Insights: Nevada . . . What If?

A recent study conducted by the University of Nevada Las Vegas' International Gaming Institute on behalf of the Nevada Gaming Control Board has industry observers wondering if and when the Silver State will decide to regulate Internet gambling. Among U.S. lawyers, the loose consensus seems to be that regulatory initiatives will begin on a state-by-state basis, rather than on the federal level. Because Nevada occupies a unique position as both a domestic and international Mecca for regulated land-based gambling, it could be argued that its decision to regulate would have significant consequences for Internet gambling in the United States.

So, IGN asked the experts:

What impact, if any, would Nevada's decision to regulate have on Internet gambling in the United States?

Patrick O'Brien: Legalized and regulated Internet gambling in Nevada would serve as a catalyst for the legalization of Internet gaming in one form or another throughout most of the United States, and there is no legal bar to Nevada doing it right now.

Gambling in the United States is governed by state law, unless superseded by federal law, and none of the federal statutes prevent Nevada from legalizing intrastate gambling. The Wire Act prohibits interstate and international sports betting, but does not apply to intrastate wagering, nor, according to the courts, to non-sports betting. The Amateur and Professional Sports Protection Act (APSPA) prohibits states from legalizing sports betting, but grandfathered in Nevada, which had already legalized it. And, the Unlawful Internet Gambling Enforcement Act establishes the framework for legalized intrastate casino gaming as well as sports betting, which is compliant with the APSPA. So, the legal frameworks have been established and there is no bar to Nevada legalizing intrastate Internet gambling any time it wishes.

Moreover, if they do it, I think there is little question that other states would shortly follow their lead. Just like state after state created lotteries to generate revenue, state after state can be expected to legalize one form of Internet gaming or another in an effort to generate revenue. The most likely candidate for legalization would be the intrastate sale of lottery tickets, as well as various games which states have developed under the lottery umbrella, such as Tennessee’s Hot Trax Champions. After that, intrastate poker would probably be legalized next by states such as California with large enough populations to provide the liquidity necessary to the game and looking at the rake as a viable stream of revenue (as well as taxation of winnings).

Finally, once states legalize gaming on the intrastate level, there is nothing preventing two or more of them from agreeing to non-sports gaming on an interstate level. Although the UIGEA only establishes the framework for legalizing intrastate gambling, it does not prohibit interstate gaming. It only prohibits forms of gambling which violate some other federal, state or tribal law and non-sports interstate gaming legalized by the states would not violate any other law.

I think it is only a matter of time before states legalize intrastate gambling and then interstate gaming. Moreover, it is only with interstate gaming that the smaller populated states can achieve the liquidity necessary to host poker and similar games.

There is no question this will happen. The only question is where and when. Perhaps the answer is Nevada and now.

Patrick O'Brien spent 25 years as a Special Agent with the U.S. Customs Service where he occupied numerous positions before joining the Greenberg Traurig Law Firm. O’Brien has expertise in offshore banking, Internet gaming, money laundering detection and prevention, international trade, trade embargoes, international trade protection, white collar crime, smuggling, fraud, the Foreign Corrupt Practices Act, and loss of goods in transit. He has represented offshore gaming operators and offshore banks in relation to foreign and U.S. compliance issues and the detection and prevention of money laundering. From 1997 through 1999 O’Brien assisted the Government of Antigua and Barbuda in drafting offshore banking, money laundering, and offshore gaming legislation while supervising the nation's offshore financial industry.

Frank Catania: The state of Nevada has long been in the forefront of regulated gambling worldwide. Its decision to commission the UNLV International Gaming Institute to investigate the viability of establishing a regulated Internet gaming industry in Nevada again demonstrates that state’s leadership.

Nevada’s action is similar to that proposed in H.R. 2140, introduced in the United States House of Representatives by Rep. Shelley Berkeley, D-Nev. H.R. 2140 would require the National Research Council of the National Academy of Sciences to provide a detailed examination of the issues involved in the regulation of Internet gambling as well as the impact of the Unlawful Internet Gambling Enforcement Act on Internet gambling in the United States.

The establishment of a federal bureaucracy to regulate Internet gambling -- as proposed by H.R. 2046, introduced by Rep. Barney Frank, D-Mass. -- runs contrary to the long-accepted premise that gambling is a matter left to the states’ discretion. Ten states have already passed some form of legislation prohibiting Internet gambling, which is their right.

However, the converse should also be true; states that desire to legalize and regulate Internet gambling should have that right as well. Individual states should have the ability to decide whether to: (1) prohibit Internet gambling; (2) legalize and regulate Internet gambling; or (3) take no action with regard to Internet gambling. This is analogous to the current status of interactive wagering on horseracing.

States which choose to enact Internet gambling regulations could do so in the same manner as with land-based casinos. The operators would have to demonstrate that they possess the good character, honesty and integrity to be licensed, and that the games being offered are fair and honest and conform to a payout percentage approved by that state. The operators would also be required to provide protections like those mandated by H.R. 2046 for the prevention of underage and problem gambling, and fraud and money laundering. Licensed operators would only be allowed to accept play from those states in which Internet gambling was permitted or those in which no law concerning Internet gambling existed. Again, this would be similar to the manner in which interactive horserace wagering is conducted at the present time.

Taxes could be based upon profits on a state-by-state basis. In the same way that winners of a certain amount in land-based casinos receive an IRS Form W-2G, winners of the same amount would receive a W-2G from the licensed Internet operator. Operators would be responsible for taxes on their own profits, just as with the land-based gaming industry.

The gaming industry in the United States has been well-regulated by states such as Nevada. American gaming regulators are respected not only in the United States but worldwide for the job they do. By contrast, the federal government has no experience in this industry, and is noted for creating bureaucratic monsters in which efficiency is absent and cost overruns the norm. So it is encouraging that a state with experience in gaming regulation will be first to commit to an in-depth exploration of potential Internet gaming regulation.

