Susan Nolan Deputy Executive Director NCLGS 139 Lancaster Street Albany, NY 12210-1903
Re: Submission on behalf of the Interactive Gaming Council with regard to Online Gaming: States Rights, Regulation and Player Protections
Dear Ms. Nolan:
Thank you for permitting Mr. Frank Catania and Mr. Jeffrey A. Modisett (representing the Interactive Gaming Council) to testify before a hearing of the National Conference of Legislators of Gaming States (NCLGS) in Newport, Rhode Island, on September 5, 2003, on the subject of
online gaming. At that hearing, you extended an offer to the Interactive Gaming Council (IGC) to present additional arguments in favor of strict state regulation of online gaming for further consideration by NCLGS. Therefore, as follow-up to the September 5 hearing, this paper is submitted on behalf of the IGC in further support of strict regulation of online gaming.
The Interactive Gaming Council (“IGC”) is an international non-profit trade association comprised of leading companies from around the globe involved with the interactive gaming industry. Members are operators of Internet gaming sites, software suppliers, e-commerce providers, information-providers or other companies involved in the gaming industry.
The IGC has always been an advocate for regulation of the online gaming industry and comprises that portion of the industry that does not subscribe to an unregulated “Wild West” approach to online gaming. Rather, the IGC adheres to an industry code of conduct, where players’ rights are protected, sites operate in a transparent fashion, and operators comply with the licensing and regulatory policies of the jurisdictions in which they operate.
Based on your comments on September 5 in Rhode Island, it is our understanding that NCLGS’s past opposition to Internet gaming has been based upon three factors / concerns:
· Public Policy - NCGLS is concerned that one state licensing and regulating Internet gaming would infringe upon the sovereignty of other states that do not license or approve Internet gaming. The underlying assumption for this concern is that a non-gaming state cannot exclude Internet gaming sites from states that allow Internet gaming. · Competition -– NCLGS is concerned that Internet gaming sites will compete with land-based casinos, lotteries and racetracks that provide needed revenue in various states. The underlying assumption for this concern is that the former provide no benefit to the state, whereas the latter provide revenue and jobs. · Consumer protection - NCGLS believes that the best protection for consumers from unscrupulous online gaming operators is to prohibit Internet gaming altogether.
We will address each of the above concerns in turn.
Public Policy Concern- Gambling is currently one of the fastest growing forms of entertainment in the world. Internet gambling, however, has not been provided an opportunity for expansion, and in fact U.S. policy continues to restrict some of the world’s most respected casino gaming companies from being competitive in this industry. This is in spite of statistics that show an estimated 1,800 gaming web sites with a projected gross income of $4.3 billion for 2003.
If gaming is lawful, the means of distribution should not affect the lawfulness. The Department of Justice (DOJ) has expressed concern that language to prohibit online gaming being considered in the Federal Congress should treat physical activity and cyberactivity differently. In a letter to House Speaker Dennis Hastert (July 15, 2000), the DOJ expressed concern about legislative language that is not technology neutral: “Legislation that is tied to a particular technology may quickly become obsolete and require further amendment. As a result, we believe it prudent to identify the conduct that Congress is trying to prohibit and then to prohibit that conduct in technology-neutral terms.”
That being said, use of the Internet, as well as other forms of new technologies, in gaming and in e-commerce generally, is undeniably a difficult and complex public policy issue, as evidenced by the debates in the U.S. Congress. With the advent of new technologies, accompanied by an increasing acceptance by the public, there is greater incentive for jurisdictions, and industry, to work together cooperatively.
The infringement on another state’s rights if that state chooses not to license and regulate online gaming should be evaluated first from a technological standpoint. Policymakers should ask whether there are technical solutions that can prevent this potential infringement. We believe there are solutions to the geographical locale issue from companies such as Digital Envoy (http://www.digitalenvoy.net/), and Quova Inc.’s GeoPoint geolocation and IP-mapping software. These companies’ technology can trace the source of the player and block access from locales where online gambling is illegal. Such software was in place during the operation of MGM Mirage’s licensed Internet gaming site out of the Isle of Man and worked successfully.
