Four more US states weigh up web gambling

You know the U.S. casino industry is hurting when the Bible Belt is willing to talk about online gaming.
Three attempts to open conservative, Deep South Mississippi to the Web have been tried, all three have failed. But the pending shutdown of Harrah’s Tunica, the largest casino in the north of the state, with the loss of 1,300 jobs, appears to have gotten everyone’s attention.

“There’s just too much supply in that market,” said John Payne, president of the Central Markets division of Caesars Entertainment, in explaining the company’s decision to close the property after 18 years of operation.
Tunica has seen gaming revenue shrink to $738 million last year from $1.2 billion in 2006.
“The Harrah’s has not been profitable for a while,” Payne said.
It’s a lament being heard in markets around the country. In January, Atlantic City’s Atlantic Club Casino Hotel shut its doors, a victim of intensifying competition in the Northeast, where Atlantic City flourished for years as the only game in town. Then the recession and a wave of legalizations across the Mid-Atlantic combined to gut revenues citywide by more than 40 percent since their peak in 2006.
Some 39 states have casino gambling of some kind, up from only two in 1988, and more sizable resorts are on the way in New York, Pennsylvania, Massachusetts and Maryland. Nationally, revenues were flat at $34 billion in 2013. Through February they had fallen for six straight months in the four largest Midwest markets: Indiana, Missouri, Illinois and Michigan. Even Las Vegas was down 12 percent through the early part of this year.
“The new reality of the gaming industry—or at least what has been the reality in recent years—is that more markets are becoming saturated and new competitors are increasingly cannibalizing their neighbors rather than growing the pie,” says Frank Fantini, an investment analyst and publisher of a series of widely read financial reports.
Gaming revenue in Mississippi fell 6 percent in 2013. That’s bad news for a state that relies on the industry for about 5 percent of its annual budget. The Legislature has responded by commissioning a blue ribbon panel to study the experiences of the three states—New Jersey, Nevada and Delaware—that have inaugurated online regulation. 

In Pennsylvania, which has grown since casinos were introduced in 2006 to become the second largest market in the country, largely at the expense of Atlantic City, an analysis by the Legislature’s Budget and Finance Committee is due for release on the “potential impact of online gaming on the gaming industry, including the impact online gaming may have on the Commonwealth’s tax revenues and employment at the Commonwealth’s casinos”.
Year on year, gaming revenue was down 1.4 percent in Pennsylvania in 2013 to $3.11 billion. Slot machine revenues fell in both January (-7%) and February (- 7.54%). Experts believe increased competition from neighboring New York, Maryland, Ohio and Delaware are taking a toll, and that has several lawmakers pushing for expansion to cover a growing state deficit. Gov. Tom Corbett wants to legalize keno and tavern gambling and expand the land-based market to fund part of his $30 billion spending plan for 2013-2014. 
In neighboring New York, Republican state Sen. John J. Bonacic has introduced a bill that would legalize online poker and allow for interstate compacts for sharing liquidity and revenues.
Discussions have resumed in Massachusetts on two bills introduced last year for expanding state lottery ticket sales to the Internet and authorize state-regulated online poker and blackjack.
Michigan has already moved in this direction and is slated to begin selling lottery tickets and offer lottery games online by the end of the year via a contract with Pollard Banknote Limited of Canada and Malta’s NeoGames. The deal is worth $23 million over the first four years, a period in which the state hopes to pocket $120 million in revenues for public education.
Michigan will join Illinois and Georgia as one of three states with an internet lottery.

The Feds are coming, and Vegas is worried

So how does a country like China, which strictly limits currency exports, fuel a gambling boom that has seen its tiny territory of Macau emerge in less than a decade as the largest casino market in the world by far, in revenue terms the size of seven Las Vegas Strips? It’s a question that has intrigued law enforcement agencies in the West for years, particularly those affiliated with the government of the United States, where Chinese money has been rolling into Las Vegas’ private baccarat salons by the train load.

Baccarat, the game of choice for China’s high rollers, first overtook blackjack as the highest-grossing table game on the Strip in 2009, and it has grown to the point where it now accounts for more than 40 percent of total Strip table win—43 percent last year at the 17 largest casinos by gaming revenue—good for $1.58 billion in 2013. Given that the game comprises on average all of 9 percent of total table inventory, it’s clear that some really big bets are being laid down. 

