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U.S. Casino Companies Flirt With Online Gaming — DOJs Opinion Stands
By Frank Catania and Keith Furlong
©World Online Gambling Law Report, Volume 1 Issue 7 (October 2002)
Some of the largest names in the casino industry from the U.S. are taking a closer look at Internet gaming, following the lead of global competitors. Initially, Nevada, the largest gaming state in the U.S., was moving toward development of rules and regulations for responsible Internet gaming. Under the stewardship of former Nevada Gaming Commission Chairman Brian Sandoval, determining how Nevada gaming companies could be part of this new industry was a priority.
The Nevada legislature passed and the governor signed into law in June 2001 enabling legislation to allow the Gaming Commission to adopt regulations governing the licensing and operation of Internet gaming, potentially to be offered by Nevadas land-based gaming companies. If gaming was going to be offered over the Internet, Nevada was not going to be left behind.
The Federal Government Roadblock
When Mr. Sandoval, an aspiring politician, left the Gaming Commission to run a statewide campaign for Nevada Attorney General, the movement toward regulated Internet gaming quickly lost its momentum. Further complicating the Internet gaming issue was that the Internet brings with it issues that involve federal law, even as gaming in the U.S. has traditionally been a states rights issue.
An important step for Nevada officials was to seek guidance from the U.S. Department of Justice (DOJ) with regard to its interpretation of federal law as it relates to Internet gaming. At the end of August 2002, Assistant Attorney General Michael Chertoff responded to Nevada officials in a letter whereas DOJs view was that the gaming activity over the Internet occurred at both the location of the player and the location of the gaming business. Not surprisingly, the end result was the DOJ reiterated an earlier position that Internet gaming was a violation of federal law.The Value of a Gaming License
The most valuable possession of a gaming company is a license to operate, without this license there is no business. In the U.S. (and throughout the World) gaming regulators assure that casino operators, gaming companies, machine manufactures, and ancillary businesses are investigated and prove to have the requisite honesty, integrity and financial stability to be involved in gaming. Protection of the public is tantamount to every regulatory scheme. A land-based gaming license is viewed as a privilege granted to responsible companies, rather than a right.
So what is happening with regard to Internet gaming in the U.S.? State gaming regulators in the U.S. are providing a limited opportunity for casino operators to offer online casino games. Gaming regulators have adopted the philosophy that U.S. gaming companies can offer Internet gaming from off shore jurisdictions as long as they operate in accordance with all of the requirements of the law, including keeping U.S. players and players from other prohibited jurisdictions from placing bets online.
While the American Gaming Association, an industry trade group, is opposed to Internet gaming on policy, their membership is apparently split on the issue. For example, MGM Mirage recently launched a gaming web site out of the Isle of Man, www.playmgmmirage.com, but with very little fanfare.
Why so little publicity? One reason for the lack of promotion is that U.S. gaming companies planning to bring their business online are spending more money on legal fees to protect their land-based business than on marketing their online properties. (Perhaps they are saving the marketing investment for a time when Internet gaming is more accepted and potentially regulated in the U.S.) Another reason for limited publicity is that MGM Mirage is putting a lot at stake in their experimentation with providing casino games over the Internet. Company representatives had to convince state gaming regulators that they could operate in accordance with all the rules and regulations as required for their land-based licenses and that they could prohibit bets from the U.S. and other jurisdictions where Internet gaming is prohibited. In Mississippi, only one of many jurisdictions where MGM Mirage holds a gaming license, regulators have to approve any foreign business that their licensed gaming operators enter into, and MGM Mirage officials had to agree to risk their land-based gaming license in order to prove that they could responsibly and legally offer Internet gaming. To make matters more challenging, regulators in Nevada have publicly stated that MGM Mirages technology and controls will be tested.
Sun Online, now known as Kerzner Interactive Limited, was one of the first well known land-based operators to bring the concept of legal online gaming to regulators in New Jersey and Nevada. Kerzner International still holds a gaming license in New Jersey as previous owners of Resorts Casino Hotel in Atlantic City; their land-based properties include the Mohegan Sun in Connecticut and the Atlantis in Paradise Island, Bahamas. The company was granted one of the first licenses to operate from the Isle of Man and launched their Casino Atlantis Casino Online site, www.casinoatlantis.com. Kerzner Interactive CEO, Tobin Prior, was diligent in the creation of an online gaming business; he made numerous presentations to state gaming regulators displaying Kerzners stringent registration process and use of various location and identity technologies to demonstrate that Internet gaming can be effectively controlled and regulated. Mr. Prior stands behind his companys ability to provide online players with fair and responsible entertainment, for those who wished to participate. One can imagine the frustration of a gaming executive following strict rules and regulations as they operate online; The companies are required to turn hundreds, if not thousands, of customers from the U.S. away while unlicensed competitors market and offer games to players anywhere in the world with no consequence.
