Gaming Law "In the News" ...

A Catania Consulting Group Client Newsletter May 12, 2009

Integrity, Leadership, Experience ...

Frank Catania, Esq. President, former Assistant Attorney General, Director NJ Division of Gaming Enforcement,   VP Compliance Players International.  frank@cataniaconsulting.com

Gary Ehrlich, Esq. VP, former Assistant Attorney General, Deputy Director NJ Division of Gaming Enforcement.  gary@cataniaconsulting.com

Keith Furlong, VP, former Public Information Officer & Legislative Liaison NJ Division of Gaming Enforcement. keith@cataniaconsulting.com

Joseph Kelly, Esq., Associate, Professor of Business Law, SUNY College Buffalo. jkelly@cataniaconsulting.com

The Internet Gambling Regulation Consumer Protection and Enforcement Act of 2009 (H.R.2267)

The Internet Gambling Regulation Consumer Protection and Enforcement Act of 2009 (the Bill) was introduced to the House of Representatives on May 6, 2009, by Barney Frank, Peter King, and Shelley Berkley. It essentially provides for the amending of Title 31, Chapter 53, by adding a “subchapter V—Regulation of Lawful Internet Gambling.” Its provisions would also provide exemption from liability under the Wire Act (18 USC § 1084) and the Unlawful Internet Gambling Enforcement Act.

In its “Findings,” the Bill asserts that millions of persons have gambled online, but there is no US “regulatory regime in place to protect United States citizens who choose to engage in this interstate activity, or to oversee operators to establish and enforce standards of integrity and fairness” (§ 5381. Congressional findings)(2)).

The Findings also state that a strict federal licensing system is necessary “to protect underage and otherwise vulnerable individuals, [and] to ensure the games are fair” (Id. at (4)). Furthermore, the recipients of a federal Internet gaming license must demonstrate they “(A) are in good financial and legal standing, and of good character, honesty, and integrity; (B) utilize appropriate technology to determine the age and location of users; (C) adopt and implement systems to protect minors and problem gamblers; . . . (E) have in place risk-based methods to identify and combat money laundering and fraud relating to Internet gambling, and to protect the privacy and security of users” (Id. at (5)).

The Bill delegates enforcement responsibility to the Secretary of the Treasury (the Secretary) to develop regulations within 180 days from passage of the bill in order to ensure that all licensees of Internet gaming facilities will be suitable, solvent, and willing to carry out socially responsible policies. The Secretary, upon determination of suitability, solvency, and social responsibility, would then issue five-year renewable licenses to Internet gaming operators.

Specifically, all gambling applicants must submit, inter alia, “(A) The criminal and credit history of the applicant [and any senior officers]. (B) The financial statements of the applicant. (C) Documentation showing the corporate structure of the applicant and all related businesses and affiliates. (D) Documentation containing detailed evidence of the applicant’s plan for complying with all applicable regulations should a license be issued, with particular emphasis on the applicant’s ability to—(i) protect underage and problem gamblers; (ii) ensure games are being operated fairly….” (§ 5383. Establishment and administration of licensing program)(Id.)(c)(2).

Compliance with the above requirements necessitates a thorough background check not only of the applicant, but all directors and senior executives of a business enterprise. The applicant must also establish by the high evidentiary standard of “clear and convincing evidence” that the applicant “(A) is a person of good character, honesty, and integrity; . . . (D) has or guarantees acquisition of adequate business competence and experience in the operation of Internet gambling facilities; and (E) has or will obtain sufficient financing for the nature of the proposed operation and from a suitable source.”(Id.) (d)(2) Any conviction of a crime punishable by more than one-year imprisonment, providing false information, or being delinquent in tax payments will automatically result in a determination of “unsuitability.”(Id.)(d)(3)

The Secretary may suspend or take other measures should a licensed operator be found unsuitable. All administrative costs must be paid by the licensee as part of a “user fee” and in any civil action the “appropriateness of the assessment shall not be subject to review.”(Id.)(e) The Secretary shall require that the licensee has established mechanisms to ensure all bettors are of legal age, in a jurisdiction that permits Internet gambling, that all gambling taxes are collected, and that there are “appropriate safeguards to combat fraud, money laundering, and terrorist finance” and “appropriate safeguards to combat compulsive Internet gambling.”(Id.)(g)

