Online Gaming in the U.S., Part 2: The (Lack of) Regulation Issue

As an official online gaming expert, I often get quite a few questions about the industry. Here’s a couple of the more common ones:

Can you tell me what my odds of winning a hand in online poker have to do with the Archbishop of Canterbury?
My answer: I’m so glad you asked. I get this question all the time.

But I’ll get to that later. Most players, online and off, hope to occasionally win. The educated player usually has a good grasp of the game, the odds, the payback and how to exploit any edge they might have. It’s the same whether we’re talking about poker, slots or any other card or casino game. Everyone wants a fair shot at winning.

So what do I do if I think an online game might be rigged? Or if I suspect the casino is cheating?

Answer: There’s a card game at the beginning of Butch Cassidy & the Sundance Kid where Robert Redford lets the other players know that he might shoot them if they don’t behave. So, that’s what you do—if you’re Robert Redford.

Alas, statistical analysis shows conclusively that the majority of readers of this article are not, in fact, Robert Redford. So, what do ordinary people like you and me do if we want to make sure the games we play online are fair? Especially if we’re talking about online games that might be hosted in a foreign country?

It’s human nature to suspect that our losing hands or missed jackpots are actually the result of a grand conspiracy on the part of casinos, probably in connection with the JFK assassination and government-funded UFO abductions. The reality is less exciting, though. If you’re talking about U.S. land-based casinos, then you can probably safely assume it’s all in your head.

Gaming hardware, software and random number generators are all scrupulously examined, audited, tested and re-tested by organizations like Gaming Laboratories International (GLI), BMM Compliance and the Nevada Gaming Commission in order to ensure that games play the way they are advertised, and that they do in fact meet various jurisdictional standards for payout percentage where applicable.

In the U.S., the gambling industry is probably second only to the pharmaceutical industry in terms of strict regulation. In fact, if Wall Street hedge funds operated with the same amount of scrutiny and oversight, then your house might still be worth more than a gallon of expired low-fat milk. Oh, sorry. That’s another column entirely.

International online gaming regulation is entirely different from the U.S. land-based industry. There is currently no broad trans-national body with the authority to examine online games, ensure they are operating in a fair manner and enforce legal consequence should they fail the test.

And to make matters murkier, there’s actually no reason to believe such an international body will ever come in to existence. That’s the bad news.

The good news is that it probably doesn’t matter all that much. Reasonably effective alternatives are already available. As you might expect, this is where the Archbishop of Canterbury comes in.

Under English Common Law, “equity” is the name given to a specific set of legal principles. Equity here is meant to help courts to apply fairness, as opposed to just enforcing the letter of the law.

The original “law courts” in England enforced the king’s laws in medieval times. But if the law wasn’t changing quickly enough to keep up with the times, or if the United Association of Revolting Peasants with Torches regarded decisions by the judges as unfair, then people could still appeal directly to the king. The king eventually shuffled this responsibility on to church leaders, who in turn introduced the concept of fairness.

The Archbishop of Canterbury was one of the first lucky fellas to handle this kind of thing. In the process, the church gained a reputation for fairness that was only minorly besmirched later by the occasional beheading of various queens and such.

So while the online gaming world currently lacks a broad governing authority that regulates online gaming fairness, we do have a digital-age version of the Archbishop of Canterbury. Or rather, several archbishops that act as an informal Court of Appeals on fairness in gaming.

According to Dr. Eliot Jacobson of Certified Fair Gambling, online players often believe that casinos have a bottom line to meet, and that the casinos will secretly change the rules of the game to get there if
need be.1

“Players also think casinos deliberately target a winning player, whether it’s changing the return on a slot, or stacking the deck in an online poker game. Players definitely have an innate distrust of casinos,” Jacobson said.

And while the idea of secret shenanigans might sound like a conspiracy, it’s actually grounded in the reality of some well-known examples in the world of online gaming.

As an example, a few years back, a minor scandal on the sister sites AbsolutePoker.com and UltimateBet.com mushroomed into a major one, and eventually made it all the way to being a featured story on TV’s 60 Minutes and in the New York Times.

If you want all the details, pour yourself a drink and google it; it’s fascinating. But the short version is that a certain group of players on these sites appeared to be winning at poker a lot more often than you’d expect. In fact, the investigation by the site owners eventually revealed that odds of these players winning the number of hands they did was slightly less likely than the odds of the current author creating untortured analogy—which is to say, so statistically outlying as to be impossible.

A flaw in the sites’ security allowed a clever bunch of folks to find a way to see other players’ hole cards—meaning, of course, these folks had a huge advantage.

Different versions of the story continue to float around, but it appears that the unscrupulous hackers made off with hundreds of thousands of dollars, and dealt Absolute Poker and Ultimate Bet a public relations catastrophe of the first order.

The resulting scandal probably cost the company tens if not hundreds of millions of dollars in lost revenue.

Paul Leggett is the chief operating officer of the Cereus Network, the group that owns Ultimate Bet and Absolute Poker. And he had the misfortune of having to clean up the mess.

“The hysteria was justified. It was the largest fraud I’d personally heard in online gambling history. I was offended just like the rest of the public. It’s an amazing story, and I understand all the attention it got. From our perspective, we inherited the problem; we acquired the sites in 2006 and the cheating had evidently gone back as far as 2003,” Leggett said.

Cereus bought the sites from another company, only to belatedly discover that some serious security flaws, and some clever insider hackers, both came with the purchase.2

“A lot of the public didn’t know the history of the sale, and it took a long time for us to get all the facts out. We wanted the players to understand that the current owners had nothing to do with it,” Leggett added.

And while Leggett and the Cereus Network might not have been responsible for the holes in the security, or the actions of the people who took advantage of them, they bore the brunt of the public backlash. Though hard numbers aren’t available, it seems clear that the scandal could have put the company out of business.

