bills passed. He gave 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, federal agencies issued rules to make it difficult for financial institutions to send money for illegal online gambling. The regulations go into effect on December 1, 2009, unless this bill passes, delaying them for one year.

HR 2267 is the heart of this proposal. It would amend current statutes to "provide for the licensing of Internet gambling activities by the Secretary of the Treasury, to provide for consumer protections on the Internet, to enforce the tax code, and for other purposes." As if that weren't clear enough, Frank named the bill the "Internet Gambling Regulation, Consumer Protection, and Enforcement Act."

But, the federal government has no experience or expertise in regulating gambling. The closest it has ever come are parts of the Indian Gaming Regulatory Act ("IGRA"), which is not exactly a model of government control.
Public policy toward gambling, including questions of prohibition or regulation, have always been left up to the individual states. Even IGRA says that tribal gaming is limited to states where that particular form of gambling is permitted.
So, although the Secretary of the Treasury will technically be issuing licenses, good for five years, HR 2267 has these neat little provisions buried deep in its middle:

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:

RELIANCE ON STATE OR TRIBAL CERTIFICATION- Any applicant may provide a certification of suitability for licensing made by any State or tribal regulatory body . . . , together with all documentation the applicant has submitted to any such 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 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:

RELIANCE ON QUALIFIED REGULATORY BODY FOR OTHER PURPOSES- 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 to carry out the purposes of this subchapter.

As for the other states, where the patrons will be, the bill does allow states and tribes to opt out. If a governor notifies the Secretary within 90 days of this bill becoming law that his state has opted out, licensed operators cannot knowingly accept bets from players in that state. Utah will probably be able to reach a political consensus in 90 days that it wants to block all Internet gambling. But states like California might have trouble making a decision like this in 90 months, let alone 90 days. There is a complicated provision allowing states to opt out after the first 90 days, but it involves waiting at least until January 1 of the next year.

The bill contains a large number of other provisions. It has the now standard language about protecting underage and problem gamblers. It clarifies that unlicensed operators who are still accepting Internet poker players from the U.S. are violating federal law, although it does not explain how prosecutors are supposed to go after a website in another country. And it would be the first federal law that I know of that would make cheating at gambling a crime.
The bill should protect operators from state anti-gambling laws. It creates a federal preemption: "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 online gaming operator can take bets from every state, except those where the governors have notified the Secretary they want to opt out.

HR 2267 does not give Nevada's gaming companies everything they would like. Sports betting, for example, is expressly excluded. This was done solely to prevent the professional and college sports associations from opposing the bill.
But the bill does seem to cut out competition from foreign operators. The Secretary has to deny a license to anyone who "is delinquent in filing any applicable Federal or State tax returns or in the payment of any taxes, penalties, additions to tax, or interest owed to a State or the United States." This is potentially bad news to every Internet gaming site that ever took bets from the U.S., whether or not they stopped when the UIGEA was passed. It is possible that the Secretary of the Treasury, who also runs the Internal Revenue Service, could conclude that an operator that had American players was doing business here, and should have been paying federal, and maybe even state, taxes.

Of course, American companies, like Harrah's, which desperately want to get into the Internet gaming business, but have never had online gaming for money, would have no trouble.

But even Nevada casino companies may not rush to go online. The problem is the last of the three bills, HR 2268. This would impose a federal fee of 2% of the money deposited by players. Operators cannot pass this fee on to players. Of course, operators don't make any revenue off of deposits, only from wagers. So gaming sites that now are constantly encouraging players to reload will have to figure out ways to gets players to make more bets without keeping large deposits in their accounts.

The bills have another hidden trap: 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 players back to California. Nevada would keep the taxes earned from patrons in other countries. 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.

© Copyright 2009, all rights reserved worldwide. GAMBLING AND THE LAW® is a registered trademark of Professor I Nelson Rose, Whittier Law School, Costa Mesa, CA. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, INTERNET GAMING LAW and GAMING LAW: CASES AND MATERIALS, are available through his website, www.GAMBLINGANDTHELAW.com.

I. Nelson Rose
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Member Articles

2009

The Politics Behind the Internet Gaming Bills by Professor I Nelson Rose

The Politics Behind the Internet Gaming Bills
by Professor I Nelson Rose