Eye on the Industry | Offshore Legacy

19 May 2009
Welcome to IGamingNews' newest series of semi-regular op-ed articles, Eye on the Industry. Here, we'll feature incisive pieces -- penned by executives, analysts, lawyers, researchers, the occasional anonymous source, mainstream media journalists, fellow e-gaming scribes and a professional gambler or two -- which examine a particular issue.

Sanford I. Millar, who is C.F.O. of (and general counsel to) Centaurus Games in California, thinks that under the new Frank bill, offshore operators with former ties to the United States may run into trouble getting licensed.

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On May 7, 2009, I spoke at the Southern Gaming Summit on the future of Internet gaming in the U.S. The day before, three bills were introduced in the House of Representatives, two by Rep. Barney Frank and one by Rep. Jim McDermott. The bills were -- and remain -- the subject of much discussion. My impression of the bills and current forecast for legalized internet gambling are as follows.

The first bill, HR 2266 (The Reasonable Prudence in Regulation Act), extends the implementation of the UIGEA regulations from Dec. 1, 2009, to Dec. 1, 2010. This bill, introduced by Mr. Frank, may help the financial services sector in delaying some implementation costs and can likely pass the House and Senate as a standalone.

The second and third bills -- HR 2267 (The Internet Gambling Regulation, Consumer Protection, and Enforcement Act, or "the licensing bill") and HR 2268 (The Internet Gambling Regulation and Tax Enforcement Act, or "the tax bill") -- respectively establish a federal licensing system and a tax system. These bills are interdependent and will survive or die as a package.

In its current form, the tax bill requires licensees to pay a monthly fee -- 2 percent of gross wagers -- and subjects unlicensed operators to a fee of 50 percent (how this fee will be assessed and collected from offshore operators is beyond the scope of this article). The bill, introduced by Mr. McDermott, does provide for information collection from players and withholding on all winnings as paid.

And Mr. Frank's licensing bill, in simple terms, creates a system of regulation that is binding on the states -- unless they opt out within 90 days of enactment.

This point may be a deal breaker on its own. The reason is that right now, under the UIGEA, states can adopt wholly intrastate Internet gambling. This means that populous states -- like California, Texas, New York and Pennsylvania -- can capture tax revenue and jobs at the expense of less populous states, which probably lack the critical mass necessary to make games successful. So the conflict is inherent.

Now, besides the small states, who would benefit from the licensing bill?

Well, for starters, large multi-state and multinational corporations. The licensing bill would allow those corporations to have large-scale marketing plans that cross state borders with a unified message and minimize competition. Just how the various tribal interests will respond to the bills, however, is not totally clear to me at this time.

Another key aspect of the licensing bill, meanwhile, is qualification for licensure. At first blush, the major land-based casino companies will surely qualify. Other corporate interests may qualify as well.

However, offshore companies that previously offered Internet gambling products in the U.S. are not likely to qualify, nor are their officers, directors or principal shareholders. Further, while some offshore companies ceased to offer services after the UIGEA was enacted in 2006, there is a distinct possibility that a provision in the licensing bill will be used to keep them out.

The provision I'm referring to requires that all federal and state tax returns be filed on time with all taxes paid, including additions to tax, interest and penalties. Compliance with the foreign bank account reporting rules would seem to be included.

Further, as a condition of the application, all applicants submit to U.S. jurisdiction for all purposes. I question whether any of the offshore operators will submit to jurisdiction with the risk of disqualification. But one could argue that the offshore companies will just not apply and continue business as usual. That is a distinct possibility, but they will be subject to claims of U.S. taxation and licensing fees regardless.

Looking ahead, I believe the future of U.S. Internet gambling is going to be filled with uncertainty regarding which form of regulation is adopted and who the likely licensees will be. One thing is clear, though. While some have argued for legalization and taxation, what those advocates will likely find is that the results will be dramatically different from what they expected.

The IGN staff continually troll the wires, foreign papers, corporate news alert services and other dark, dusty corners of the Web to bring you the very latest industry news.