Complete Compliance

Online gaming became legal in New Jersey in 2013. It quickly became apparent that existing rules and regulations covering land-based gaming needed to be updated and adjusted.

And then with the launch of legalized sports betting in 2018 and subsequent spread to more than 40 states and jurisdictions across the United States and its territories, the regulatory models in all those regions were given a wake-up call.

For the in-house compliance officers and the outside attorneys participating in this process, it’s been a long, yet often satisfying, road as cooperation between them and the regulators overseeing this process has, in most cases, provided a transparent process that stresses integrity.

But the road wasn’t always so smooth. First, trust had to be established.

Changing Fortunes

Tommaso Di Chio is the chief legal and compliance officer for Bragg Gaming Group, an industry supplier of systems and content. He says the goals always remained the same.

“The overriding themes of compliance, adhering to a specific set of rules to protect both your customers and those businesses operating in the sector, haven’t changed with the advent of online sports betting and iGaming,” he says.

“What has changed is the way that those standards are enforced, and the environment itself. Online gambling is an environment where millions of players interact with an operator/supplier in an environment where there are millions of decisions and transactions taking place, often in real time. This sort of environment necessitates a need to be compliant, to effectively be breach-proof, an environment companies like Bragg are working towards and are achieving, on balance.”

Stephen Schrier, a partner and co-chair of BlankRome’s Gaming Group, says no one in the U.S. was up to speed before 2013, when New Jersey first launched iGaming.

“First, online gaming provides significantly more information about customers,” he says. “For compliance, that can be both a blessing and a curse. It is a blessing because the information necessary for compliance to do its job is readily available.

“It can be a curse, however, if the system or the staff are not able to properly process that additional information because a company may be charged with knowledge of what is in its database (even if not processed or reviewed) and fail to act on that information as required.

“Second, the spread of online sports betting and iGaming presents challenges because of the different rules and requirements in different jurisdictions. Even if compliance staff are well-versed in all of the different rules, it is easy to mix them up when working at a fast pace, and difficult to stay on top of the traders, risk managers, game developers, customer service teams and marketers who may design a ‘one size fits all’ betting line, game, promotion, or responsible gaming program.”

Tommy Shepherd is a partner with the Mississippi branch of Jones Walker LLP. He says iGaming and online sports betting took technology to the next level. “There are always advances in technology in gaming, but for these forms of gaming, it’s all technology and it’s very complicated.”

Heidi McNeil Staudenmaier, a senior partner with Phoenix-based Snell & Wilmer LLP, believes it’s just another technology improvement that comes with these forms of gaming.

“From my perspective,” she explains, “the general regulatory environment has not changed; however, with the advent of online sports betting and iGaming, there are further areas of regulatory oversight required and many of the regulatory authorities have had to increase staffing, increase training and provide related oversight to ensure these new areas are adequately covered from a regulatory standpoint.”

Education First

With those complications, it’s crucial that regulators understand the issues if not the technology. Robert Russell is the chief gaming analyst with Michigan’s RMC Legal. He believes some of the issues are resolved with outside help.

“The majority of regulators apply testing standards by independent testing labs such as GLI and BMM, and as standards evolve and are improved it helps to narrow complications,” he explains.

“The issues that can be challenging are when a standard is not met in a live gaming setting—how best to resolve the issue to ensure further compliance, while not unfairly penalizing an operator? Getting both the regulators and company advisers familiar with the unique differences in the online gaming world and opening up lines of communication is key.”

Schrier says no one in the U.S. was up to speed before 2013.

“It was all new,” he says. “Everyone in the U.S. had to learn from the companies and regulators abroad. The iGaming states got a head start, and learned by trial and error how the software, geolocation, player account management systems and platforms operated.

“Their labs were trained or relied on GLI, which had a wealth of experience in foreign jurisdictions. In 2018, a whole new slate of state regulators started to launch sports betting. We, as legal counsel, were required to understand enough to explain how these technologies fit into the regulatory scheme of each state.”

