The question of how to best regulate and oversee sports wagering is a key topic that state and tribal gaming regulators are dealing with as sports wagering becomes more prevalent across the United States.
In 2018, the United States Supreme Court found that the Professional and Amateur Sports Protection Act (PASPA) was unconstitutional. Since then, numerous states have taken legislative action to authorize the activity on an intrastate basis. Over the years, as casino gaming proliferated in the U.S., new jurisdictions generally had many different regulatory models to look at in developing their approaches. With sports wagering, however, most of the new states are looking to Nevada for guidance, as it’s the only domestic jurisdiction with experience in the area.
As states offer sports wagering, there are numerous common regulatory policy issues that need to be addressed, either through legislation or by the adoption of regulations, including:
- How regulators will approach integrity issues
- Who will operate sportsbooks
- Licensing of service providers
- Whether mobile or online wagering will be offered and if so, whether accounts will be allowed to be set up online
- Whether cash reserve requirements will be put in place
- Whether collegiate sports wagers will be permitted, and if so, whether local colleges will be excluded
Most jurisdictions that have allowed sports wagering have established minimum internal control standards for operators to follow and have required publication by the operators of detailed house rules. This article will describe the approach of jurisdictions that currently have permitted sports wagering regarding these topics, focusing on overall concepts and licensing requirements applicable both to sportsbook operators and service providers.
Integrity
Uniformly, gaming regulators require operators to monitor and report any suspicious activities, and to provide notice to the regulators in the event any action is to be taken. It’s also common to require that any suspicious information is forwarded to all other sports wagering operators. This is not illogical, as the operators have the most access to unusual betting activity, as well as a vested interest in ensuring that games are not unduly influenced.
Coalitions such as the Sports Wagering Integrity Monitoring Association (SWIMA) have moved to the forefront, providing operators with a collaborative entity among operators intended to identify and notify sportsbooks of illegal or suspicious betting activities before the games are played, thereby allowing operators to remove certain games or wagers from being bet upon. SWIMA has emerged as the industry leader. Its members include the majority of the major sports betting operators in the industry, and members fully fund its operations.
SWIMA is modeled after the ESSA (Sports Betting Integrity), a European sports integrity monitoring association that has successfully operated in betting markets across Europe for many years. SWIMA members must pledge to report any unusual betting activity into the proprietary platform. It then must send out an alert that a member has reported suspicious activity, with members also pledging to respond to the alert within two hours, notifying SWIMA if the operator offers that event and if it, too, experienced unusual activity.
SWIMA then determines whether regulators should be notified. If so, it contacts all sports wagering regulators in the U.S., informing them of the unusual activity so they can decide what action, if any, to take.
George Rover, chief integrity officer for SWIMA, notes, “I do think that regulators welcome having SWIMA screen out what is worth hearing about and are comfortable with SWIMA sorting it out.”
Who Will Operate the Sportsbook?
A key question any state needs to resolve is who will operate the sportsbook. Some states have existing casinos offering such wagers (retail and sometimes mobile). Some run sports wagering through state lotteries (retail and sometimes mobile). Others have authorized both existing casinos and other providers to offer sports wagering.
Many jurisdictions with online wagering have allowed operators to have multiple “skins” that allow the operator to utilize different brands in making the offerings to customers, and many operators work with service providers to manage the sportsbook through such skins. Yet others rely on service providers to provide key data and operational advice while keeping the operational management in-house.
Licensing of Service Providers
Potential service providers to the casino industry may be somewhat surprised by the differences between jurisdictions when it comes to licensing matters. As those with experience in supplying the casino gaming industry in North America can attest, although there are some common focuses of gaming regulatory bodies when it comes to licensing, each jurisdiction tends to take its own specific approach.
Brian Ohorilko, administrator of the Iowa Racing and Gaming Commission, notes, “Licensing is somewhat complicated, and it really depends on the specific relationship between the company and the casino property.”
Service providers may also be surprised to discover that some jurisdictions may require a greater level of information disclosure and may also require individual employee licensure. Such providers will want to develop a plan to meet the unique regulatory requirements in an organized and efficient matter that will allow them to get to market quickly.
Jurisdictional Rules or Regulations
Many of the states that have legalized sports wagering have chosen the model of Nevada’s experienced regulatory system. Nevada has a separate and distinct chapter in its rules governing sports wagering. Some of the states that have authorized sports wagering have either copied completely or copied in substance the Nevada regulations governing sports wagers (e.g., Arkansas and Mississippi).
