Red, White and Blue in the Face


As operators, affiliates, players and everyone in between keep looking over their shoulders for the switch to flip in the US, others are asking if US gambling legislation in 2010 is showing any real signs of change at all. Tom Lippiett and Joanna Davey of Berwin Leighton Paisner LLP assess the developments.

The widespread criticism of the UIGEA is not surprising. It has long been compared to the US’s attempts to ban alcohol in the 1930s, a move that simply led to consumption continuing, but outside of the regulated sector. In much the same way, US citizens have largely continued to gamble online, only with sites that are not licensed in the US and, perhaps most significantly, pay no taxes into US coffers.

Hardly surprisingly, therefore, a number of proposals have been suggested to regulate the industry. In addition to enabling specific conditions to be placed on licensees, such a system would also, inevitably, generate much-needed additional funds for the US budget. However, as we all know, gambling comes with its own unique set of issues, and in particular the moral objections to the overt licensing of the activity remain substantial in a country which has an incredibly wide-ranging set of views on the subject.

As things currently stand, a repeal of the UIGEA is far from certain in the short term. However, there are a number of legislative efforts currently underway that seek to better regulate the online gambling sector in the US. Set out below is an assessment of each current legislative attempt. It is, of course, worth bearing in mind that while none of these Bills are a certainty to succeed, the UIGEA itself took everyone by surprise. Accordingly, while it currently appears to be a slow-burning process, it cannot be ruled out that re-regulation will likewise come when we all least expect it.

The Frank Bill (HR 2267)

Congressman Barney Frank’s Internet Gambling Regulation, Consumer Protection and Enforcement Act outlines a federal regulatory and enforcement framework for licensing and regulating the online gaming industry in the US.

The Bill, through which online gambling operators could obtain licenses to offer services to customers based in the United States, will be the subject of further legislative hearings in the House Committee on Financial Services was scheduled for April 16 but that date has been postponed, and at press time, no new date has been set. If eventually passed, it would mean licensed operators would be exempt from UIGEA.

The Bill proposes that, having undergone criminal background checks, websites would be licensed based on their financial condition, corporate structure, business experience and suitability to the market. Online gambling operators would be granted licenses for five-year terms, with renewal conditional on good conduct and efficiency. Responsibility for enforcement would lie with the Department of the Treasury, who would monitor sites. Where providers failed to comply with the law, the Department of the Treasury would be given the power to revoke licenses.

The Bill also contains consumer protection devices such as age compliance and location monitoring. The aim is to ensure that wagers are not being made from states or tribal lands where the actions are prohibited and to make sure that those gambling are of age in their home state. Privacy and security also feature in the bill, which incorporates measures to prevent incidences of identity theft, fraud or money laundering. In addition, play would be monitored for compulsive gambling tendencies and "fraud, money laundering and terrorist finance."

The McDermott Bill (HR 4976)

Representative Jim McDermott introduced the Internet Gambling Regulation and Tax Enforcement Act to the House. It acts as a companion to the Frank Bill and calls for the establishment of a tax collection structure to target any legal and licensed online gambling operators.

The McDermott Bill seeks to tax licensed online gambling operators at a federal rate of two percent and a state rate of six percent. Unauthorized bets or wagers would be taxed at 50 percent and all money would go to the United States Treasury.

The Menendez Bill (S1597)

The Internet Poker and Games of Skill Regulation, Consumer Protection and Enforcement Act has been put forward by Senator Robert Menendez. Although broadly similar to the Frank Bill, the Menendez Bill distinguishes itself in that it only seeks to address the regulation of “skill games” such as poker, bridge, mahjong, backgammon and chess as games in which a player’s skill determines the outcome. The bill seeks to establish a regulatory framework, which would make significant changes to the status quo, for example allowing online poker companies to register in the US. It also suggests a 10-percent tax on all deposits, which would be split equally between state and federal governments.

As with the Frank Bill, consumer protections are a priority and the Menendez Bill also includes age verification procedures and provisions for compliance with state law in territories which prohibit online gambling.

The bill has been read twice and referred to the Committee on Finance and is expected to receive support from various financial institutions across the US, which were previously charged with the task of rejecting individual bank transactions under UIGEA.

Gregg/Wyden Bill (S3108)

On February 23, 2010, Republican Senator Judd Gregg and Democrat Senator Ron Wyden introduced The Bipartisan Tax Fairness and Simplification Act (BTFSA) into the US Congress. The Bill is comprised of a set of reforms aimed at simplifying the US tax code but also contains a provision allowing for the regulation and taxation of online gambling. The language for this part of the bill is heavily based on Barney Frank’s Internet Gambling Regulation, Consumer Protection and Enforcement Act (HR 2267).

The idea of taxing online gambling is seen by many as a primary reason to regulate and fully legalize the activity. Surrounding this bill, figures have been published by the Joint Committee on Taxation, which estimate that taxes of around $42 billion could be raised through the taxation of this industry over a 10-year period.

Senators Wyden and Gregg are well respected and add much needed gravitas to the bill. It’s widely believed that positioning their online gambling regulations in the depths of a favoured tax bill may help it to pass through Congress more smoothly. In fact, of the pending online gambling bill, this bill is widely regarded by industry commentators as having the highest likelihood of passage in the coming months.

The American Gaming Association’s stance

The American Gaming Association (AGA) is a powerful Washington-based lobbying group. On March 24, in support of online gaming reform (and reversing their previous position), they issued a statement acknowledging the necessity for a regulated legal framework for online gambling. While the AGA is not specifically endorsing any of the current bills, this change in position will add additional pressure to Congress in the coming months.

Online Waiting Game

At the risk of ducking the question, in much the same way as very few people predicted the timing of the prohibition, it is likewise almost impossible to place an exact time frame on any licensing of online gambling. What’s almost certain is that it will occur, but whether this will occur in six months or six years remains open to debate. Accordingly, 2010 may be the year of change, but the odds are stacked in favour of a slightly longer wait.

The above said, given the near-inevitability of licensing occurring in one form or another at some point, another interesting question is exactly who will benefit from any licensing regime.

There are a number of gambling behemoths in the US, although such operators have been noticeably slow in embracing the online sector. That said, if faced with a national licensing regime for gambling, any entity, not least those whose share prices have suffered with the economic downturn, is certain to be tempted by the potential revenue. However, while their “brand power”, through their familiarity with the US public, may benefit the US operators (together with the possibility of preferential treatment by the licensing authorities), the requisite know-how for large-scale online gambling operations almost certainly resides with the European operators. Accordingly, if we do ever see the national regulation of online gambling in the US, the possibility of Euro-US alliances for assaults on the market should not be ruled out.

Tom Lippiett, a lawyer at Berwin Leighton Paisner LLP, provides detailed advice to a variety of clients on UK gambling regulation, and has obtained a number of operating licences for clients in the online and offline sector. Tom also specialises in worldwide jurisdictional issues in the gambling sector, including the multitude of legal aspects relating to the supply of betting and gaming services. As such, he has in particular advised a number of clients on the legal issues surrounding the European Union (and its member states) laws on gambling, and the complexities of the highly specialised US and Asian gambling markets. Joanna Davey, a trainee solicitor in the firm’s commercial department, assists Tom.
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