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November 24, 2014

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Nevada gaming companies see potential flush online

Companies operating offshore poker sites may be out of luck in U.S.

The race for Internet gambling riches may have turned in favor of Nevada-based casino operators that own some of the best-known brands in the business.

Bricks-and-mortar casinos in Nevada and other states have stood by while online wagering has blossomed into a multibillion-dollar business. They were unwilling to risk operating Web casinos considered illegal under federal law.

Now, they stand to be big winners under legislation that aims to punish foreign gambling websites that have profited significantly by accepting bets from Americans.

“Clearly it’s in the best interest of Nevada casinos to limit those who can get licenses to those not currently in the (online) industry because they have had a large head start,” Las Vegas gaming attorney Tony Cabot said.

On Wednesday, the House Financial Services Committee passed a bill to legalize and regulate online betting — but not before tacking on amendments designed to prevent online operators now violating U.S. gambling laws from becoming licensed under the new regime. The bill will be forwarded to the House.

“Al Capone couldn’t get a liquor license if he’d stayed around to the end of Prohibition,” said Rep. Brad Sherman, D-Calif., who authored one of the amendments.

One amendment prohibits entities that “knew or should have known” they were operating or working for illegal online gambling sites and bans licenses for individuals involved in taking wagers, paying winnings or promoting such sites.

The restrictions, among many protections added in committee, received support from conservatives and moderates who either oppose or aren’t comfortable with Internet gambling.

“These are criminal enterprises,” Rep. Spencer Bachus, R-Ala., a gambling opponent who voted against the bill, said of the many betting websites.

These sites include popular poker brands that are widely advertised in the United States. The federal government considers all forms of Internet gambling illegal, however.

The amendments strengthen the bill’s original language, which prohibited licensing applicants delinquent in filing state or federal taxes. Internet poker sites operate offshore and do not pay U.S. taxes.

Some online gambling experts say the bill’s current wording will make it difficult, if not impossible, for the two largest gambling websites, PokerStars.com and FullTilt.com, to obtain federal licenses — effectively clearing the playing field for bricks-and-mortar casino companies such as Harrah’s Entertainment, which owns the World Series of Poker franchise.

The online poker sites and their supporters, such as poker advocacy group Poker Players Alliance, disagree.

“(N)othing in the committee-passed legislation precludes lawful Internet poker-only operators whom U.S. players know and trust today from the opportunity to operate under a regulated system,” the alliance, a group for legalizing online poker, said in a statement.

Poker sites have lobbied Congress for years for legalization. Internet gambling operators also have approached the Nevada Gaming Control Board, the state’s gaming regulatory body, seeking guidance on possible state authorization of Internet gambling or a federal regulatory system in which the state might play a role. Such efforts, experts say, may have backfired.

If Congress approves a federal regulatory system like Nevada’s, it would be “very difficult” for sites now accepting bets from Americans to operate legally, Nevada Gaming Control Board member Mark Lipparelli said last week. Lipparelli and Control Board staff are following the federal legislation and its potential effect on state agencies.

One amendment gives the Treasury Department the option of outsourcing Internet gambling regulation to state agencies, such as those with more experience regulating gambling, as an alternative to creating more federal bureaucracy.

“There’s no need for us in the federal government to reinvent the wheel here,” said Rep. John Campbell, R-Calif.

The bill includes many controls that parallel Nevada rules designed to keep out the mob, including requirements that regulators conduct background checks of owners and managers of online entities. Financing must come from a “suitable source,” and licensed operators must have “good character, honesty and integrity.” The legislation lacks details on the standards for such investigations, which would be established by the Treasury Department. Regulators would have to audit gambling software that prevents minors from gambling and imposes protections for compulsive gamblers.

Internet gambling companies doing business in the United States are mounting legal defenses to ensure survival should the bill pass Congress.

Web casinos have long argued that federal laws such as the Wire Act, passed during the Kennedy administration to crack down on mob-controlled bookmaking operations, don’t specifically outlaw online gambling. The Unlawful Internet Gambling Enforcement Act of 2006 further criminalized Internet wagers by making it illegal for banks to process such transactions using credit or debit cards. The law is focused on online gambling transactions and doesn’t alter existing gambling laws, poker sites say.

PokerStars welcomes the bill’s licensing standards because the company, which has long sought to be regulated in the United States, has built sophisticated controls to protect against underage gambling, money laundering and collusion, said Tom Goldstein, a Washington-based attorney for the privately held company. PokerStars is based on the Isle of Man, which has crafted Internet gambling regulations that pass muster with foreign governments that have legalized online wagering.

Recently, France and Italy vetted such controls when they approved the company’s poker websites, he said.

PokerStars, which believes it operates legally in the United States, applies “massive algorithms” to data on poker hands and players to detect fraud, Goldstein said.

The Wire Act applies to sports books, which is one reason why the federal government has not prosecuted companies involved in online poker only, he added.

Such arguments don’t pass muster with the Justice Department, however. Federal authorities say Internet gambling is a largely anonymous enterprise that can’t be adequately regulated and lacks effective technology to verify the age, identity and location of players. Specifically, the FBI has said Internet gambling allows players to cheat others and launder money in the process.

Most of Nevada’s casino giants — some of which have arm’s-length business arrangements with online poker sites — support legalizing Internet gambling but are not taking sides on whether major online poker sites should be out of the running for a license.

While Nevada casinos wait on the sidelines, they must determine whether to risk potential licenses by aligning with competitors that have long-standing relationships with millions of potential customers and years of expertise running virtual casinos.

Online poker sites aren’t about to give up their competitive advantage and will fuel future debate about whether their business is illegal, Cabot said.

“Whether it plays out in the courts or in Congress, there’s probably going to be a lot more debate before the end of this controversy,” the attorney said.

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