Other states have chosen to adopt their own unique regulations. Examples include New York, Pennsylvania and New Jersey, and states such as Delaware and Rhode Island that run and/or regulate sports wagering through their lottery agencies.
Mobile Wagering
For the purposes of this article, mobile wagering is considered wagering anywhere within a state, as opposed to wagering that may be permitted only on casino premises. As of September 13, there’s an even mix of states that accept mobile wagering versus requiring patrons to physically visit casinos to place sports wagers. Indiana, Iowa, Nevada, New Jersey, Pennsylvania, Rhode Island and West Virginia all permit (or will permit) mobile sports wagering. Arkansas, Delaware, Mississippi, New York and Washington, D.C. do not currently have live mobile sports wagering.
In all states permitting mobile wagering, geofencing technology is required to verify that customers are located within the boundaries of each state when placing their wagers. In most states, geofencing service providers will need to submit to licensing.
Lindsay Slader, vice president of regulatory affairs for GeoComply, the leading geofencing provider in the U.S. iGaming market, notes, “You need to have a very robust, technology-driven solution for geofencing, utilizing technology that has been rigorously tested and vetted, by a government or third-party testing laboratory.”
New Jersey stands poised to be the biggest player in the mobile wagering marketplace, due in part to the limited number of competing states, but perhaps more so due to the fact that New Jersey’s population is among the largest of those states that have authorized sports wagering—and is also located conveniently located near both New York and Pennsylvania.
In fact, New Jersey’s monthly handle for both May and July of this year exceeded Nevada’s, despite New Jersey’s sports wagering industry only being a little more than one year old. New Jersey also has a large proportion of its wagers placed via mobile betting, with roughly 80 percent of wagers being online for year-to-date through July 2019.
Account Setup
States have differed in their regulations relating to setting up accounts for mobile or online wagering. One approach is to require customers to physically visit casinos to prove their identity and age before being allowed to place mobile wagers. States that have such requirements include Iowa. In contrast, Indiana, New Jersey, Nevada, Pennsylvania, Washington, D.C. and West Virginia do not require customers to set up accounts in person.
Cash Reserves
Different states have established a wide variety of minimum reserve requirements. In Indiana, operators must have a minimum $500,000 reserve. Both New Jersey and West Virginia also require a $500,000 reserve, or the amount necessary to cover the outstanding sports pool and online sports pool liability, whichever is greater.
In Arkansas, Nevada and Washington, D.C., operators have a complicated reserve formula, requiring operators to have a minimum reserve no less than the greater of $25,000 or the sum of all amounts held for patron accounts, amounts accepted as wagers on contingencies whose outcomes have not been determined, and amounts owed but unpaid on winning wagers. Mississippi has the same requirements, except it set the fixed amount at $50,000 instead of $25,000.
Iowa and New York require a reserve in the amount necessary to cover the outstanding sports wagering liability. In contrast, neither Delaware, Pennsylvania nor Rhode Island has promulgated a required minimum reserve amount.
Collegiate Sports and Home Teams
One interesting aspect of the varying regulations relates to bets on collegiate sports within the respective states.
Many states have chosen to prohibit wagers on “hometown” college sports teams or to impose additional restrictions on wagers on those teams. For example, in Arkansas, a customer must physically place a wager on Arkansas collegiate teams at the casino; mobile wagers on Arkansas collegiate teams are forbidden.
In Delaware, New York, Rhode Island and Washington, D.C., customers cannot wager at all on any college sports involving the home state (or district), collegiate teams or on collegiate games taking place in their respective states (or district). New Jersey has a similar prohibition, although it is waived in instances of multi-state collegiate tournaments as long as at least one site is outside the state of New Jersey.
By contrast, states such as Indiana, Iowa, Mississippi, Nevada, Pennsylvania and West Virginia have no restrictions on collegiate wagering. They do recognize certain issues inherent in college sports, however. Alan Godfrey, executive director of the Mississippi Gaming Commission, notes, “We have met with the athletic directors and institutes of higher learner and have listened to their concerns. We have accommodated them as best we could. One of the things they were concerned about were prop bets that individual players could affect. Accordingly, I wrote a letter to the casinos prohibiting them from offering prop bets.”