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) wants to know where they’re coming from, and the implications of that are sending shudders through the industry.
“This is a serious issue that could radically alter the way that casinos do business,” as Geoff Freeman, president of the American Gaming Association, the industry’s national lobbying arm, put it recently.
Analysts attribute the game’s sudden impact to the success of the three Nevada licensees—Las Vegas Sands, MGM Resorts International and Wynn Resorts—whose Macau subsidiaries now generate a sizable portion of their corporate profits. 
But it hasn’t come without a price. Las Vegas Sands, which last year derived 70 percent of its gaming revenue and 61 percent of its EBITDA from its Sands China subsidiary—90.6 percent and 90 percent, respectively, counting the company’s Singapore resort—has been under investigation by the U.S. Justice Department and the U.S. Securities and Exchange Commission since 2011 in part in connection with its dealings in Macau. Last August, the company agreed to forfeit $47.4 million to the Justice Department to avoid criminal charges tied to cash transactions its Venetian/Palazzo resort complex on the Strip handled on behalf of one Zhenli Ye Gon, a high-rolling Chinese-Mexican businessman linked to international drug trafficking. 
In October, Caesars Entertainment, the largest operator in the U.S. by number of properties, reported that its Strip flagship, Caesars Palace, was being investigated by FinCEN for possible money-laundering violations.
Sands says it no longer allows customers to transfer funds internationally and limits the use of checks or money transfers from business accounts. It also restricts the amount of cash customers can withdraw from their casino accounts in a given day. And it has bulked up on former FBI agents, regulators and attorneys experienced in anti-money laundering law to help it monitor high-roller activity. 
FinCEN, however, wants more and is reported to be crafting rules that will require casinos to vet the sources of their high roller funds along the lines of the strict anti-money laundering requirements financial institutions must adhere to under the U.S. Bank Secrecy Act. Given that current law requires only that casinos report so-called suspicious transactions, this would indeed be radical, as Freeman suggests. Wealthy gamblers, every casino’s best-kept secret, will certainly resent the intrusion, and operators fear, not without justification, the whales will take their chips elsewhere—to places like Macau, where they can be assured there’ll be no questions asked.
Chinese law says its citizens aren’t allowed to take more than the equivalent of US$50,000 per year out of the country. Chinese companies can exchange yuan for foreign currencies, but only for approved business purposes, such as paying for imports or approved foreign investments.
The reality is something else entirely. Macau’s casinos raked in $45 billion last year, most of it from mainland Chinese gamblers. Through the first three months of 2014, gaming revenue was tracking just shy of $1 billion a week.
Data analyzed by The Wall Street Journal in 2012 suggested that in the 12 months through September of that year, about $225 billion flowed out of China, equal to about 3 percent of the nation’s economic output. 
The U.S.-China Economic Security Review Commission claims more than $200 billion is laundered through Macau every year, and while it “did not seek nor did it find evidence of wrongdoing by any U.S.-based casino company, either in Macau or in Las Vegas,” given the potential for terrorist financing from such massive leakage, the commission concluded in its annual report to Congress last fall “that the underlying questions about the integrity of operations in Macau bear further scrutiny by Congress. As part of this review, Congress should examine whether federal oversight and, potentially, regulation of the overseas activities of domestically licensed gaming enterprises is merited.”
VIP gambling is the locus of these concerns, a secretive world built on sprawling, more or less loosely organized junket syndicates comprised of thousands of agents and sub-agents who provide the high rollers, most of them from the mainland, who account for two-thirds of those casino billons. 
They operate the private rooms where it’s made, and they provide the credit that fuels it, which is how they circumvent Beijing’s currency limits, and as gambling debts are not legally enforceable in China, they perform the additional, and critical, function of collecting on the loans.
Last month’s conviction in a Hong Kong court of businessman and junket investor Carson Yeung for money laundering has shined a light on their activities, but it was with an eye on FinCEN—the Macau government having evinced little interest in the sector—that Sands China was reported recently to be stepping up scrutiny of its junket partners, a policy that could reduce the number of junkets willing to work with the company. 
The AGA, in the meantime, has put together a set of Bank Secrecy Act “best practices” which they’ve discussed with Treasury officials, and they’ve formed a task force composed of casino members and staff to try to head off the worst of what FinCEN’s new rules might contain.
“The AGA is dedicated to strengthening the gaming industry’s relationship with FinCEN and supporting their critical goal of protecting the United States,” Freeman said. “With our industry partners, we are also helping FinCEN to better understand the nuances of the gaming business and our commitment to compliance.”