MGM Mirage launched MGM Mirage Online in September 2001. On June 30, 2003, the company announced it would cease operations of its Internet casino, playmgmmirage.com. In a statement released by the company, Terri Lanni, Chairman and CEO of MGM Mirage, indicated that MGM Mirage was able to prove Internet gaming can involve the same high standards as those expected from land-based casino licensees. While MGM Mirage, through its online gaming web site operated from the Isle of Man since fall 2002, proved that a regulatory model for online gaming is workable, according to the company the closure of its operations resulted from an unclear, and potentially hostile political climate in the U.S. and other countries.
While the news was disappointing to advocates for licensure and regulation of online gaming, it was not surprising from a business perspective. In the press announcement, MGM Mirage indicated that it would take an approximate $5 million loss in discontinuing its Internet gaming operations. Clearly, you cannot run a business with opposition from U.S. policymakers when so much of the demand for Internet gaming is concentrated in North America. We think it is illogical for policymakers to continue toward a policy of prohibiting online gaming when such a policy only prevents the most responsible and experienced companies from entering the market.
MGM Mirage proved that companies can accurately identify the location of players. Companies such as Kerzner Online, Action Online and MGM, let alone the many other reputable companies currently involved in this form of entertainment, and comprising representatives with vast experience from the land-based gaming industry, do not want to jeopardize reputations -- individual or corporate -- by engaging in operations that are anything but professional and credible.
At the September 5 hearing, concern was also expressed over how the states can coordinate diverse regulatory regimes if one or more states legalize online gambling, which could include lotteries, horse racing, bingo or any other gaming activity. As we stated at the hearing, we believe such obstacles are no different than many other interstate policy issues legislators grapple with almost every day. While it is true that initially the strictest state policy would likely dictate the policies the online gambling websites would follow – so that the companies can operate in the greatest number of states – it is also likely that organizations such as NCLGS can draft, ideally in conjunction with industry, model laws that the states can consider and hopefully implement for the common good of the states.
Competition Concern- State governments will have to consider ways to protect the jobs and revenue currently created by the largest U.S. gaming companies when overseas competitors begin to provide online casino games to American residents. It is important to note that prohibiting the most respected gaming companies based in the U.S. as well as individual states themselves in terms of lotteries from participating in online gambling will not stop this competition. It makes more sense to develop a strict regulatory regime in the U.S. and let U.S. gaming companies lead the world and individual states preserve and protect revenues. While there will inevitably be some adjustments in the gaming world as offline and online companies learn to live with each other and deal with any dislocations in their respective industries, this is no different than Barnes and Noble learning to adjust to Amazon.com. We believe the demise of the MGM Mirage virtual casino should send a message to policymakers that the issue of Internet gaming needs to be addressed in a more sensible atmosphere then currently exists in the U.S., one that provides an environment of business certainty.
The MGM Mirage decision to shut down its www.playmgmmirage.com web site is an example of how misguided public policy decisions are keeping the most responsible and reputable companies from entering this industry. A strictly regulated Internet gaming industry, which would include proper due diligence and continuous monitoring, would provide an opportunity for policymakers to protect citizens against underage and problem gambling as well as money laundering and at the same time produce additional revenues for governments and provide for job creation. The fear is that current policies are pushing the Internet gaming industry further underground, where there is less control, no revenue generation for states and no monies available to assist with player protection.
It was not lack of demand that caused the closing of the MGM Mirage web site. There was no lack of willing consumers from the U.S. Each day, under direct or implied pressure from regulators of their land-based casinos, MGM Mirage, and Kerzner International before it, rejected huge numbers of players with a nexus to the U.S. Few businesses can survive when they have to turn away 60-70 percent of the potential customers who show up at their door. The more looming question we must ask is what will happen when competitive overseas gaming companies from first world jurisdictions such as the U.K. begin offering regulated games to U.S. residents. The U.S. gaming industry will have to respond and compete regardless of whether these companies are offshore or from the U.S.
