NAGRA. U.S. Internet Gambling in 2010

Transcription

1 NAGRA June 28, 2010 Conference Vancouver, B.C. U.S. Internet Gambling in 2010 Michael D. Lipton, QC June, 2010 Overview of Discussion 1. Existing Federal Laws Applicable to I-Gaming UIGEA Wire Act of 1961 Travel Act of 1961 Unlawful Gambling Paraphernalia Act 2. Status of Legislation Authorizing and Taxing I-Gaming Congressman Frank's i-gaming bill - H.R Congressman McDermott's tax bill - H.R Senator Menendez's i-poker bill S Bi-partisan bill of Senators Gregg & Wyden - S Recent Federal Enforcement Activities 4. Activity Relating to I-Gaming at the State Level California Florida Nevada New Jersey Washington 2

2 Historical Growth of Internet Gambling 1995 first internet gambling website introduced Antigua & Barbados and the Kahnawke Territory (Canada) establish regulations authorizing i-gambling the United Kingdom Gambling Act 2005 authorizes i-gambling U.S. enacts UIGEA, ostensibly to block payments by financial institutions to i-gaming sites Legislation introduced in Congress to authorize and regulate i-gaming estimated 2,800 i-gambling websites operating. 3 Economic Growth of Internet Gambling 1997 estimated $300 million in revenue estimated $651 million in revenue i-gambling grows from an estimated $3 billion to a $20 billion industry estimated $22 billion in revenue estimated $25 billion. Source: Christiansen Capital Advisors, LLC. 4

3 Current Federal Law: UIGEA Unlawful Internet Gambling Enforcement Act of 2006 ("UIGEA"), 31 USC 5361, et seq. UIGEA adopts a regulatory model to prohibit i-gaming by requiring payment blocking. Enforcement burden shifted to financial institutions to identify and block restricted transactions. 5 Current Federal Law: UIGEA (cont'd) What conduct is unlawful under UIGEA? A "person engaged in the business of betting or wagering" may not "knowingly accept" via various forms of electronic transfers of credit or funds wagers in "unlawful internet gambling". What is "unlawful internet gambling"? UIGEA, perhaps intentionally, vaguely defines "unlawful internet gambling" to mean circumstances "where such bet or wager is unlawful under any applicable Federal or State law in the State or Tribal lands in which the bet is initiated, received or otherwise made." 6

4 Current Federal Law: UIGEA (cont'd) How is UIGEA enforced? The Department of the Treasury and Federal Reserve Board are mandated to promulgate regulations requiring financial institutions to "identify and block" restricted transactions. UIGEA Final Regulations do NOT: define "unlawful internet gambling". stipulate clear policies and procedures financial institutions can adopt. November 2009 UIGEA Final Regulations implementation delayed but now implemented effective June 1, Current Federal Law: Wire Act of 1961 Wire Act of 1961, 18 USC 1804, et seq. Prior to UIGEA, the Wire Act was the principle law the federal government (unsuccessfully) relied on to criminally prosecute i-gaming. Wire Act prohibits betting or wagering knowingly using a "wire communication facility" for the transmission of bets or wagers on "any sporting event or contest". 8

5 Current Federal Law: Wire Act of 1961 (Cont'd) A "wire communication facility" means a system used to transmit information by and of a wire, cable or other like connection between points of origin and reception of such transmission. United States v. Cohen, 260 F.3d 68 (2d Cir. 2001) held that the Wire Act could reach internet wagers. Limitations of the Wire Act: Operative restriction is for wagers on "any sporting event or contest". In re MasterCard Int'l Internet Gambling Litigation, 313 F.3d 257 (5th Cir. 2002) held that the Wire Act does not prohibit nonsports wagering, however United States v. Lombardo, 639 F.Supp.2d 1271, 1279 (D. Utah 2007) held to the contrary. 9 Current Federal Law: Travel Act of 1961 Travel Act of 1961, 18 USC 1952 Travel Act prohibits the use of any facility in interstate commerce to promote, manage, establish, carry on or facility any "unlawful activity". "Unlawful activity" is defined to mean any business enterprise involving gambling. Thus, the Travel Act could be used as a law enforcement tool to prohibit i-gaming. 10