The Secretary shall also have authority to examine all licensee records and require a licensee to attend a hearing. Should a licensee commit a willful violation of regulations, he would be subject to a civil penalty not to exceed $100,000.(Id.)(l)

The Secretary may also defer determination as to suitability of an applicant to a state or tribal regulatory body, although “the Secretary retains the authority to review, withhold, or revoke any license if the Secretary has reason to believe that any applicant or licensee does not meet the suitability requirements for licensing established under this section, or any other requirement of a licensee” (Id. (o) (4)Reliance on state and tribal regulatory body certifications of suitability for applicants ). The Secretary may also rely on “qualified” state or tribal regulatory bodies “for such other regulatory and enforcement activities” as the Secretary might find appropriate.(Id.)(5)

About seven pages of the 48-page bill are devoted to provisions mandating Responsible Gambling procedures, including a “Self-Exclusion Program” (§ 5384. Problem Gambling, Responsible Gambling, and Self-Exclusion Program). Among the minimum requirements are provisions ensuring that customers may establish loss limits, have access to responsible gambling material, and forfeiture by a self-excluded gambler to any winnings should the gambler ignore the self-exclusion.

The bill may also alleviate concerns of those states or tribes that do not want their residents to participate in US licensed online gambling. For example, the Governor or principal tribal chief may decide to opt out of any inclusion within 90 days after the enactment of the bill. The Bill also might ameliorate the anti-gambling fears of professional sports leagues by reiterating that the bill does not permit any sports betting prohibited pursuant to the Professional and Amateur Sports Protection Act prohibitions (§ 5387).

The Reasonable Prudence in Regulation Act (H.R.2266)

The second Frank bill would delay for one year (Dec. 1, 2009, to Dec. 1, 2010) the requirement for non-exempt financial transaction providers to have developed policies to stop financing of illegal Internet gambling payments.

The Internet Gambling Regulatory and Tax Enforcement Act of 2009 (H.R.2268)

The Internet Gambling Regulatory and Tax Enforcement Act of 2009 introduced by Cong. Jim McDermott, would establish a monthly 2 percent tax on all customer deposited Internet gambling funds. There is also a penalty of 50 percent of all deposited money should the gambling operator not be licensed. The licensed operator shall also establish procedures for the reporting and taxing of customer winnings.

Deal with Tribe Will Give Florida $150 Million a Year

After extended deliberations, the Florida Legislature finally reached an agreement with the Seminole Tribe and the state racetracks which provides benefits to each in exchange for a large payment from the Tribe. Under the terms of the agreement: The Seminole Hard Rock Casinos in Hollywood and Tampa can keep their card games and Class III slot machines; the tribe can offer no-limit poker at all seven of its casinos; the banked card games of blackjack, baccarat and chemin de fer can only be offered at the Tribe’s facilities in Broward and Hillsborough counties; the Tribe will make an annual $150 million payment to Florida for 15 years; and the state’s racetracks may also offer no-limit poker, but are banned from offering VLTs without the approval of the state legislature and local referenda.

Minnesota Internet Gambling Web Site “Blacklist” Saga Rolls On

In a move reminiscent of the Kentucky domain name seizure case, the Minnesota Alcohol & Gambling Enforcement Division released a “black list” of 200 Internet gambling web sites, simultaneously demanding that Internet service providers (ISPs) block Minnesota residents from accessing these sites through their networks. The list included a few well-known Internet gaming sites, but many were small sites and, strangely, a number were sites that do not accept US customers. Calling the demand “a half-baked attempt at intimidation rather than thoughtful enforcement,” The Interactive Media Entertainment & Gaming Association (iMEGA), an Internet gaming trade group, took various actions.

