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US Internet Gambling
Monday, January 04, 2010, by Andrew Thornley, comments 0

In the recent deal between Harrah' Interactive Entertainment and Dragonfish for its casino and poker software it was stated that the focus would be the launch of the World Series of Poker and Caesar Casino brands in the UK.


But with Harrah' Entertainment being a major US gaming company it was inevitable that the deal would be seen as a dry run for a time in the future when the US Internet market is regulated. 

The importance and desirability of the US market to the Internet gambling industry cannot be overstated. It has a large, relatively affluent population, of which a sizeable proportion likes to gamble as a form of entertainment. 

From an operational perspective, Internet and broadband penetration is high - some 230m Internet users - and consumers, even in the credit crunch, can obtain credit cards, which are crucial to the payment methods used by the industry. 

Prior to the passing of UIGEA in October 2006, when companies were still operating in the US, Europe was something of an afterthought as a market. For example, in the year to 31 July 2006 Sportingbet took 57% of its turnover from the Americas and 95% of its operating profit. Europe contributed 26% of turnover and just 1.3% of the company' operating profit. 

Even now European online poker rooms frequently cite the difficulty of competing with those rooms that continue to take business from the US and can use the dollars harvested there to build their businesses in the European arena. 

But on the legislative front the situation with regards to Internet gambling in the US continues to be as complex as ever. There are several pieces of proposed legislation that have been introduced, all with similarly unwieldy titles. 

In August 2009 Democrat Senator Robert Menendez introduced the Internet Poker and Games of Skill Regulation, Protection and Enforcement Act (S.1597). It is legislation that would regulate online poker and derive tax revenues from it. 

His proposals in the bill include: 
A 10% tax on all deposits made to Internet gambling sites, which would be divided between the state government where the player is located and federal government,
The ability for a state or Indian tribe to opt out of the regulation, making it illegal to accept bets from these states
A licence length of five years 
Money laundering, compulsive gambling, and age verification safeguards

Senator Menendez' legislation does not contain proposals for Internet casino gaming or sports betting. It does include, however, several similar features to Barney Frank' HR 2267 Internet Gambling Regulation, Consumer Protection, and Enforcement Act, particularly regarding consumer safeguards, licence length, and the ability of individual states to opt out of the regulation. Frank' bill would also not allow sports betting.

HR2267 (introduced 6 May 2009) currently has 58 co-sponsors and has been referred to three committees, including House Financial Services. These committees will determine whether any bill receives a full hearing in the Senate or House. Frank' other related piece of legislation the Reasonable Prudence in Regulation Act (HR 2266) has 37 co-sponsors and seeks to delay the implementation of UIGEA by a year until 1 December 2010. The Internet Gambling Regulation, and Tax Enforcement Act (HR 2268) introduced by Democrat James McDermott seeks to introduce a Federal Fee, which every licensee will be required to pay. It will amount to 2% of all funds deposited by customers during the preceding month. The bill has four co-sponsors and has been referred to committee. The timeframe within which any of these bills will become signed laws is not certain and the current financial crisis already seems to have delayed Frank' (HR 2267) Internet Gambling Regulation, Consumer Protection, and Enforcement Act. Indeed, there is no guarantee that any will fair any more successfully in their progress through the legislature than previous versions that have been introduced. At a state level, the financial crisis could be beneficial for the prospects of state Internet gambling law. Many states, most notably California, are struggling with budget deficits and are cutting services. 

Regulated intrastate Internet gambling could be an attractive source of revenues. California, Florida, and Nevada are likely first candidates for such state regulated Internet gambling. On 26 August 2009 a bill was signed into law which now allows Illinois residents to place horse racing bets online. Racing handle in Illinois has been generally falling from a peak of US$ 1.29bn in 1992, dipping below US$ 1bn in 2006 and in 2008 the state' handle for all forms of racing stood at US$ 818m. Nevertheless, the new law should be of interest to the likes of Betfair-owned TVG.com and Youbet. But it should not be taken for granted that UIGEA is dead. At the start of September 2009 the US Court of Appeals in Philadelphia upheld the law in a challenge brought by Interactive Media Entertainment & Gaming Association Inc. (iMEGA). One of iMEGA' arguments related to the vagueness of UIGEA but the Court rejected this, saying "the Act' prohibitions are not in terms so vague that persons of ordinary intelligence must necessarily guess at its meaning and differ as to its application". Many of the major operators based in European jurisdictions are taking hope from the proposed skill games regulation bills and are looking to the time when the US market opens up to Internet gambling. In April 2009 PartyGaming signed a Non-Prosecution Agreement with the US Attorney' Office for the Southern District of New York, relating to its activities in the United States before the enactment of the UIGEA in October 2006.

In return for a payment of US$ 105m (payable in 8 instalments until 2012), the Attorney' Office will not prosecute PartyGaming for providing Internet gambling services to US customers. But there has to be a concern as to whether any of these companies will be granted a licence, assuming that any favourable legislation is passed. Despite settling their cases with the US Attorney there will always be a "reputation" linked to those firms that operated in the US prior to October 2006. The deal between Harrah' Interactive Entertainment and Dragonfish suggests that B2B deals might be the way back in to the US for these companies. But as noted earlier, the Harrah' deal is focused on the UK market, where Internet gambling licensing and regulation is in operation. 

If the US authorities do choose to regulate their domestic Internet gambling market it is certain that they will ensure their interests are protected and the benefits remain in the US. An initial attempt at using Internet gambling tax revenues for the benefit of society was made in September 2009 when Senator Ron Wyden proposed using them to subsidise health care reform. Especially in the current economic climate - the fallout from which is likely to last for several years - the lawmakers will make sure that US companies benefit and no revenues are lost to companies based outside its borders. Witness President Obama' September introduction of "safeguard duties" of 35% on tyre imports from China in order to protect US interests - unrelated to gambling but a definite sign of the economic times.