Di Chio says the complicated technology makes education difficult.

“Education can be challenging, in respect of what we as individuals working in the compliance sector focus on,” he says. “That is where inviting regulatory officials to speak at the various industry trade shows and conferences can be so beneficial, in that it allows us operators and suppliers to understand their points of view, how they work and vice versa.”

Developing healthy relationships with regulators is crucial.

“Fostering open dialogue with your regulatory officials and communicating in a way which is both honest and open are a key part of the relationship,” Di Chio says. “Maintaining regular communication channels with them beyond just the standard regulatory reporting responsibilities is vital. By doing this, you can more greatly anticipate changes to regulation, provide your insights to the regulator concerned and make a valuable contribution to the overriding debate.”

Shepherd uses the “golden rule” when dealing with regulators.

“Treat them as you would wish to be treated if the roles were reversed,” he says. “Try to make their job easier—use diagrams to facilitate understanding of transactions, prepare descriptions of the transactions that can easily be copied and pasted into investigative reports, etc. Do the research and analysis before you meet with the regulators.”

“It is very important to educate regulators on the technology and as noted, many operators are proactive in their communications with the regulators to ensure that there is a ‘team environment’ as opposed to an ‘us vs. them’ attitude,” says Staudenmaier.

 

Revolving Regulators

Most regulators have set terms and are often replaced by new officials who likely have little to no experience in gaming regulation, land-based or online. Shepherd has one reaction when a trusted regulator is replaced by an inexperienced one.

“Panic!” he jokes. “This is why it is so important to bring multiple parties from a regulatory body into the discussion regarding a client issue. Then you have the ability to reach a consensus decision instead of only a single party having been involved in the discussion and the result.

“It is also important to create a written record of the dialogue and the decision. Memories fade over time, and having a written record regarding the confirmation of a decision helps.”

Scott Sherer, a shareholder with the Reno, Nevada branch of Brownstein, says it can be very frustrating and often adversarial when a regulator is replaced.

“With most regulators, the education process has to start over,” he explains. “You have to be patient and be willing to put in the work to help a new regulator understand your company and your products.

“Even more importantly, you need to be respectful. A new regulator has been put in that position for a reason and brings their own strengths to the position. Be willing to learn and understand those strengths and, where necessary, be prepared to help compensate for the weaknesses we all have.

“Unfortunately, some regulators see themselves solely as adversaries to the industry and resist cooperative efforts. In those cases, you may need to rely on the law to show that you are in compliance, whether it is with that particular regulator, other members of a regulatory body or, if necessary, the courts.”

Russell believes that the answer is to foster a network of relationships.

“Much like the established executive networks of the casino industry, the regulatory landscape is similar,” he says. “Often regulators are promoted within an agency or transfer to new jurisdictions. This ensures the continuation of knowledge, and therefore relationship management is key with not only senior agency staff but throughout an agency.”

Multiple Rules & Regs

International companies seeking to do business in the U.S. got a shock when it was explained to them the depths of the licensing investigations and the individual jurisdictions, which usually have slightly or widely different regs. Di Chio disputes that view, however.

“The beauty of having experienced the growth of iGaming across Europe is that we as a business have already grown accustomed to different types of regulatory approaches across our operational markets,” he says. “So, in effect, we treat each individual state as its own separate regulated market with different standards, regulations and responsibilities.

“At the same time, we’ve encouraged dialogue between regulators across these states and maintained open lines of communication with them. Until the U.S. market regulation is harmonized and consistent across all the states, this is the approach we’ll continue to take.”

Staudenmaier says it’s not only commercial jurisdictions that operators and suppliers must consider.

“It is incumbent on the operator to do their homework for each jurisdiction,” she says, “including tribal jurisdictions. Each tribal jurisdiction, like states, is unique in terms of its regulatory requirements. Conducting careful due diligence on the regulatory requirements is essential. This can be done by engaging outside counsel in each jurisdiction, or targeting specific jurisdictions for initial market entry.”