Grey markets concern Gambling Commission

“In April 2012 it was reported that the UK Gambling Commission was in talks with its French counterpart ARJEL regarding a co-operation.
When the UK – which as Minister of State Smith says has a “strong history of being a leader in gambling provision, and [a] highly reputable regulatory environment” – is seeking advice and co-operation with France on the matter of gambling regulation, it is time for the sector to be worried. Just look at the state of the French internet gambling sector.”

Such was the concern GBGC’s director Lorien Pilling raised in the Interactive Gambling Report back in May 2012.
Any agreement between an EU country and the UK on gambling matters was unlikely to lead to a benefit for UK-facing operators.
And so it has come to pass.
As part of the new point of consumption licensing process, the UK Gambling Commission has asked those operators applying for a licence to list the countries where they trade. If that country contributes more than three percent of revenue then the application must be accompanied by a legal opinion that it is lawful to conduct internet gambling in that country. 

This explains the recent announcements by some operators that they were pulling out of a curious range of markets. William Hill, for example, said it March 2014 it was leaving more than 50 jurisdictions for “regulatory reasons”. The list included the likes of Algeria, Benin, Mongolia, and Togo.
But imagine the situation in which 20 licence applications are sent to the Gambling Commission and each trades in the same particular country that qualifies for a legal opinion. 
The Gambling Commission will no doubt note that there is a consistency amongst the opinions but what if three do not coincide with the others. What course of action will the Gambling Commission take?
Some say that the Gambling Commission will do nothing; they are merely causing operators to be aware of their social requirements.
But that leads to another question. Why collect data and do nothing with it when you have it? Could it be that once consistency has been established the Gambling Commission may change the regulations at a later date?
At school I was taught that trade was so important to the UK being an island in the northern hemisphere. We were told we had to export to survive because our climate was such that we were, in those days, not self sufficient in food. To pay for the food we had to sell our products abroad.
I would have thought that those seeking to bet in a strong gambling jurisdiction like the UK would have been a good thing, something that should be encouraged. It benefits the UK, the punter and the operator.
It brings forward the question whether there could be more to this than meet the eye. 
The UK Internet betting market is dynamic and ultra competitive. As the regulations stand, therefore, the Point of Consumption Tax will most probably be absorbed by the bookmakers so far as sports betting is concerned.
But remember – not everyone went offshore. Bet365 for example stayed in the UK, paid 15% gross profits tax on its betting activities and employed 2,345 staff. They intend to build a new office and add a further 500 jobs. Bet365 has done all of this and paid the tax. So its offer to customers is unlikely to change. They will remain competitive.
William Hill and Ladbrokes went offshore to Gibraltar. They have demanding institutional shareholders that require dividends and non executive directors who will not take even the slightest regulatory risk. Their competitive position is cramped by those limitations.
How will they compete with Bet365 without taking a hit on profits? They cannot. When that situation arises the only course of action is to change the competitive landscape. By restricting the likes of Bet365 and GVC – both strong in certain non-UK internet gambling markets – the balance is restored away from value to brand. 
When GPT was first mooted in the UK the then Customs and Excise said it was a deal that could be done on the basis that the betting companies returned from Gibraltar to the UK, and they did.
Would the Department of Culture Media and Sport (DCMS) and the UK Gambling Commission be tempted by another such deal with the likes of Hills and Ladbrokes along the lines of: you return from Gibraltar and we will restrict UK-licensed companies from taking bets from ‘grey’ areas?
In the short term it would be lauded as a success for Treasury: we have slammed a tax on the bookies and in return they have returned to the UK which will be good for jobs. But the punter will be worse off and that will encourage the drift towards illegal betting sites.

Horserace betting right, wrong

In George Osborne’s budget speech he announced his intention to extend the horserace betting levy to offshore licensed bookmakers, to look at wider levy reform and at introducing a ‘racing right’ to support the sport.

