Online gambling action shifts to states

By Martin Merzer

Thwarted by federal law and entangled in a knot of often contradictory regulatory and judicial rulings, millions of American credit card users eager to place online wagers are finding that their state governments may be their best bet.

A number of states, hungry for new revenue and influenced by supporters of online poker playing and more risky forms of gambling, are moving toward the partial legalization of Internet gaming. Not surprisingly, Nevada is leading the drive at this point, but legislative or regulatory action regarding online betting also has been under way in Delaware, California, New Jersey and several other states.

"The floodgates have opened and 2012 will likely be an active year for state legislatures around the country," said Laurie Itkin, founder of Rouge Government & Public Affairs, a San Diego, Calif., legislative and regulatory consulting firm that keeps a particularly close eye on online gambling and related issues.

All of this is of great interest to many credit card customers. Yet it's a multilayered and exceedingly complicated issue. So, before examining the situation in several key states, we should set the stage by taking a look at the overall national environment and the online gambling state of the art.

• First, "Internet gambling" is an umbrella term that covers pretty much all forms of online gaming, including sports betting, Web-based slot machines and other activities often found in brick, mortar and neon-intensive casinos. Virtually all online betting is funded by charges placed on and winnings transferred to gamblers' credit cards. By 2008, online betting accounted for about $22 billion in annual global revenue, according to industry estimates, with half of that originating in the United States.
• The most popular form of Internet gambling, by far, is online poker. How popular? Try this: The Poker Players Alliance, a Washington, D.C.-based lobbying organization, alone claims more than 1 million online poker players as its supporters. During online poker's heyday a few years ago (more about this later), tens of thousands of Americans would be playing at any given moment.
• In 2006, Congress attempted to ban or at least significantly restrict what it called "illegal Internet gambling." Acting in the dead of night, tacking the restrictions onto a totally unrelated port security bill, Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA). Republican supporters said they were trying to protect young Web-surfers and adults addicted to gambling; Democratic opponents said the law primarily was intended to protect the interests of politically influential casino operators.
  The bill sought to choke off the money supply to online betting operations by prohibiting credit card companies and other institutions from processing financial transactions involving those firms. It was signed into law by President George W. Bush Oct. 13, 2006, and went into full effect Jan. 19, 2009.

Complicated legal landscape
The federal law is vague and ambiguous. Among other things, it never gets around to defining the key term "illegal Internet gambling," and it significantly complicated efforts for everyone involved in the activity -- individual gamblers, online betting operations and credit card companies.

• On April 15, 2011, a day now called "Black Friday" by online gambling advocates, the U.S. Justice Department indicted the founders of the three largest online poker operations -- PokerStars, Full Tilt Poker and Absolute Poker. The feds seized those poker websites and issued scores of restraining orders. The charges, based on the UIGEA, included bank fraud, conspiracy, unlawful Internet gambling, money laundering and wire fraud.
• Thousands upon thousands of U.S. online poker players later learned that their accounts -- funded by their winnings and by charges to their credit cards that often were processed by foreign institutions -- had been drained dry by what federal prosecutors called outright fraud and a sophisticated Ponzi scheme. Nearly [%Link?type=article&id=5841&text="$300 million in those U.S. gamblers' accounts vanished"%], allegedly into the hands of the poker sites' operators.
• In September 2011, the U.S. Justice Department issued an opinion quite favorable to most forms of online gaming. It said that the Federal Wire Act of 1961, which prohibits the use of telephone lines and similar means of communication in the placing of bets, applies only to wagers placed on sporting events. Itkin described this as "a watershed event."
  "It gave states the impetus to introduce intrastate online gaming legislation, as the Federal Wire Act is no longer considered to pre-empt state online gaming, except for Internet sports wagering," she said.
• Meanwhile, some in Congress are trying to overturn or modify the UIGEA, and other efforts are under way to specifically legalize online gambling. For example, a federal judge ruled in August that, technically speaking, poker isn't gambling and thus, presumably, shouldn't be covered by any federal anti-gambling laws. U.S. District Judge Jack B. Weinstein of New York said poker predominantly is a game of skill, a somewhat odd ruling that further complicates the situation for pretty much everyone, though it was embraced by poker players.
  "Judge Weinstein's thoughtful decision recognizes what we have consistently argued for years -- poker is not a crime, it is a game of skill," John Pappas, executive director of the Poker Players Alliance, said at the time. "As the judge's opinion aptly notes, poker is an American pastime that is deeply embedded in the history and fabric of our nation and his decision sets aside the notion that the vague laws render the game criminal."