Terri Lanni, Chairman and CEO of MGM Mirage, summarized the frustration of proponents of regulated Internet gaming in the U.S. in the MGM Mirage statement:
“Unfortunately, even in light of a successful working model, the legal and political climate in the U.S. and several other countries around the world remains unclear. The fact is that millions of U.S. citizens currently participate in online gaming in an unregulated environment. We believe that a more sound and realistic public policy would be to regulate the activity and hold operators to the highest standards of probity and integrity…
In the meantime, millions of U.S. citizens who are currently playing casino games online every day must continue to do so without the protections provided by common sense regulations that (we believe) should be implemented.”
Parenthetically, the protection of revenues and jobs created by the horseracing and lottery industries is also an important consideration. But just as the jobs and revenues from these industries should be protected, so should the online gaming segment, by providing an opportunity to offer responsible gaming products in a regulated environment that will allow for job creation and revenue production.
Consumer Protection Concern- In the opinion of the IGC, much of the consumer protection issue should focus on protections for our most vulnerable citizens: children and problem gamblers. The issues of underage and problem gambling are crucial to the debate of online as well as any other form of gaming. After evaluating how to best protect the most vulnerable, the next step is to offer protections to those consumers that choose to play at online casino web sites.
In land-based gaming, jurisdictions devote significant resources to preventing minors from gambling. Obviously, the physical presence of minors helps to facilitate their identification. Yet, even with the opportunity presented by the physical presence of minors, no gaming jurisdiction is 100% effective in keeping minors from gambling, nor are jurisdictions 100% effective in controlling the purchase of tobacco and alcohol products by minors despite the person being physically present during the purchase. By contrast, many tools, including data cross checks, biometrics and geo-positioning and age verification software, are currently available to exclude minors and others from participating in gambling online. These technologies are rapidly improving in quality and are becoming increasingly cost-effective. Indeed, products such as iris and fingerprint recognition are being viewed as the next step forward for ATM card user verification. There are proposals in industry for a central registry where players who wish to be banned can register.
Unfortunately, there is no panacea for protecting youth. Rather, the IGC argues that the best strategy is a combination of social and educational interventions, technology-based tools and legal and regulatory approaches combined with parental control … NOT prohibition.
Similar arguments have been made with regard to problem gamblers. There appears to be an assumption that if pathological players must be present in a casino to gamble there is more of a chance that they can be identified and assisted. We have been unable to find any reliable data to back up this assumption. We believe that a computer-based system that allows a gambler to self-exclude or to establish loss limits stands a far greater chance of being effective than the systems in place in most casino jurisdictions today. In fact, computer technology provides an opportunity to identify patterns of behavior that may lead to problem gambling, and offer intervention when necessary. We concede that a gambler who is determined to gamble can hop from website to website, but a gambler who is determined to gamble can hop from one form of land-based gaming to another -- including government-run lotteries with a prize pool in the millions of dollars and a return to player of not much over 50%. In the online world, rules of games and reports of a player’s activities can be made readily available, as can contact details for bodies that aim to assist those with possible problem or compulsive gambling issues.
Another topic of debate is the claim that unregulated gambling creates societal ills for a minority of problem gamblers that outweigh its benefits to the majority who can enjoy it without adverse consequences. In the absence of sufficient research and data, we believe this argument is based more on emotion and intuition than on facts. There are equal claims that such problems do not stand alone, that they are in fact co-morbidity issues and that the treatment services in the industry are subjected to the theories of a product life cycle. Specifically, with proper treatment, funded through an appropriate taxation structure, these problems can be addressed.
The fact is that Internet gaming already exists. 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 American citizens and leave the U.S. with no subsequent benefit, directly or indirectly, to the U.S. or any individual state (including no dedicated funds for protecting children and problem gamblers through education or other programs).
This brings up the question of taxation. How can states tax online gaming operators? Taxation is a complex (and controversial) area of e-commerce, but as policy makers are beginning to understand, the taxation issue is important and not impossible. In our experience, state governments would have several options available with regard to taxation, with no serious debate on this topic occurring to date. Whichever method a state regulatory jurisdiction decides with regard to taxation, the bottom line is additional revenue to that jurisdiction.
