10-Sep-2010
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Testimony of Frank Catania |
Testimony of Frank Catania
Before the Assembly Tourism & Gaming Committee on Internet Gaming Regulation
Mr. Chairman and Members of the Committee, I would like to thank you for being the source of the money laundering activity.
the opportunity to testify today on the Internet gaming industry and the prospect of effective state regulation. I previously served as Director of the New Jersey Division of Gaming Enforcement, and since leaving that position I have established a consulting business to assist states, foreign governments, and companies, to establish strict regulations for the oversight of gaming.
I need to begin by saying that Internet gaming already exists. The most recent statistics that I have heard from analysts state there are as many as 1,400-1650 gaming web sites currently operating, a significant increase from only one year ago. You will hear further testimony today from Marc Falcone of Bear Sterns who can provide input into these figures and projections. There is no question that billions of dollars are reportedly being bet over the Internet with little, if any, oversight or guarantee that the operators of these sites are fair and honest or that protections are in place to keep children and compulsive gamblers away. These revenue projections imply that a percentage of these monies are from our citizens and leave the United States with no subsequent benefit, directly or indirectly, to the U.S. or any state (including no dedicated funds for protecting children and problem gamblers through education or other programs).
My support for Internet gaming regulation is concentrated on the exact issues raised by opponents of Internet gaming. The solution lies in a strictly regulated alternative aimed at ensuring the presence of harm minimization measures, not the least of which relate to the protection of children and compulsive gamblers. The key issues of such an approach are protection of minors, appropriate problem / compulsive gambling measures, protection of revenue and ensuring the integrity of products and probity of those involved.
In the gaming industry, it is well known that New Jersey and Nevada share leadership positions in the gaming industry and the business of casino regulation, albeit with a competitive undertone on occasion. The legislature and the gaming regulators deserve credit for this distinction.
Over the last two years the New Jersey and Nevada Legislatures both introduced and debated legislation that would legalize, license, regulate and tax the Internet gaming industry. While the New Jersey legislation, introduced by Assemblyman Impreveduto, never gathered much momentum, the Nevada legislation was signed into law on June 14, 2001.
Assemblyman Impreveduto’s research showed that New Jersey residents were already playing casino games online and that there exists an element of Internet gaming operators, also known as fly-by-night operators, that had no desire to play fair with these players. I applaud Assemblymen Impreveduto, Cohen, Azzolina and Asselta for the foresight to draft legislation to legalize and regulate an industry that historically had flourished in an environment with little, if any, regulatory oversight.
The legislation introduced in New Jersey to regulate Internet gaming will do far more to minimize the social ills, including underage and problem gaming, than will any attempt at prohibition, let alone no action at all. I submit to this committee that the question is not whether or not you will have on-line gaming – you most certainly will, unless you ban the Internet itself, but the question is whether you will have well regulated, above-board on-line gaming or unregulated, underground on-line gaming.
Adding to the complexity and reflecting the desire of existing, reputable companies to diversify into this new technology, a quick media search will show that at least three large Las Vegas gaming companies-- Harrah’s Entertainment, MGM Mirage and Park Place Entertainment— already offer play-for-fun casino-style Internet games to registered visitors to their respective web sites. Some licensed casino companies will move forward with Internet gaming plans in other jurisdictions while excluding players from the United States, at least for now. The latest example involves Station Casinos, a Nevada licensee, partnering with Sun International, a New Jersey Licensee and former owner of Resorts in Atlantic City, in an Internet gaming venture licensed out of the Isle of Man (currently excluding play from the U.S.).
Gaming companies realize they will have to expand to the Internet and will be looking to acquire, or align with, legitimate Internet companies. Progress and profits will be the motivating factor. The Nevada legislature recognized that Internet gaming legislation would position Nevada and its casino industry to benefit from Internet gaming when the practice of taking wagers over the Internet becomes accepted within the United States.