In addition, most jurisdictions prohibit participants in athletic events from placing wagers. In most instances, operators are prohibited from accepting wagers from players or coaches that they know or reasonably should know are participants. The operators are required to take reasonable steps to prevent the circumvention of the requirement. New Jersey goes further, requiring the registration of any employees of sports governing bodies or its member teams prior to allowing such employee to place any sports wagers.
Minimum Internal Controls
For internal controls, states have taken four different approaches:
- Imposing detailed specific requirements for minimum internal controls (“MICS”) that must be approved
- Requiring operators to develop and submit internal controls for approval but only provide broad categories of issues that must be addressed
- Requiring operators to develop and submit internal controls for approval without requiring any specific categories to be addressed
- Not requiring any specific sports wagering internal controls
Nevada has promulgated specific MICS relating to racing and sports wagering. The MICS are very detailed in their requirements, and outline required compliance for virtually all aspects of a sports wagering operation, with the MICS rules running nearly 20 pages. States across the U.S. have either adopted the Nevada approach directly or a hybrid of the approach, all with the goal of ensuring integrity.
House Rules
The predominant practice has been to allow each operator to develop its own house rules. The regulations governing house rules typically require that they address the amounts to be paid on winning wagers, the effect of schedule changes, the redemption period for winning tickets and the method of noticing odds or line changes to patrons, and state that wagers may be accepted at other than the currently posted terms if that applies. Typically, the house rules must be submitted to the regulator for approval before adoption or amendment.
New Jersey’s rules add requirements that the rules contain the method of contacting the operator for questions and complaints, a description of prohibited sports pool participants, a statement regarding the policy for limiting the maximum amount that a patron can win on any particular wager, and the method of funding a sports wager.
As both Delaware and Rhode Island run their sports wagering through the lottery, the house rules regulation takes a different approach. Instead of granting authority to its operators to create house rules, the lottery has promulgated house rules that each casino must post and follow.
The absence of specific requirements in regulations doesn’t mean regulators take a passive role in reviewing and denying any inappropriate house rules, however. Some states, such as Iowa, have chosen to streamline the process, to get sports wagering up and running quickly. Ohorilko, administrator of the Iowa Racing and Gaming Commission, notes, “In order to launch fairly quickly, some things were ‘tabled’ to be addressed alter. Specifically, many wager offerings were not permitted upon launch and will be reviewed when everything settles.”
State regulators take compliance seriously. In Mississippi, for example, the gaming commission recently issued a disciplinary complaint and fine against a vendor who permitted wagering on a type of event that had not been approved by the commissioners.
Tribal Sports Wagering Considerations
Like commercial casinos, tribal casinos are also moving forward with sports wagering plans. The first consideration in tribal casinos offering sports wagering are the terms of existing tribal-state compacts and whether amendments are necessary to permit the tribal casino to offer sports wagering.
From the federal level, as sports wagering is a Class III game, NIGC oversight is limited, but approval may be necessary for potential management agreements with third-party vendors.
Depending on the terms of a compact, the local regulator may be the state gaming commission, a tribal gaming commission or both. In either case, education of the regulator regarding internal controls relating to gaming and sports wagering may be necessary. RSM US, LLP is an independent audit, tax and consulting firm that has worked with multiple tribal councils and gaming commissions on developing internal controls relating to gaming and sports wagering. Theresa Merlino, office managing partner and consulting principal of the Las Vegas office of RSM US, notes that changing technology and customer demands require a different operator approach to internal controls.
“It requires the operators to think about how they are going to meet the control objective, which is different from saying this is what they say they want, so we’re going to write it into our regs—now they’re having to think about how we meet this obligation or standard,” she says.
Sports wagering is a new activity throughout much of the country. The state of Nevada offers an ideal model for jurisdictions to follow to assure a comprehensive regulatory approach to the activity, with New Jersey being a good model for mobile wagering. One area where there are likely to be significant jurisdictional differences will be in the area of the licensing of service providers to the operators. Service providers and operators looking to start offering sportsbooks in new jurisdictions should seek to become aware of the licensing and regulatory framework and structure that is likely to be applied to their business.
In places where sports wagering has been newly authorized, there is typically heavy pressure to allow wagering as quickly as possible. Service providers that are prepared to quickly go through the individual state’s licensing and/or registration process will definitely have a leg up on the competition.