Educating your client on the U.S. regulatory landscape is crucial, according to Scherer.

“You try to tell them and prepare them up front,” he says, “but it is natural for companies and their executives to assume that because they have been licensed in multiple jurisdictions, they will have no trouble getting licensed in the next jurisdiction. All of us tend to overlook our weaknesses, and if we fail to understand how the concerns or approaches of a particular jurisdiction might apply to those weaknesses and deal with them up front, we do so at our peril.”

Shepherd says a gentle suggestion that an issue could be handled more effectively sometimes works.

“Depending upon the jurisdiction and the issue, I sometimes will say to jurisdiction X that jurisdiction Y handled it a certain way, just to give jurisdiction X an idea that what we are proposing is not out of the mainstream of regulatory thought,” he explains. “That becomes particularly helpful if the example you are providing is Nevada or another major jurisdiction.”

Foreign companies that resist the regulatory structure in the U.S. often need to be given a dose of reality.

“You have to be frank on the front end and mold expectations,” says Shepherd. “I had a European client undergoing a licensing investigation in the U.S. The general counsel objected to certain information requests from the regulators and wanted to push back hard. We had to have that difficult discussion: Do you want a license or not? If so, you need to provide the information or offer a reasonable alternative.”

Russell says international companies entering the U.S. market would be smart to work with a law firm that has relationships in many jurisdictions, saving time and money.

“There are many firms across the U.S., such as Brownstein, Bose McKinney, etc., that have navigated multi-jurisdictional licensing process,” he says. “It is my recommendation that an in-house counsel find a centralized law firm to work with and have them coordinate with local state advisers when needed. This approach will ensure good representation without duplicate efforts and will reduce costs.”

For companies considering entering the U.S. market, Scherer has some suggestions.

“Understand how your products and services fit in the market,” he recommends. “Really learn the applicable rules, consulting knowledgeable outside experts where necessary, and perform a gap analysis to determine what it is going to take to get your system or methodology approved in each jurisdiction. Understand the time it will take to get licensed and get your products approved.

“If time and immediate revenue are critical, seek those jurisdictions where you can get to market sooner, but understand that you will need to change your compliance approach as you move from markets with lower regulatory hurdles to larger, more well-established markets with higher regulatory expectations. If you have adequate capitalization and time, consider starting in those larger, more well-established markets, creating compliance processes that will serve you well wherever you go in the United States.” Schrier concurs.

“When new clients contact us about U.S. opportunities, we spend a substantial amount of time understanding their product, and their role, whether that is sports, iGaming, esports, sweeps or lottery,” he says. “We talk through their business plan and relationships they will form with operators, regulators, suppliers.

“We also create a plan for their potential licensing needs, evaluating whether they have the most efficient corporate structure for licensing, what their organization looks like, and who are their UBOs (ultimate beneficial owner). Then we review the plan of attack for the U.S. launch. The goal is to comply with U.S. requirements with the least amount of persons and entities having to obtain licensing.

“One piece of advice we always give at the start is for the foreign company to let us meet with its UBOs and directors to explain U.S. licensing, and why they will need to be a part of the disclosure. Also to explain the confidentiality provisions that govern this information.”

Sometimes the process can be expedited by using expert outside counsel, Shepherd says. “The first thing is for your U.S. legal counsel to understand the product or service to determine if licensing is required in the targeted jurisdictions,” he says. “The next step is to match up target customers and the jurisdictions in which they are licensed to determine the jurisdictions where the new entrant will make the most impact. It does no good to get a license in a jurisdiction where you won’t make any money because you have no customers or you cannot compete effectively. It is important to evaluate the costs of entry into the market and timing as compared to the potential rewards.”

Di Chio has seen it all, so he has some strong suggestions on an entrance to the U.S.

