Why casinos in Nevada won’t go online (for now)

By Liz Benston

Thursday, Aug. 20, 2009 | 2 a.m.

While Nevada officials pass on an opportunity to pursue Internet gambling for state residents, gambling interests in California, the nation’s most populous state and one of the world’s largest regional economies, are pushing legislation to allow online wagering in that state.

California’s efforts, made possible by a loophole in federal law, come as the federal government begins a comprehensive crackdown on offshore Web casinos by taking down the middlemen who pay gamblers from American bank accounts.

Many Internet gambling experts think California, rather than Nevada, will emerge as the online gambling leader.

That possibility springs from the federal loophole, which allows states to opt out of congressional efforts to regulate online gambling and, instead, regulate it for their own state residents — and generate tax revenue.

California is at the forefront in pursuing in-state Internet gambling.

By preventing online operators elsewhere from tapping California residents, California — struggling under a crippling budget deficit — wouldn’t have to share tax revenue with the feds or other states.

That’s OK with Nevada regulators and legislators, who are more intent on bringing gamblers to Nevada than allowing intrastate online gambling.

In California, a bill draft proposed by a coalition of casino tribes and card rooms has emerged alongside a similar bill introduced in Congress this month by Sen. Robert Menendez, D-N.J. The Menendez bill, which expressly legalizes Internet poker nationally, follows a companion bill introduced by Rep. Barney Frank, D-Mass., to legalize Internet casinos.

Both federal bills give states 90 days to “opt out” of the federal regulatory system — a potentially lucrative opening for states to regulate and tax local Web casinos.

In Nevada, authority to legalize Internet gambling rests with the Gaming Control Board and Gaming Commission, which would have to adopt online betting regulations.

Three major hurdles established in state law stand in the way.

Nevada regulators would need the blessing of the Justice Department — an agency that has been adamantly opposed to Internet gambling for more than a decade.

(The Justice Department told the Control Board in 2002 that all forms of Internet gambling are illegal.)

Second, regulators would have to determine that Web gambling technology provides “reasonable assurance” that minors or people in places where Internet gambling is illegal can’t take part.

Third, regulators would need to determine that online gambling is consistent with Nevada’s public policy of fostering “the stability and success of gaming.”

The last finding is perhaps the most problematic.

In 2001 the Nevada Legislature passed a law authorizing the state to explore Internet gambling regulations. At the time, legislators envisioned gamblers nationwide betting in Web casinos operated by Nevada companies, with the state collecting millions in tax revenue. It would be hard to justify Internet gambling for state residents only, given how much gambling exists, Gaming Control Board Chairman Dennis Neilander said.

That wouldn’t expand the market so much as cannibalize it, with business potentially siphoned from smaller casinos — the majority of Nevada’s operators — to bigger casinos and chains that are best positioned to create Web gambling empires.

Even if regulators could jump all these hurdles, they won’t — at least not for some time.

They cite a 2008 survey by UNLV’s International Gaming Institute indicating Nevadans had little interest in either gambling online or regulating the activity.

“I was surprised at the results of that study, but gaming is so convenient in Nevada that maybe that’s why there’s not much appetite for it,” Neilander said.

While Nevada stands back, California is moving forward.

The Unlawful Internet Gambling Enforcement Act of 2006, pushed by conservative Republicans in Congress, further criminalized Internet gambling by making it illegal for banks and other financial institutions to process online bets. But it also opened the door for states to legalize Web casinos within their borders.

The law was widely criticized by offshore casinos seeking to operate legally in the United States, as well as online gambling advocates including Nevada legislators who have supported federal bills to regulate Web casinos. While overseas operators of Web gambling sites have been affected, U.S. companies, including Nevada casino giants, remain poised to capture Internet gambling business under a future regulatory scheme.

The law has moved offshore Web casinos further into black market territory while allowing bets that are “initiated and received ... within a single state.”

Meanwhile, the government has stepped up efforts to crack down on offshore Web gambling operators, clearing the playing field for U.S. gambling companies to set up shop on the Web.

This month, the U.S. attorney for the Southern District of New York indicted Douglas Rennick on multiple charges including bank fraud, money laundering and illegal gambling operations — part of an ongoing sting operation that has involved the FBI for at least the past three years.

The government contends that Rennick opened accounts with multiple banks under false pretenses, then transferred Web casino winnings from a Cyprus bank account to U.S. bank accounts used to pay American gamblers. Authorities are demanding the forfeiture of $566 million in Internet gambling receipts — the largest amount ever sought by the Southern District in an Internet gambling case. If found guilty, Rennick, who could be used to ensnare other middlemen or Internet operators, faces a maximum penalty of 55 years in jail and $1.8 million in fines.

Abdicating the opportunity for Internet gambling might seem an unusual move for Nevada, but the state’s small population doesn’t offer much return on investment, observers say.

By contrast, California — 14 times more populous than Nevada — could become a $2 billion market for online poker sites licensed there, said Tony Cabot, a Las Vegas gaming attorney specializing in Internet gambling.

Efforts by more populous states to legalize Internet gambling could lead to its acceptance as a mainstream activity and, ultimately, federal regulation, he said.

Regulations are more likely to pass on a state-by-state basis than on a federal level, Cabot said. Legalization efforts in Congress have significant support but are too easy for special interests — including competing gambling operators and industry opponents — to short-circuit.

There’s still a chance that Nevada could capture Internet gambling action from more populous states.

If a state like California fails to opt out within the time frame specified in the Frank and Menendez bills, then Nevada operators, should such federal legislation become law, could operate licensed online poker games aimed at states “that can’t get their act together,” said I. Nelson Rose, a California-based Internet gambling attorney.