First, it sent letters to ISPs arguing that they need not comply with the Minnesota demand because of the state’s error applying a federal law – the Wire Act of 1961 (18 USC 1084) – as the basis for the order. “Because website operators are not subscribers of yours, have no contracts with you and are not provided facilities by you, you should be aware [that Minnesota] is attempting to mislead (either intentionally or inadvertently) you into believing that you are bound by federal law to do what [Minnesota] asks,” the letters state. “In fact, [the Wire Act] simply does not apply to the web site operators and imposes no duty upon you and provides no authority to you to comply with the [Minnesota] request.”

Additionally, iMEGA filed an action requesting the United States District Court in Minneapolis to prevent Minnesota from enforcing its order to ISPs to block state residents’ access to the “blacklisted” web sites. The lawsuit argues that Minnesota lacks the authority to compel the ISPs to block residents’ access to the sites, and that the state’s actions constitute a violation of free speech rights guaranteed by the First Amendment to the United States Constitution. “It’s our hope that Minnesota will recognize their error and drop their blocking order,” said Joe Brennan Jr., iMEGA chairman. “Censoring Internet access for Minnesota residents would establish a troubling precedent of government intrusion into the online world, and we just can’t allow that to happen.”

Disputes Decline at eCOGRA Certified Online Casinos, Poker Rooms and Sportsbooks

The Fair Gaming Advocate at eCOGRA, the independent player protection and standards body, has released the organization's first quarter 2009 player disputes report. Total disputes handled in the full year 2008 period were down from the 2007 number. About 50% of complaints involved cash-ins, well ahead of bonus issue disputes. Locked account complaints also exceeded bonus issues, with the remaining complaints dealing with miscellaneous issues.

Nevada Casino Ownership Proposal Seeks To Spur Investment

A proposal to allow institutional investors to own up to 25% of a Nevada gaming company without undergoing background checks is now before the Nevada Gaming Commission. The proposal, which would increase the threshold from 15%, is aimed at encouraging investment in Nevada casinos at an especially difficult time.

It comes as banks and bondholders are considering takeovers of gaming companies in Chapter 11 bankruptcy reorganization, and could pave the way for additional firms to enter the market as passive investors. The existing regulation, waiving background checks for institutions owning up to 15% of a company’s voting securities, was adopted to accommodate firms that would not have otherwise invested in Nevada casinos. Given the existing economic circumstances, other jurisdictions may consider similar provisions.

Sports Betting Bill Moves in Delaware

Delaware (along with Oregon, Nevada and Montana) is one of the states whose ability to legally offer sports betting was “grandfathered” in by the Professional and Amateur Sports Protection Act, which prohibits sports betting in all other states. Delaware had a sports lottery in the 1970s. On the initiative of the state’s Governor, who is seeking help alleviate the state's budget crisis, the Delaware House of Representatives has now taken the first step toward legalized sports betting.

The House bill, which is opposed by every major US sports league as well as the NCAA, would re-establish a sports lottery in Delaware. Making some concessions to the state’s three casinos, the bill would allow them to install table games (only video poker and other electronic games are allowed now), and share in the sports lottery revenue.

"From an NCAA perspective, we oppose all kinds of sports wagering," an NCAA spokesman said. "Sports wagering is a problem, not a solution (to budget woes) from our perspective." The NCAA expressed its opposition to Delaware officials in March and, if the bill becomes law, NCAA would bar the state's universities from holding NCAA championships. Such a threat led Oregon to abandon its sports lottery three years ago, giving the state the ability to play host to NCAA men's basketball tournament games. However, Delaware lacks the facilities to host major NCAA postseason contests in any event.

Catania Gaming Consultants Member Appearances

On May 6, Catania Gaming Consultants vice president Gary Ehrlich appeared on the CNBC “Breaking News” program with Dennis Kneale, to discuss the bill introduced by Rep. Barney Frank to legalize and regulate Internet gambling in the US. http://www.cnbc.com/id/15840232?video=1116070423&play=1 Also on May 6, Catania Gaming Consultants Joe Kelly was quoted by Gambling Compliance, Interactive Gaming News, Forbes.com and Rolling Good Times regarding the Frank bill. He stated that this bill has a better chance of passage than any previous US Internet gaming regulatory bill.