Internet Gaming: Regulating the “Tubes”

The idea of Internet gaming is hardly new. Recently, however, the buzz has been that Internet gaming can be regulated. This is a bit of a surprise to us, since we’ve never doubted that Internet gaming could be subject to effective regulation. We’ve always considered the issue to be political. Specifically, the issue is whether the lure of increased tax revenues could trump the opposition of bricks-and-mortar casino operators and anti-gambling expansion advocates.

Politics aside, we see the issue as simply one of holding Internet gaming entrepreneurs accountable. This should not require the advent of some new, mysterious technology or innovation. To us, as old-fashioned, nuts-and-bolts regulators, it is merely a matter of adapting tried-and-true regulatory principles to a new set of risks—and regulators have been doing this since the slot machine first began its evolution from a purely mechanical device. There is no reason not to cast the regulatory net around the Internet.

In the past, we’ve hesitated to weigh in on this issue with the public policy question still in play, at least in this country. Whether a particular method of gambling is a good or bad idea is more or less irrelevant to its regulation. Riverboats, tribal gaming enterprises and technological advances such as wide-area progressives and ticketing have all presented challenges to regulators once adopted by the political entities.

But now that Internet gaming appears to be gaining some traction, we’ve decided to offer our humble perspective on potential regulatory issues.

Here, There and Everywhere
As an initial matter, we have to get our regulatory arms around the Internet itself. The Internet is often described in almost mystical terms—a sort of omnipresent force worthy of Jedi-like worship. The Internet is everywhere, yet nowhere at the same time. It is this purported “location-less” characteristic that has been advanced as making regulation of Internet gaming difficult, if not impossible.

Though we don’t adhere to the prosaic opposing view that the Internet is merely a system of “tubes,” it is hardly an amorphous ethereal cloud encompassing the planet.

From our perspective, as applied in a gaming construct, the Internet boils down to a server connected to a client PC by a series of routers. The server has to have a physical location somewhere, which someone (a person or entity) has to own and maintain. Regardless of the circuitous nature of the route between server and client, there are real people and entities involved in the gaming transaction. We see no reason why they cannot be regulated to the same extent as traditional casinos.

But all this doesn’t mean that there are no issues peculiar to the Internet gambling world. Let’s look at basic regulatory requirements as applied to an Internet-based gambling enterprise and identify what may be the same as, and different from, a physical casino.

Licensing is perhaps the easiest link in the regulatory chain when applied to an Internet operation. Like bricks-and-mortar casinos, an Internet gaming venture must have owners and people that actually operate the business. Someone has to own the computer hardware and software and, at a minimum, own or lease a physical location to house its equipment. Similarly, someone has to operate and maintain that location and equipment. Both the entities and individuals involved have to be subject to identification and background examination in the same manner as any other gaming enterprise.

It might be argued that, unlike stationary casinos, the owners and operators of Internet companies could be scattered around the globe. However, for licensing purposes, the residence of the applicant is basically irrelevant. The casino industry presently has casinos with owners located in Asia and the Mideast and licensed suppliers from countries such as Japan, France and Slovenia. Regulators are accustomed to travelling to remote spots around the world and using translators to conduct background checks on those involved with casino gaming. An Internet enterprise would not pose any significantly different challenges regarding licensing.

A jurisdiction that permits Internet gambling, if it wished, could require a foreign operator to maintain a legal presence within the licensing jurisdiction. Such requirements are not uncommon for operators or suppliers entering new gaming jurisdictions. Typically, the gaming entity sets up a subsidiary company within the licensing jurisdiction, which becomes the applicant for licensing purposes.

In some sense, this aspect of regulation would be considerably easier in an Internet environment. There are no drops, no money exchanges on a table or at the cage, and the only surveillance that is really needed is at the server location.

All casinos operate under regulations and internal controls adapted to the unique circumstances of the operation and the needs of the regulators. Once the risks are identified, the regulators’ requirements can be constructed to address them.

It must be remembered that the very technology that makes Internet gambling possible also makes its regulation feasible. A camera can be placed in a server room hundreds or thousands of miles from the jurisdiction. Computers involved in the enterprise can have programmed audit trails and security measures designed to prevent and detect unauthorized or fraudulent activity.

There are certainly existing templates for some of these measures. For years, we have dealt with wide-area progressives, remotely located back-of-the-house accounting servers and gaming system help desks that directly assess gaming devices for maintenance and upgrade purposes. It is simply a matter of applying well-established regulatory principles to these new technological environments.

Audit is another regulatory area that may actually function better in a wholly electronic gambling operation. Unlike a bricks-and-mortar casino, every transaction and game play on an Internet system can be recorded and tracked. In a sense, it is an auditor’s dream. Paper records can be lost or altered, but in the Internet world, the auditor is freed from fill slips, manual jackpots and other human interactions subject to simple error or outright fraud.

In a world where billions of dollars of banking transactions and retail sales take place electronically on a daily basis, the mechanisms for tracking and auditing gaming activity already exist or can be readily adapted to the needs of the regulator.

One of the concerns raised regarding Internet gambling involves the potential for money laundering. Frankly, we have read the arguments and are not persuaded that the risk is any greater, and it may even be less, for the reasons previously discussed, than in the ordinary casino environment. To participate in Internet gaming, the patron needs to open an account and establish some method of funding, such as a credit card or bank transfer. Regulators can require detailed identification of both and careful tracking of all transactions. Potentially, the regulations can assure a higher barrier to money laundering activities than in a traditional casino.

The two challenges that distinguish Internet gaming from traditional casinos involve underage patrons and problem gamblers. Certainly both also pose real challenges to bricks-and-mortar casino operations.

As to minors attempting to engage in gambling, there can be physical controls governing entrance to a traditional casino. Even in relatively open casino environments, security personnel can roam the floor and request identification from anyone who appears underage. In many cases, minors are identified and excluded when they attempt to obtain jackpots or play at table games, where the scrutiny of players is enhanced.

One of the characteristics of the Internet is anonymity. It is a challenge to know exactly who is sitting at the keyboard. However, there are measures that regulators can require to reduce the likelihood that underage patrons will be able to assess Internet gambling sites. The first step could involve stringent registration requirements. Potential patrons could even be required to appear at a physical location to verify their age and provide detailed identification information. Biometrics such as fingerprint, voice or facial recognition could be used at login to verify that the player is properly registered. If improper use was detected, the registrant could be subjected to a permanent ban or even criminal penalties as a deterrent.

There is no doubt that some determined minors might be able to defeat whatever controls a creative regulator might establish. However, no system is perfect and certainly minors manage to find their way into even highly controlled physical casinos. In either environment, the only answer is constant vigilance.

Problem Gamblers
The issue of compulsive gamblers exists wherever there is gambling, whether it is a lottery, casino, racetrack or illegal card game. The Internet, through carefully monitoring of activity patterns, has some potential to identify and exclude people who cannot control this impulsive behavior. Regulators could impose limits on access to funding sources or wagers for varying time periods. Credit or asset reporting requirements and reviews could also be used to ferret out problem gamblers. Finally, the same voluntary exclusion programs and problem gambling hotlines used by physical casinos could be adapted to the Internet environment.

Final Thoughts
As noted, we don’t see any particularly insurmountable problems with regulation of Internet gambling. There are certainly some unique challenges, but at the core, it is fundamentally the same as the current casino environment. Regulators need to keep out the bad guys, assure game integrity, fairly enforce realistic regulations and account for revenue. We don’t doubt that the basic programs used to accomplish these objectives for bricks-and-mortar casino can be adapted to the Internet environment.