On hearing this, the rather ecstatic Paul Bittar from the British Horseracing Authority said:
“Today’s announcement by the Chancellor represents a major milestone in our efforts to secure the future finances of our industry.
For too long we have sought a funding mechanism which reflects the nature of the modern Racing and Betting industries. Today’s commitment brings us considerably closer to achieving this goal, and securing the future prosperity of one of the country’s leading sports and a major employer across the country.
We look forward to engaging positively in both consultation processes, on levy extension to offshore operators and wider levy reform or replacement, in the coming months.”
We have been here before. The only new element is that the statement from the Chancellor underlines the government’s commitment to be rid of the levy, where, on occasion, the Minister is asked to become the arbiter when the two sides cannot agree. Something governments hated because you cannot please everyone and normally end up pleasing no one. 

Governments can do more or less whatever they think fit but it is not unknown for change introduced by government to go horribly wrong. They are not right all of the time and I think they may be making a big mistake on granting to racing a right to bet.
First of all, let us look at the tortuous process that has taken place from the government’s original decision to where we are today: 
May 2001: following a Quinquennial Review carried at by the Home Office the government announced its intention to abolish the levy. The statutory mechanism was to be replaced by a commercial structure based on the British Horseracing Board selling database rights to bookmakers.
November 2004: The European Court of Justice ruled that the BHB had no protectable rights in its database. The first attempt to abolish the levy failed. 
January 2005: The Minister of Sport commissioned an independent review into the future funding of racing chaired by Lord Donoughue.
March 2006: the Minister agrees to retain the levy for the foreseeable future. It emerged that the problem with a commercial agreement would cause bookmakers to pay VAT on their payments to racing which would ultimately produce lower income for racing. There were also issues relating to competition law. 
2007/2008: Irreconcilable differences emerged between betting and racing. Racing’s product in the betting shop was in decline but racing wanted more than bookmakers were willing to pay. 
• Betting exchanges and internet bookmaking were growing and the margin which affected affordability deteriorated. The levy yield dropped from £93m to £75m. 
• A phase two report from Lord Donoughue identified three possible alternatives: 
1. A voluntary agreement between the parties 
2. A hybrid commercial/statutory arrangement 
3. Sale of pictures and other available rights
Lord Donoughue recommended option (3) 
• It was not adopted because of concerns of collective selling which would drive up the price bookmakers wanted to pay. 
• Not known to Donoughue at the time, a number of racecourses had grouped together to form AMRAC and Turf TV was born as a competitor to SIS, the monopoly provider. 
January 2011: a “racing right” received a degree of support in a Parliamentary debate. A proposal emerged whereby a deduction of winnings from punters be applied to support racing. 
March 2014: Chancellor announces Government plans to look at a Racing Right.


Problems with a racing right 
The bookmakers would first of all have to agree a price. What would happen if they could not agree and who would determine the outcome? When a right was discussed previously it came with limitations on what products the bookmakers could offer so as to protect racing’s ‘integrity’. Why would bookmakers agree to a supplier telling them how to run their business?
The racing right would be a monopoly provider and although the current levy is imperfect it does have various checks and balances to prevent abuse from either side.
There is no property right payable for anyone to participate in racing so presumably primary legislation would be needed to create one. The Gambling Act allows conditions to be attached to licences that conform with the licensing objectives (crime, fairness, protection young). A racing right falls outside that scope.
The Government has said that a racing right would apply only to horse racing but to do so would cause other sports to complain and bring forward state aid objections. The levy came into being in 1963 and was amended in 1969 which predates the UK’s membership of the EU. It is therefore thought of as existing state aid and thus tolerated by the EU. That, however, does not make it legal and any tampering with the existing system could make it “new aid” and thus challengeable.
The main issue is the 20% VAT that would be chargeable under any commercial arrangement. 
My View 
The racing lobby is clearly very powerful. Why should that be so? Look at the people who own the horses, the richest 0.5% in the country and look at the government in place today.
The levy is not perfect, far from it, but it does carry with it significant tax advantages that would be lost if it were abolished.
Roger Bootle, while discussing housing in The Telegraph, said last week “Politicians are constantly in search of purpose. That is why they meddle in so many things that should not concern them”.
On this issue they should let sleeping dogs lie.
 

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