As a brief update of Internet gaming on the federal level, the Department of Justice has contended, despite strong opposition, that Internet gaming is a violation of the Wire Act, and as such is already an illegal activity. In February 2001, however, a federal court in Louisiana in a class action lawsuit against credit card companies brought by gamers who lost monies while wagering at Internet casinos rejected the plaintiffs’ claims for various reasons. Included in the determination was the finding that “Internet gambling on a game of chance is not prohibited conduct under 48 U.S.C. Section 1084," or the Wire Act. The difficulties arise because legislation and control has historically been left to the states, but the very nature of the Internet is global, ignoring jurisdictional boundaries. You will hear more about the legal circumstances surrounding Internet gaming from Nicholas Casiello, an attorney from Sterns and Weinroth.
While the Internet poses many challenges to governments and law enforcement agencies, creating a regulatory framework for Internet gaming is a far better solution to this difficult public policy issue.
Just like regulation of traditional casinos, there cannot be any short cuts with regard to suitability, especially in the infancy of Internet gaming. Any regulatory structure would have to be particularly sensitive of all the allegations and rumors of impropriety over the Internet. The suspicion and mistrust of Internet gambling that exists must be countered by strict regulations allowing only those with impeccable suitability and financial viability to be licensed, the same requirements as established for traditional casino licensing. There should be no difference in the licensing process between a traditional gaming license and an Internet gaming license.
The same level of scrutiny needs to apply to the evaluation of systems and games and to the general good business practices and internal controls addressing the operational and administrative processes. This is something that is common with all well regulated traditional forms of lawful gambling, and something that New Jersey has held a leadership position in throughout its 25-year history with regulated casino gaming.
NEW JERSEY GENERAL ASSEMBLY
COMMITTEE ON TOURISM AND GAMING
ASSEMBLYMAN GARY L. GUEAR SR., CHAIR
MARCH 18, 2002
QUICK FACTS ON REGULATION OF INTERNET GAMING
CURRENT STATE OF INTERNET GAMING
The number of gaming sites is changing daily. Estimates range between 1200 to 1400 existing sites with approximately 350 operators having multiple sites. With those sites regulations range from non-existent to fully regulated sites in Australia, the British Isles and the Mohawk Territory of Kahnawake. The jurisdictions without effective regulations have little or no controls leaving the public at peril. The public has no assurances that the games are fair and honest and these sites are susceptible to money laundering by players as well as by the operators themselves.
WHAT ARE GOVERNMENTS DOING?
Governments have taken one of three approaches, do nothing or wait and see, prohibit or regulate.
· Wait and See
Governments that have taken the wait and see approach realize the existence of Internet gambling but have taken no action to regulate or prohibit. With this approach the government receives no financial benefits and Internet gaming thrives unabated.
· Prohibition
The Internet has no boundaries and for that reason it cannot be stopped at state or country borders. Governments, most notably the United States, had tried an Internet gaming prohibition. Prohibition did not work with alcohol and will not work with Internet gaming. In my opinion it would be impossible to enforce. We do not have enough resources and manpower to enforce a total prohibition as is being proposed by Representative Goodlatte and Leach. The concept of prohibition itself is contrary to the basic concept of the Internet.
The United States could prohibit Internet gambling in the United States but it could not prohibit it in places like Antigua, Belize, Curacao, Australia. So what happens, sites establish in other jurisdictions where restrictions from taking US bets are non-existent. This allows play to come from the United States and the revenue goes elsewhere.
· Regulation
Internet gambling will continue to exist even if prohibited. We could make it more difficult for players to get access but it will never be stopped. Regulation would provide comfort to those who get entertainment out of playing online games for cash rewards. If the Internet has one problem, it is not being able to give the user a feeling of trust. Regulation will provide the trust that is missing. The player will know that the site is licensed and monitored for providing fair and honest games through rules, regulations and standards adopted and followed by a governmental body such as the New Jersey Casino Control Commission or Division of Gaming Enforcement. Society accepts gambling as a form of entertainment. Forty-seven of the fifty states recognize some form of gambling. Why is the challenge against Internet gaming when all other mediums for providing gaming to the public are regulated?
HOW CAN INTERNET GAMBLING REGULATION WORK?
Internet gaming regulation must be based on the same principals as the regulations established for traditional, brick and mortar casinos. Put simply, regulators must have the power to ensure honesty, integrity and the financial security of operators and to oversee the integrity of the games being offered.