6 Current Federal Law: Unlawful Gambling Paraphernalia Act Unlawful Gambling Paraphernalia Act, 18 USC 1953 Prohibits the transportation of certain devices and paraphernalia used or designed to be used in bookmaking, sports wagering pools, or numbers games. Violations are subject to criminal penalties of fines or imprisonment up to five years. 11 Status of U.S. I-Gaming Legislation Internet Gambling Regulation, Consumer Protection, and Enforcement Act ("IGREA"), H.R IGREA would establish a comprehensive regulatory framework authorizing i-gaming. Regulatory framework under IGREA would: Identify legally permissible bets. Establish a federal licensing system. Provide for state and tribal regulatory oversight 12

7 IGREA (cont'd) IGREA has 63 co-sponsors. December 3, 2009 House Financial Services Hearings Focused on ability to regulate i-gaming and was not a hearing to mark-up IGREA. Congressman Frank announced at the conclusion that "we will be returning to this subject [in 2010]." Bi-partisan bill in the Senate of Senators Gregg & Wyden is very similar to the Frank Bill 13 Internet Gambling in the U.S.? Challenges to enacting IGREA: 1. Opposition from NFL, NHL, MLB, NBA and the NCAA despite IGREA excluding sports betting from the permissible wagering activity. 2. Games of skill vs. games of chance IGREA would authorize all gambling games; pragmatic observers suggest that a bill authorizing only poker or card games ("games of skill") has the best chance of passing. 3. Opt-out or opt-in IGREA creates a regulatory system requiring States and Tribes to "opt-out" if want to ban i- gambling; States and Tribes may prefer an "opt-in" approach. 4. Federal regulation vs. State regulation IGREA establishes a federal regulatory scheme (could delegate to States, but feds can still override); States likely to push hard to have any regulation at the State level and not at the federal level. 14

8 Federal Tax on I-Gaming Internet Gambling Regulation and Tax Enforcement Act of 2009 ("I-Gaming Tax Act"), H.R I-Gaming Tax Act would adopt a new federal tax regime for i-gaming. Four aspects: 1)Imposition of a "Federal Fee" on each i- gaming site operator. Federal Fee equals 2% of all funds deposited by customers during any given month. 15 Federal Tax on I-Gaming (cont'd) Four aspects of new i-gaming tax regime (cont'd): 2)Federal wagering tax would be expanded to reach all wagers made with federally licensed i-gaming site operators. 3)Tax imposed on winnings individuals receive from i-gaming. 4)More businesses subject to U.S. corporate income tax. Site operators would be subject to withholding obligations and information return filing 16

9 The I-Gaming Tax Act May 19, 2010, U.S. House of Representatives Committee on Ways and Means held a hearing on Tax Proposals Related to Legislation to Legalize Internet Gambling Fact finding hearing relative to tax issues related to i-gaming. Rep. McDermott testimony: "Mr. Frank's bill combined with my bill would establish a system of regulation and taxing of online gaming to what the Roosevelt Administration established for regulating and taxing alcohol. Regulation and taxation has proven to be a better policy for our country when it comes to alcohol and the same is true for online gambling." Hearing was not a mark-up of IGREA or the I-Gaming Tax Act. 17 The I-Gaming Tax Act (cont'd) As discussed relative to IGREA, similar challenges exist to enacting the I-Gaming Tax Act, including: Mid-term election year. Controversial issue. Unpopular Congress. Major items remain on the legislative agenda. Well funded opposition. 18