The legality of Internet Gaming?
The underlying issue is still the legality of Internet gaming. Most recently, the U.S. House of Representatives, in a voice vote, passed legislation, known as the Unlawful Internet Gambling Funding Prohibition Act (H.R. 556), sponsored by Congressman Jim Leach (Iowa) to prohibit financial instruments for illegal Internet gaming. While Senator Kyl announced plans to shepherd this legislation through the Senate by the end of this Congress, timing is critical. Given the current Congressional calendar, it is unlikely that there will be a law either prohibiting or regulating Internet gaming in the short term, but the threat is definitely present.
The current congressional session will recess for elections and is still entangled in partisan debates between Democrats and Republicans with regard to the creation of a homeland security department in response to terrorist concerns brought to the forefront of legislative activity after the World Trade Center bombings. Ironically, as the Interactive Gaming Council (IGC), a trade association of online gaming companies, was quick to point out, most banking experts would agree that the effect of the above ban will be new development of settlement solutions that banks cannot recognize and block anonymous and unregulated e-cash. According to IGC Chairman Sue Schneider, It is safe to say that, if the Leach bill becomes law, some portion of the 4.7 million Americans who like to wager on-line would seek alternative ways to bet, and some of these new settlement mechanisms would undoubtedly have unintended consequences.
The first break through on the legal front may be in Federal Court, specifically the 5th Circuit Court of Appeals. Judge Duval previously ruled "In Re: MasterCard" case that the Wire Act, the federal law prohibiting betting over phone lines, was not applicable to casino style games offered over the Internet. Judge Duvals ruling is logical; the legislative intent of the Wire Act could not have foreseen casino gaming on a medium that had not yet been invented, the Internet. Again, a contrary opinion is held by the Department of Justice as detailed above in their response to Nevada officials, and DOJs opinion has not been altered since the Internet gaming issue first arose.
Aside from legal questions, many gaming executives in the U.S. also have concerns about being seen as overly aggressive with regard to providing gaming entertainment over the Internet. Many executives, for example Thomas Gallagher from Park Place Entertainment, have expressed publicly that gaming companies need to know more about the Internet and potential weaknesses for underage and problem gambling before risking its reputation as responsible corporate citizens, which took many years to develop.
All in all, there are no simple answers to the Internet gaming issue in the U.S. Further, Internet gaming is a quagmire for U.S. gaming executives. On one hand, no executive wants to be criticized five years from now for being left behind if Internet gaming becomes regulated and profitable; on the other hand, no executive of their right mind would want to risk the ire of gaming regulators where they hold land-based licenses.
The U.S. continues to move slowly and is still caught up with senseless debate on prohibition, which has proven unsuccessful throughout our countrys history. The Federal government should move the debate toward legalization and regulation or at least delegate regulation of Internet gaming to the states that wish to enter that arena. The reality is that US players are providing and will continue to provide the bulk of the play, regardless of potential prohibitory laws, while other jurisdictions will be reaping the taxation income derived from it, as the National Council on Problem Gambling points out, monies that could be used for research and treatment of problem gambling.
Frank Catania is an attorney and principal in Catania Consulting Group, Inc. of New Jersey, a consulting firm with extensive experience in gaming issues. He is a former Assistant Attorney General and Director of the New Jersey Division of Gaming Enforcement, the regulatory and enforcement agency responsible for maintaining integrity and trust in all Atlantic City gaming operation. He currently serves as Chair of the International Masters of Gaming Law, has previously served as chair and vice chair of the International Association of Gaming Regulators, and was a co-founder and past Chair of the Forum of American Casino Regulators.
Keith Furlong is the vice-president of the Catania Consulting Group, Inc. and serves as the deputy director of the Interactive Gaming Council, a non-profit trade association that promotes fair and honest online gaming. He is a former public information officer and legislative liaison with the New Jersey Division of Gaming Enforcement.