In most traditional gaming jurisdiction, a person or company cannot receive a license to operate a casino unless they undergo an intensive background investigation, and the casino regulators determine them to possess the highest degree of good character, honesty and integrity. In New Jersey only those holding a land-based license in Atlantic City will be able to apply for an Internet gaming license. The proof is evident in the regulations already established in several countries throughout the world. Internet gaming regulations may not be perfect at the beginning, but just as with traditional gaming regulations, an effective regulatory scheme will evolve over time. New Jersey was in the forefront of stringent casino licensing it could be the leader in Internet gaming regulations. There should be no difference in the licensing process between a traditional gaming license and an Internet gaming license.
That same level of scrutiny needs to apply to the evaluation of systems and games and to the general good business practices and internal controls addressing the operational and administrative processes.
· The regulating body must be able to ensure the consumer that Internet gaming operators are legitimate, that operators offer fair and honest games and that they have the financial stability to pay winnings to its players. The Internet gaming regulator must ensure that Internet gaming consumers are given the opportunity to play games that are fair, with government approved odds, the same requirement as for electronic slot machines. BMM, an Australian testing company that has provided Internet gaming technical standards for some of the Australian states outlines the technical requirements to be satisfied prior to an operator commencing gambling operations.
· Gaming regulators should check continuously to assure that casinos are financially stable, that there are sufficient resources on hand to pay all winnings, and that a customer’s financial information is not misused. Operators who cannot demonstrate the ability to pay large monetary prizes or the necessary security measures to protect customer information would simply not be licensed.
· Casino regulators should check and monitor all gaming equipment and the conduct of the games themselves to make sure the games are honest and offer patrons a fair chance of winning.
· To prevent the under-aged gambler from gaining access to a gaming site the Internet gaming operator must be required to use the many tools available, such as allowing only a small amount be wagered until hard proof is received. Data cross checks and software must be used to do all that is possible to determine the age and location of a player. There should also be an accessible link to reputable filtering programs to enable players to prevent access by minors.
Significant resources are devoted to preventing minors from gambling at the traditional casinos. However, with all the resources and the physical presence of the minor no gaming jurisdiction could prevent gambling by minors 100% of the time.
· The same should be true for problem or compulsive gamblers. The gaming sites should provide information that gambling is addictive and readily links to reputable compulsive gambling sites.
PLAYER PROTECTIONS
· Players should not be allowed to play until they are registered.
· Players must be required to submit proof of their identity before they could wager more than a minimal amount. The identification must have a player’s identity, age and residence. Hard proof such as a driver’s license, a passport or voter’s registration should be required. Once the player’s identification has been established then a personal identification number needed to access the site should be mailed to the player.
· There should be an identity check every time a player signs on to play and a player should not be allowed more than one account.
· Players must be able to;
(1) Select the duration of play for each session;
(2) Select the number of sessions during a specific time period such as daily, weekly or monthly;
(3) The player should be informed of the duration of each session; and
(4) The players should be able to initiate a break during each session.
(5) Players should also be able to establish loss limits, which cannot be changed without a cooling off period.
· Mandated breaks to avoid continuous play.
· There shouldn’t be any credit offered by the casino
· Games should provide instructions on use as well as the win/loss odds.
· Gaming sites must provide full disclosure to its patrons.
· Players must be afforded the opportunity to exclude themselves by request or linking exclusion to losses. Once excluded there must be a procedure to be reinstated that has a specified time period.
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Regulators should implement an advertising code of practice. Games should never give the player a false expectation of winning whether by better odds or falsely representing any occurrence or event. The games should be fair and honest and not misleading. The same rules that apply to the traditional casino with regard to rate of return must be applied and enforced by the Internet gaming regulator.
Operators should not be allowed to induce players to continuing playing. There shouldn’t be any baiting of players. Advertisement on sites frequented by children should be forbidden.
WHAT ABOUT AVAILABLE TECHNOLOGY?
In my opinion Internet casinos could be more effectively regulated than the traditional brick and mortar casinos. Real time auditing, auditing reports available immediately are more efficient than traditional casino auditing. Required outside auditors would be no different than the traditional casino auditor. Testing, fraud and intrusion detection, border controls, to mention a few, are some of the technology that already exists to regulate both traditional and Internet casinos.
Money laundering could be detected by following patterns of bets and other characteristics that could be formulated to detect suspicious activities of players. Suitability of operators would put a stop to the operator |
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