State legislators should consider at least two issues with regard to taxation. One is tax generation within an individual state, where players would only be allowed to participate from within a single state’s jurisdiction (and perhaps also accept players from overseas). The other is tax sharing among states that move toward a cooperative regulatory framework for online gaming.
An example of the latter scenario is oversight and administration similar to participation in a multi-state lottery game, such as Powerball where, according to the multi-state lottery association, www.musl.com, the profits from the game in any specific state and from any other lottery game in that specific state is exactly the same. That is in each individual participating state, profits from the game are distributed based on each state’s participation and go for the purposes required by state law. The Multi-State Lottery Association, which is a non-profit government benefit association owned and operated by the member lottery states, administers and oversees tax distribution.
In either case, legislators and policymakers could decide to tax online gaming operators on gross income or require operators to identify gross win from each participating state, with a tax distribution made to each individual state based on the residence of player participation. In addition, a strictly regulated environment would allow the best opportunity for state governments to collect tax based on player winnings. It is not intended that any cooperation between states would allow for infringement on another state’s rights if that state chooses not to license and regulate online gaming, as mentioned above in discussing NCLGS’s public policy concern.
The above represents but a couple of possible approaches to the issue of taxation, the point being that any method of taxation would at least allow for tax revenues where currently none exist.
The IGC believes regulation (including tax revenue generation used toward education and awareness of gaming issues) will do far more to restrict the social ills that attend problem gaming than will any attempt at prohibition, and at the same time provide consumers with a safe alternative. Prohibition will in fact drive the industry underground and create an environment with fewer consumer protection measures. One example of ensuring that consumers are protected through government regulation is to ensure that games operating are actually the games that should be operating, and that winners will be paid. With regard to testing approaches currently available to online gaming operators, BMM International, an Australian testing firm, developed a “New Solution for Internet Gaming Systems Verification Testing,” as described at http://www.bmm.com.au/PressReleases/System%20integrity%20verification100602.pdf. Further, reputable companies such as PriceWaterhouseCoopers would not publish reports on the return to player of online gaming sites if they were not satisfied as to the suitability of the online operations that they are evaluating.
The question is not whether or not the U.S. and therefore its States will have online gaming – American citizens are already participating in this industry. However, currently Americans are left to participate from a regulated jurisdiction offshore or an under-regulated one. The question is whether individual States and/or the Federal government will consider offering a well regulated, above-board online gaming alternative for its citizens and ensure that appropriate revenue remains onshore. Issues arising with online gaming should not be looked at in isolation as they relate across the board to e-commerce.
Current Political Climate in the U.S.: States Rights Given the concerns addressed by NCLGS, it is appropriate to review the political climate in Washington, D.C. Congress has attempted to pass some form of Internet gaming prohibition the last several sessions and has never considered the feasibility of allowing the states to determine their own destiny when it comes to online gaming. Currently Congress is attempting to prohibit online gaming by preventing the usage of financial instruments, mainly credit card purchases, for online gaming.
This past summer both houses of Congress took action on legislation with regard to online gaming. The House of Representatives passed legislation in June to prevent payment mechanisms for online gaming. The House bill exempts "any lawful transaction with a business licensed or authorized by the state." Therefore if a state decides to make online gaming legal, the House legislation, introduced by Rep. Spencer Bachus, R-AL, would not apply within its borders. The Bachus legislation, however, is politically less desirable in the Senate because it does not allow an exemption for Indian gaming.
Given that Indian tribes have land-based casinos in 29 states-- and a strong lobby in the Senate-- the Senate legislation introduced by Senator Jon Kyl was amended to be friendly to Indian tribal interests by allowing for limited intertribal online gaming. However, the Senate Banking Committee members acting on a legal opinion by the U.S. Department of Justice, which stated that the Interstate Wire Act of 1960 makes illegal betting of all types across state lines, stripped the exemption allowing states to regulate online gaming as well as the tribal exception. The bill as reported by the Senate Banking Committee contains no carve-outs for anyone except horse and dog racing, and thus is opposed by the American Gaming Association and National Indian Gaming Association, and it is expected that state lotteries will be opposed. Therefore, under the proposed Senate bill, gaming, which traditionally has been an issue left to the states under the 10th Amendment of the United States Constitution, is usurped by the Federal government.
