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Internet Gaming Comeback?

Two bills likely to move through Congress by next year have significant similarities.

Internet Gaming Comeback?

The internet gaming industry may finally bring the U.S. back into the fold next year.

In 2009, two very significant interactive gaming bills were introduced in Congress. On May 6, Rep. Barney Frank (DMass.) introduced HR 2267 in the House of Representatives. Titled “The Internet Gambling Regulation Consumer Protection and Enforcement Act of 2009,” the bill currently has 54 co-sponsors. On August 6, Senator Robert Menendez (D-N.J.) introduced S 1597, titled the “Internet Poker and Games of Skill Regulation, Consumer Protection and Enforcement Act of 2009.”
This bill presently has no co-sponsors.

The major difference between the two bills is that the Frank bill would license and regulate all internet gambling, except for sports betting, while the Menendez bill would license only non-banking interactive poker and other skill games, as well as legalizing interactive interstate horse racing “without need for a license pursuant” to the Menendez bill.

The Frank and Menendez bills contain remarkably similar provisions. Both delegate enforcement responsibility to the U.S. Secretary of the Treasury, to develop regulations and a licensing framework within 180 days from passage to ensure that all licensees of internet gaming facilities and games of skill 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 and
game of skill operators.

The proposed legislation would require all applicants submit, inter alia: “(A) criminal and credit history of the applicant (and any senior officers); (B) financial statements of the applicant; (C) documentation showing the corporate structure of the applicant and all related businesses and affiliates; and (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 or prevent underage and problem gamblers and (ii) ensure games are being operated fairly.

Security Provisions
Just as required in most gaming jurisdictions, compliance with the above requirements would require a thorough background check not only of the applicant, but also of 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: “is a person of good character, honesty and integrity,” “has or guarantees acquisition of adequate business competence and experience” in the operation of internet gambling and games of skill facilities, and “has or will obtain sufficient financing for the nature of the proposed operation and from a suitable source.”

Any conviction of an offense punishable by more than one-year imprisonment, providing false information, or being delinquent in tax payments will automatically result in a determination of unsuitability.

Both bills would mandate the secretary to require that the licensee has established mechanisms to ensure that all bettors are logging in from a jurisdiction that does not prohibit internet gambling, that all gambling taxes are collected, and that there are appropriate safeguards to prevent “fraud, money laundering, and terroristic finance,” and appropriate safeguards to prevent compulsive internet gambling. The secretary will 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.

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.”

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.

Responsible Gaming
Portions of each bill are devoted to provisions mandating responsible gambling procedures, including a “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 of any winnings should the gambler ignore the self-exclusion. The Menendez bill would also require licensed operators “to prevent persons” on the self-excluded list from initiating wagers. It also authorized a study for the identification, prevention and treatment of problem gambling, and the conduct of a national campaign on problem gambling awareness issues (Title III).

Both bills may alleviate concerns of those states or tribes that do not want their residents to participate in U.S.-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 either bill.

There are certain differences between the bills. While the Frank bill is silent on taxation, its companion bill “The Internet Gambling Regulatory and Tax Enforcement Act of 2009” (HR 2268), introduced by Rep. Jim McDermott of Washington, 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 must also establish procedures for the reporting and taxing of customer winnings.

The Menendez bill (Title II, Internet Games of Skill Tax Provisions) would amend the Internal Revenue Code of 1986 to require a 10 percent gaming licensing fee on a “licensee’s internet gaming deposited funds for a calendar month.” The amount would be split between the federal government and either the state or tribal government of the player. The Menendez bill also imposes huge tax penalties on an unlicensed operator, and a withholding tax on nonresident aliens.

The Menendez bill also imposes a 21-year age requirement, while the Frank bill defers to the legal age “as defined by state or tribal law.” While both bills permit civil monetary penalties and mandate user fees on licensed operators, the Frank bill makes both assessments “unappealable,” while the Menendez bill permits judicial review of both the amount of the user fee and the penalty.

More importantly perhaps, the Menendez bill specifically states that an online skill gaming operator who had accepted U.S. players could not be denied a license for that reason, and could continue to accept customers while the application was pending.

The Frank bill would deny a license to a gaming applicant if the applicant was convicted of an offense with a one-year imprisonment penalty, but is unclear as to the licensing prospects of a non-sports gaming operator who accepted U.S. customers.

The Menendez bill, unlike the Frank bill, would not defer to a state or tribal gaming determination on suitability unless the regulations were “no less stringent” than those that would be established by the secretary.

Finally, the Menendez bill would require the director of the Financial Crime Enforcement Network (FinCen) to draft a list of unlawful internet gambling enterprises, including the names of owners and financial agents (Sec. 103). Should the director include an entity, it would then be the burden of the operator to establish “by a preponderance of the evidence that such a person is not an unlawful internet gambling enterprise” before the Federal District Court for the District of Columbia.

There is consensus that the Frank bill will be the first to move through Congress, but probably not until 2010. It is uncertain whether the Menendez bill will divide the online gambling licensing supporters, since the major hurdle seems to be proving that internet gaming can ensure the location of the player and verify the age requirementthrough a “know your customer” policy. These verification procedures should be the same for all interactive gambling. 

Frank Catania is president and a principal in Catania Consulting Group, Inc. of New Jersey, a consulting firm with extensive experience in gaming issues. An attorney, he is of counsel to Catania & Associates, Law Offices, L.L.C. Catania served as assistant attorney general and director of the New Jersey Division of Gaming Enforcement; vice president and compliance officer, Players International; deputy speaker of the New Jersey General Assembly; partner in the law firm of Catania and Harrington; and counsel to Catania & Associates, LLC.

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