10 I-Poker Act Internet Poker and Games of Skill Regulation, Consumer Protection, and Enforcement Act ("I-Poker Act"), S I-Poker Act embraces a similar regulatory model as IGREA. I-Poker Act differs from IGREA with respect to the type of gaming which would be authorized. I-Poker Act would only authorize any "Internet game of skill". Poker, chess, bridge, mah-jong and backgammon are identified as permissible games of skill under the I-Poker Act. Would impose a 10% tax on all deposits in player wagering accounts. 19 Recent Federal Enforcement Activity Criminal prosecution against i-gaming site operators. During 2009, U.S. Attorney for Southern District of Manhattan sought a court order to seize in excess of $30 million of funds representing payments to over 27,000 U.S. i-poker players. Seizures may be tied to recent federal initiatives aimed at greater disclosure of foreign activities of U.S. taxpayers. More recently, DOJ has pursued through indictments money processors relating to internet gaming using a variety of statutes & charges including Wire Act, Travel Act, Illegal Gambling Business Act, Bank Act, Fraud, Conspiracy & Money Laundering seizing several millions of dollars(eg. Tzvetkoff, Wienski & Rennick) 20

11 State Law Developments: California On February 9, 2010, the California Senate Governmental Organization Committee held an informational hearing concerning intrastate poker in California. May 28, 2010, Senator Rod Wright introduces S. 1485, which would authorize intrastate i-poker in California. S would allow up to 3 California-based operators to offer i-poker in California. The California Department of Justice would award the licenses, which would have 5 year terms. S provides that at least 20% of the revenue from i-poker sites would be paid to California. 21 State Law Developments: Florida The Office of Program Policy Analysis & Government Accountability of the Florida Legislature issued a report in November 2009 outlining policy options for i-poker. There has been speculation that the Florida Legislature will consider legislation authorizing some form of intrastate i- gaming. 22

12 State Law Developments: Illinois The Illinois General Assembly is considering a proposal introduced by Illinois Senate President John Cullerton to authorize the Illinois lottery to offer online sales of single lottery tickets or shares thereof. Illinois SB 1654, requires the state to receive a memorandum from the U.S. Department of Justice ("DOJ") that it is legal under UIGEA for Illinois residents (and potentially non-residents) to purchase lottery tickets online. Recent reports indicate that the Illinois lottery has already formally requested a DOJ opinion on this subject matter. 23 State Law Developments: Nevada Nevada generally prohibits individuals from placing wagers over the internet. Nevada has enacted legislation delegating authority to the Nevada Gaming Commission to establish the licensing and regulation of "interactive gaming" in Nevada. Under the Nevada authorizing statute, the initial licensing fee for a license to operate an interactive gaming system would by $500,000. Licenses would be subject to renewal every two years, with a $250,000 renewal fee. Revenue received from interactive gaming would also be subject to certain other state licensing fees. To date, the Nevada Gaming Commission has not issued a license to conduct interactive gaming. 24

13 State Law Developments: New Jersey New Jersey Senator Raymond Lesniak introduced New Jersey S.B. 490, which would authorize i-gaming in New Jersey. S.B. 490 would authorize Atlantic City licensed casinos to offer intrastate i-gaming. Would be allowed to offer same games as offered in New Jersey casinos. Imposes a 20% tax on gross revenue received from i-gaming. Servers would be required to be located in Atlantic City, either on casino property or in another secure location. S.B. 490 also has comprehensive problem gambling provisions. June 3, 2010, S.B. 490 was favorably reported out of committee. 25 State Law Developments: Washington Washington state amended its gambling laws in 2006 to extend prohibitions on gambling to specifically include internet based gambling. The 2006 amendments were the subject of a legal challenge brought by i-poker players seeking to strike down the amendments as applied to i-poker. The Washington Court of Appeals, in Russo v. State of Washington, No I (Wash. Ct. App. March 23, 2009) (unpublished), rejected the constitutional challenge. Russo contended that the 2006 ban on internet gambling violated the federal Dormant Commerce Clause. Washington Supreme Court granted an appeal on September 10, Argument was recently heard on May 27, No decision has been entered by the Supreme Court. 26

14 Contact Information Michael D. Lipton, Q.C. Dickinson Wright LLP 120 Adelaide Street, Suite 2107 Toronto, Ontario M5H 1T1 Tel: (416)