But Leggett and his team filed suit against the prior owners, refunded all the players, and basically did what they could to make good on the problem at the time.

In the interim, the company moved off the problematic legacy platform and implemented a variety of security measures to help ensure something like that doesn’t happen again.

“We took a lot of steps to improve things by changing our internal procedures and adding an internal auditing and compliance department that works directly with the gaming commissions, so there’s a lot more transparency now.”
At the end of the day, though, it’s an unfortunate black mark for which the company will probably always have to go out of their way to overcompensate.

But this particular example of super-secret security flaws, wily hackers and shady players is unusual in the industry. Most problems with gaming fairness come down to an unglamorous technical issue of some variety—for example, a bug in the software that’s throwing off the odds of winning, or something of that nature.

And it’s largely just a quality-control issue. Because there’s such a high demand for online games, waves of new games are released each year—perhaps 100 times more games than are released in the same period for the land-based market.
“The result is that certain things slip through the cracks. But in all the cases I’ve examined, I’ve never found an instance of the casino itself intentionally ripping off players,” Jacobson noted. “Usually, the online casino wants to fix the problem as quickly as possible.”

Because word of mouth spreads so quickly among players at online forums and message boards, it’s quite easy for a minor scandal to become a major one if immediate steps aren’t taken to address an issue about game fairness. The Absolute Poker/Ultimate Bet experience shows just how quickly a minor problem can snowball into a major catastrophe.

As we noted, oftentimes an old-fashioned software bug is at fault. And more often than not, players spot it first. They are, after all, the ones sitting and playing the game the most.

But if the casino does not take immediate efforts to investigate a potential fault, the word of mouth can gain momentum and potentially destroy a company. Thanks to the Internet, communication among players worldwide is rapid. Any issue can get immediate attention.

“In the long run, sites like Absolute Poker and Ultimate Bet usually go pretty far out of their way to clean up the problem and make good on any issues with their customers. An online casino can lose a lot more money through a cheating scandal than they could ever hope to win from rigged games. It’s just not in their long-term financial interest to have anything other than completely honest and fair games,” Jacobson added.

Some members of Congress are hoping that the promise of up to $72 billion in new revenue might persuade federal lawmakers and cash-strapped states to allow for online poker and other Internet gambling to be regulated and taxed.
But despite the lure of big money, there is still little consensus on how exactly to legalize online gaming in the United States, much less how to regulate it.

A good first-start would probably be to examine how the Europeans do it. The leading online gambling jurisdictions have created regulatory structures that bear a surface resemblance to traditional regulation for commercial casinos in the U.S. Though varied, these regulatory regimes have some common elements. For example, games should be conducted fairly, and the underlying gaming technology should be approved by a regulatory body or a designated testing facility. But, these regulations are pretty open-ended at the moment.

In pursuit of greater respectability and consumer acceptance, some online companies have formed a voluntary standard-setting organization called E-Commerce and Online Gaming Regulation and Assurance, or eCOGRA. The organization establishes minimum standards for consumer protection, fair gaming and responsible online conduct.3 eCOGRA claims about 50 members, both casinos and game developers.

Of course, they hold no particular legal authority, and compliance or participation with their standards, ratings and seals of approval is completely optional. But who knows, they might one day be the accepted default alternative for the online world.
In the interim, it’s important not to underestimate the influence of Internet-powered word of mouth. As the Absolute Poker/Ultimate Bet scandal so clearly illustrated, savvy online players are often the first to identify gaming irregularities. And the websites that cater to the online gaming community provide a potentially devastating cyber-megaphone to air and publicize their concerns.

CasinoMeister is an example of a popular player-advocate site. An advocate for fair play in online casinos for more than a dozen years, the site receives some 10,000 page views per month from U.S.-based players alone. And that’s a number that’s more than doubled since just the beginning of last year.4

As they say, the only thing that spreads faster than good news … is bad news. For that reason, most online casinos go out of their way to fix problems. If an online casino gets a bad reputation, they are typically publicly blacklisted at player-advocate sites like CasinoMeister, and relegated to the category of “rogues.” It’s sort of like a no-fly list for players to review, though the general tenor of the discussion on such sites tends to be several degrees more civil than the burly, irritable TSA screening at your local airport.5

As we mentioned earlier, it’s pretty self-defeating to cheat players. And while not a perfect system by any means, economics generally make the industry self-regulating for the same reason. These days, rogue casinos tend to raise eyebrows more quickly than swarthy-looking flight-school students with a curious interest in learning how to fly, but not land, commercial airliners.

Much like the land-based casino world, trust is the glue that holds online gaming together. Without trust, there’s little else to capitalize upon. As long as Internet gambling remains unregulated, players will probably remain cautious and prone to suspicion. It is up to the casino and the software manufacturers to combat this bias. But experts used to worry that no one would feel comfortable buying books and underwear from a site like Amazon.com. That fear seems to have passed into history, and I can confirm the site indeed sells some really nice boxer shorts.

As to online casinos, the way to maintain and enhance trust is to be honest, and upfront, and when mistakes or cheating is discovered, to come clean about it as quickly as possible. Admitting mistakes humanizes the inherently impersonal online world. This is a people business.

In the meantime, players will have to make do with a reasonably effective substitute for equity. And that’s the fact that, for the moment, crowds of online gaming aficionados seem to do a better job of keeping casinos honest than any supra-national governing body ever could.

Footnotes

1 www.jacobsongaming.com/Certified_Fair_Gambling.html
2 www.ub.net/ and www.absolutepoker.com/
3 www.ecogra.org/Home.aspx
4 www.quantcast.com/casinomeister.com
5 www.casinomeister.com/rogue/

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