One proposal introduced by Rep. John Conyers (D-Michigan) would create a commission, which would recommend ways the federal and state governments could potentially regulate online gaming. Such recommendations could lead to the licensing and regulation of online gaming operations in the United States. Unfortunately this legislation has been given little consideration in the online gaming debate.
Online Gaming and Regulation If individual states looked toward regulation, rather than prohibition of online gaming, how would 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 any 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 find them to possess the highest degree of good character, honesty and integrity. Regulators could perform the same kind of investigation and qualification of Internet gaming operators in exactly the same way it is done for traditional gaming. 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, a more efficient regulatory scheme will evolve over time.
The impact of technology in the general business community is resulting in increasing globalization of businesses and products. Internet gambling is alone in this regard. Many of the traditional gaming entities are establishing strategic alliances with partners based elsewhere and are diversifying their target markets and product range. Coupled with the growth in technology is the presence of new players in all gambling fields, moving away from the historic perspective of “born and bred” participants; hence the need for cooperative and stringent regulation of participants.
Suitability investigations will be paramount to ensure the character, honesty and integrity of the licensees. A cursory suitability investigation will not be acceptable. Those applying for licenses in land-based casinos are subject to extensive background investigations and the same should be true for Internet gaming operators.
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 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.
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 do everything possible to ensure the honesty of the games offered to the consumer. They 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 in most traditional gaming jurisdictions. In this regard, draft technical functionality documents outlining the technical requirements to be satisfied prior to an operator commencing gambling operations have been drafted in several jurisdictions.
Gaming regulators should check continuously to assure that operators 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. As an example, gaming regulators spend thousands of hours verifying that computer programs for slot machines, keno, video poker and other electronic games perform as represented by the manufacturer; and, similar regulation and testing needs to be performed in cyberspace. If we can test the computer chips and gaming software in gaming jurisdictions throughout the world, there is no reason we could not inspect and verify the software used for Internet gaming. Operators and government need to create systems that, at the most basic level, allow a gambler to know that their $10 wager will provide them with the same opportunity of winning as if they were to wager the same $10 at a traditional casino.
Conclusion Internet gaming is a complex policy issue for governments and regulators in every corner of the world. The simple solution is to make Internet gaming illegal, and hope to forget about it.
The acceptance of a global market for online gaming is a reality unless the Internet itself is banned, something that is unlikely. It is important to recognize that prohibiting U.S. gaming companies as well as individual states themselves, whether it be operating an online casino or operating online lotteries, from participating in online gambling will not stop Internet competition. It makes more sense to develop a strict regulatory regime and let U.S. companies lead the world and allow individual states to protect and increase revenues.
A policy of regulation is logical. If gambling in various forms is already available to residents then why would a new technology change this offering? If governments want to provide protection for the public, then the solution is regulation. Further, the goals of a proper regulatory scheme are commendable: fostering responsible gaming practices (harm minimization in other terminology), specifically protecting the most vulnerable citizens, underage and problem gamblers, and states rights concerns.
The debate would not be complete without addressing the question of prohibition. Rather than allowing the industry to continue in uncharted territory, regulation is needed to protect players, instill confidence and to potentially create a new revenue source. The IGC urges state legislators to move away from any recommendation to deputize sectors within an industry, for example financial institutions or ISPs, and instead focus on working with members of the online gaming industry to develop workable controls and regulation.
The IGC would welcome the opportunity to meet with officials from NCLGS or participate in panel discussions at your upcoming Winter Meeting in Las Vegas or at any other time convenient to your membership. Please contact Mr. Rick Smith, Executive Director, at (604) 732-3833 or via email at
with any questions or to request additional information.
Respectfully Submitted,
Sue Schneider Chairman, Interactive Gaming Council
Rick Smith Executive Director, Interactive Gaming Council