“Develop an understanding of both the U.S. market as a whole and the individual states which have chosen to regulate iGaming and sports betting,” he says. “Understand the operators which are already in the market and their strategies for gaining market share. Then understand the U.S. player, their habits, what they like and what they don’t like.

“That’s the beginning of the framework for the entry plan. You must also engage with everyone you can, be it land-based operators, regulators or suppliers catering to the U.S. market. If you are already working with them (operators and suppliers) in other markets, then you have the foundation and the opportunity to broker the expansion of those relationships to the U.S. market, to the benefit of both parties.”

Staudenmaier says new companies coming into the U.S. need to understand every aspect of the market and the compliance landscape.

“Do your homework!” she insists. “Don’t try to enter every market, whether it’s a state or tribal jurisdiction. Start with a targeted approach as to which jurisdictions make the most sense from an economic perspective. Once the company has determined its target markets, engage competent outside counsel to assist with the regulatory requirements.”

Merger Mania

The prospects of success in the U.S. for operators and suppliers alike sometimes are determined by business decisions that would include the purchase of, or merger with, other companies. That provides more compliance issues for both parties.

Schrier believes there are always issues with M&A activity.

“Clients from foreign countries find the M&A activity to be challenging,” he says. “Often, the parties focus purely on the business terms and give little thought to the regulatory implications. Because gaming licenses are not transferable, every state regulator has its own rules on how a change of ownership must be approved, or documented.

“Deals are done ‘subject to regulatory approval’ but that means a variety of things and typically months of individual discussions and filings with all the regulators that oversee the companies involved. Of course, in the deal itself, the regulatory history of compliance by the seller is critical to the buyer, so they do not inherit a compliance nightmare. Coordinating the deal with regulators adds substantial time and effort (and cost) to the transaction because of these factors.”

Di Chio’s company, Bragg Gaming, has used M&A to significantly grow the organization.

“M&A activity is a natural part of any industry; it’s just what occurs in the normal course of business,” he explains. “Addressing the demands it places on compliance, there are the obvious moving parts of adhering to all competition-based regulations, as well as dealing with things like the transfer of operational licenses, and any certification concerns which might arise.

“For example, when we acquired U.S.-based Wild Streak Gaming  in 2021 and Spin Games in 2022, we had to craft a compliance program which involved integrating complex software solutions across multiple regulatory jurisdictions. This required extensive coordination to ensure that operational licenses were aligned with local regulations in each market.

“It was a process which took time to complete, but was ultimately beneficial as it allowed us to significantly bolster our global content development and increase our U.S. content delivery and distribution. I wouldn’t necessarily say M&A increases the compliance complications per se, primarily because any iGaming company should be naturally aware of what it is to remain compliant in any given market. This just adds a new dimension to the process.”

Russell states that M&A has always been a part of the gaming industry—land-based or online—so if companies understand how it works, there should be no problems.

“There is a well-established process for navigating M&A activity in the gaming industry,” he says. “Ensuring the business lawyers working on a deal are communicating with gaming advisers is key to ensure complications are minimized.  Nine times out of 10, when licensing complications occur is when gaming advisers are not brought in early in the transaction to ensure what is proposed from a business standpoint can meet licensing requirements.” Shepherd says the process can sometimes seem chaotic.

“M&A transactions, especially in the manufacturing/distributor and sports wagering sectors, create much angst regarding compliance with licensing and regulatory requirements,” he says. “Typically, the transaction documents call for all applications for regulatory approvals to be filed within a certain number of days of execution of the agreement.

“Then there is a mad flurry of activity to determine the persons/entities required by the regulators to file applications and to gather the information necessary to complete the applications (some states use physical paper applications while others can only be completed using fields in online forms that are not flexible in accepting information).

“Different states have different ideas of what information is important and whether the information must be provided up front with the application forms or later during the investigation. Then you have to deal with the logistics of having busy people interrupt their days to execute multiple application forms in multiple states.”