Given a vague federal law and friendly federal opinions, credit card users and anyone else trying to assess the overall legal status of online betting -- at least at the federal level -- might just as well roll the dice.

"What we need is thoughtful, deliberate legislation that will regulate the thriving online poker industry, require the most state-of-the-art technology to keep kids and problem gamblers safe, protect players from fraudulent websites, and bring billions of dollars and thousands of jobs to the United States," Pappas recently said in a written statement.

A turn to the states
Unwilling to wait for congressional action that may or may not arrive, advocates of online poker and other forms of Internet gaming have turned their attention to state legislatures, regulatory agencies and governors' mansions.

Any state law or rule regarding online or any other form of gambling applies only to that state. So, state-authorized online gambling operations must be restricted to users currently within the borders of that state. Several companies are at work right now developing software that would monitor and regulate such activity, no easy task considering the ability of hackers and even more ordinary Web surfers to camouflage their locations.

With that in mind, here is a thumbnail description of online gambling developments underway in various states, listed by magnitude of activity.

• Nevada: A leader in the field, Nevada already has in place its online betting legislative and regulatory foundation. It recently approved online gambling licenses and more are on the way. Internet poker operations could begin soon, limited -- as we have seen -- to intrastate players.
  "Over the past few months, Nevada regulators have been awarding licenses to operators and vendors and continue to work through the backlog," Itkin said. "Dozens of companies have lined up to apply for licenses."
• Delaware: Somewhat surprisingly, Delaware also is a leader in online gambling, though in a specialized subcategory. Its governor recently signed into a law a bill that authorizes online lottery games. Pre-paid debit-type cards, sold by local convenience stores and other retailers, are the only form of accepted payment and the games can be offered only by Delaware's three existing licensed "racinos," racetracks that also operate to some extent as casinos.
• New Jersey: A new law allows gamblers already on the grounds of Atlantic City casinos to place a variety of bets through their smartphones and other mobile devices. A bill allowing a wider form of Internet gambling throughout the state is moving through the legislative process. Taken together, the laws would authorize remote forms of blackjack, poker, slot machines and other conventional casino games.
• California: Several powerful state legislators proposed a bill that would authorize online poker operations. An early version of the bill could have led to other online casino games, but that element was eliminated. The bill died without final action in 2012, but is expected to be resurrected in a subsequent legislative session.
• Illinois: A proposed law to allow casinos, racetracks and other entities to sponsor currently unspecified online games is expected to be considered during the state Senate's November-December session.
• Iowa: The state Senate passed a bill that would allow intrastate online poker wagering. The measure was not considered by the House before the legislative session ended.

"State legislatures still have the challenge of building support for specific approaches to online gaming," Itkin said. "In California, for example, a number of powerful tribes oppose online gaming legislation unless it blocks nontribal entities from competing. The debate in California could go on for many years because consensus appears to be hard to reach."

Moreover, the credit card industry has to get its act together. Most authorities already consider online bets on horseracing to be legal, but credit card companies and other financial institutions -- constrained by that tangled knot of legal and regulatory precedent -- are refusing to process bettors' credit card and debit card transactions.

"Since horse-racing wagering is a relatively small industry, there hasn't been a big enough hue and cry to change the status quo," Itkin said. "As states begin to legalize more forms of online gaming, the lack of uniformity among banks and credit card issuers is going to be frustrating for states and consumers."

Published: October 10, 2012

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