Of course, the unknowns in the domestic Internet gaming equation remain as elusive as ever. First, can a U.S.-based Internet gaming operation be profitable without the ability to offer sports betting? And second, will the United States Department of Justice continue to adhere to its previously asserted positions that all Internet gambling (casino games as well as sports betting) is unlawful, and that such gambling is unlawful under various provisions of federal law even if offered solely on an intrastate basis? As to these issues, only time and experience will tell.

Frank Catania is the principal of Catania Consulting Group Inc. and a partner in the New Jersey-based public-affairs firm of Catania Furlong Snyder Public Affairs LLC. He is a former assistant attorney general and director of the New Jersey Division of Gaming Enforcement .

Martin Owens: Study or no study, I can’t see any American state government doing anything to legalize online gambling until at least early 2009. First, because the Bush administration opposes Internet gambling in all its forms, and has demonstrated that in this area, as in many others, they will push the legal envelope to the limit -- even past it -- to hit people they think are the "bad guys." Second, because any politician who favors gambling is handing his opponents a stick to beat him with. Progress must wait for the off season.

And I do not think Nevada will be first to activate online gaming in an in-state-only mode. It is true that the Silver State already has enabling legislation in place for Internet and interactive gaming, and all that would be needed on the legal side to begin actual operations are regulations from the Gaming Control Board. But that’s not the question. The question is, for Nevada, do the advantages of opening up Internet gambling outweigh the costs and risks?

They don’t need the money. Nevada is running a surplus in its budget from land-based gambling already. (In fact, the state is so flush that its lawmakers turned down a request to be taxed from Nevada’s legal bordellos, who are seeking the social status of taxpayers to burnish their collective image [see footnote 1. -Ed.].) Nevada certainly does not lack land-based gambling facilities, and consequently there is little need for online gaming to supplement them. And because of the Professional and Amateur Sports Protection Act (28 USC §3702) Nevada cannot offer sports betting, the most popular moneymaker, beyond the physical borders of the state. In effect, in the online realm a Nevada operator would be working with essentially consists of consolation prizes, such as online slots, amid lots of competition.

Then, too, Nevada could not simply declare Internet gambling open to all and sit back. Let’s take an example. If Nevada allows, let’s say, Oklahoma residents to bet at its online parlors, then the state of Oklahoma will surely demand some of the control and especially some of the revenue. And if Nevada can reach into Oklahoma’s home market, it seems logical that Oklahoma would reserve the right to do the same for Nevada -- and the Nevada market would necessarily include all the millions of tourists visiting there. Would that be to Nevada’s advantage?

There would have to be talks between Nevada and Oklahoma regarding what games would be available to whom, and when. There would have to be arrangements for division of jurisdiction, of taxes, and of income, and for the collectibility of gambling debts and prevention and punishment of cheating. The two states would have to work out coherent and consistent programs for preventing underage or unauthorized betting and protecting the "problem gamblers" from themselves. And they would have to define the limits of liability from "sore loser" or "devil-made-me-do- it" lawsuits, particularly class actions. Ditto between Nevada and 48 other states. And it is entirely possible that states or outside parties opposed to this expansion would use the Federal court system to secure injunctions against expanded I-gaming, claiming imminent and irreversible damage. States such as Hawaii and Utah, that don’t hold with gambling at all, could easily gum up the works by demanding that the procedures in software to exclude underage and unauthorized bettors measure up to a level of perfection which is unattainable as a practical matter.

So while it is true that Nevada licensees such as Harrah’s are all for expanding into cyberspace, it is not at all clear that there is any particular advantage there for Nevada itself. The current state of affairs is plenty profitable for them, and the expansion into online does not hold irresistible attractions -- after all, the entire worldwide market for I-gaming totals $12 billion or so, and Nevada alone can match that all by itself [see footnote 2. -Ed.].

The study that UNLV has been commissioned to do, however, allows Nevada to defer consideration of this question until the study is done. I do not anticipate any pressure for a quick report.

The prime candidates for the expansion of I-gaming in this country are large, populous states who run perennial deficits, such as California, New Jersey, New York, Ohio or Texas [see footnote 3. -Ed.].

The most probable I-gaming format would be online poker rooms, since poker already enjoys a semi-privileged status as an All-American game.

Even if the Wire Act does cover all Internet gambling, as the U.S. Justice Department doggedly and wrongly insists, there is nothing to prevent a state from licensing Internet gaming within its own borders, again provided the clientele is restricted to people located inside those borders. Twenty-nine states already use Internet-based horse gambling, three permit Web-based subscriptions to their state lotteries, and interest from other states is only growing. Although the DOJ has pronounced all Internet gambling to be illegal, there is no statutory nor case law support for that extraordinary position. And while a few showpiece raids and arrests have been made against vulnerable foreign companies, it is most unlikely that the DOJ will order state-sponsored online gambling shut down. And after the next election, there may well be a new set of bosses in Washington, D.C., who do not share the current fetish for suppressing I- gaming at all costs.

Driven by the continual need for increased revenues, the states will continue to move their gambling online, a few states and a few games at a time, with or without the federal government’s approval. This don’t-ask-don’t-tell standard was in place during the Clinton years, and it would be easy to let it return, UIGEA notwithstanding. I predict that just as happened with state lotteries in the twentieth century, Internet gambling will eventually become so widespread as to be the new norm. And just as the states found it more profitable to pool their lotteries into cross-country giant events such as Powerball and Megamillions, they will find a way to combine their poker rooms, blackjack tables, and so on.

Two steps forward, one step back, and big jumps to either side, we continue to stumble boldly into the future.

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