Relationships with Online Operators: Proceed With Caution

Internet wagering is booming. A 2006 article published in Business Week, titled “Britain Bets on Internet Casino Games,” noted that “Americans are by far the biggest online gamblers, betting a massive $145 billion over the Internet in 2005—nearly half the global total.”1 This puts the global sum wagered over the Internet in 2005 at nearly $300 billion. That was five years ago.

Licensed U.S. gaming companies, however, are unable to compete from the U.S. due to a variety of U.S. laws, including but not limited to the Federal Wire Act, RICCO, the Illegal Gambling Business Act, the Travel Act, ITWPA, the Unlawful Internet Gaming Enforcement Act (UIGEA), and anti-money laundering laws. For a variety of reasons, licensed gaming companies, including some licensed gaming companies in Nevada, have entered into business relationships with online gaming operators, or the .net complement to an online gaming operator, for the joint marketing of land-based events at licensed gaming establishments in the U.S.

On May 28, 2010, Nevada Gaming Control Board member Randall Sayre issued a letter to the Nevada industry addressing these issues and, more specifically, whether business arrangements with online gaming operators are permissible under current Nevada and United States law.2 His answer, distilled: Nevada operators should exercise considerable caution in determining the operating practices of any online gaming operator with which they are considering an engagement. Currently, cautious Nevada licensees are shying away from such relationships, while more aggressive operators are much more risk tolerant in choosing partners in this arena, particularly when the deal is with a non-gambling .net operator. This article provides a short roadmap for categorizing Internet gaming operators and discusses how their operational practices—both past and present—may impact their Nevada partners.

Current Online Gaming Law
Currently, interstate online gambling3 and related transactions are subject to prohibitions under various state and federal statutes, such as the Federal Wire Act, the Illegal Gambling Business Act and the UIGEA, among others. While there is some debate regarding the applicability of the Federal Wire Act to gambling other than sports gambling, other federal and state statues clearly apply to other forms of wagering, and thus, in the view of the U.S. Department of Justice, offering online betting to U.S. players violates one or more federal and state gambling prohibitions.4

In Nevada, state statutes also prohibit accepting wagers online from anyone physically present in the state of Nevada without such activity being permitted by the Nevada Gaming Commission as a Nevada gaming licensee.5 In combination with federal statutes, such as the Illegal Gambling Business Act, the act of taking wagers from Nevada residents without a Nevada gaming license could violate federal law in addition to violating Nevada law.

The .Net/.Com Distinction
Early in the Internet’s history, the .com Top Level Domain (TLD) was intended to be reserved for commercial use; the .net TLD was set apart for network-related organizations.6 With these good intentions formalized, a number of events occurred to make them impractical: (1) The number of registration requests proliferated, making it difficult to ensure that the registering entity accurately satisfied the criteria for the different TLDs; (2) registrants recognized the advantage of employing a .com TLD rather than the less-popular .net or .org TLDs and thus disregarded the criteria for the different TLDs; and (3) it became increasingly burdensome and difficult to distinguish between organizational types.7 Network Solutions (NSI), rather than continue to attempt—however unsuccessfully—to police registrants to ensure they satisfied the original organizational intent for the TLD for which they were registering, opened registration for both the .com and .net TLDs to all comers, regardless of organizational type. As a result, many organizations will register the same name with both a .com and .net designation.

Enter Internet gaming. The vast majority of Internet gambling operators chose to use the popular .com TLD for their online gambling sites rather than other TLDs. In response to federal enforcement investigations and actions against broadcasters and publishers with regard to carrying advertisements for online gambling sites, many online gambling operators opened free-to-play sites using the .net TLD. The argument was that a broadcaster or publisher could carry ads for the .net site without fear of federal law enforcement action because the .net site did not offer any gambling, an activity deemed by the U.S. Department of Justice to be illegal.

Nevada operators have employed this logic to justify their engagement with .net entities that are essentially the free-play twin of their online gambling .com counterparts. This argument appears less worthy, however, as it becomes clear that many—if not most—online gambling .com Internet gaming operators with associated free-play .net sites have common ownership and share physical, intellectual and capital assets. In most developed gaming jurisdictions, investigators will consider not only an individual entity (a subsidiary, for example) but also associated entities, and especially entities and individuals with control over the particular entity in question, when determining suitability for licensing or even suitability for formal association with licensees. As Sayre explained in his advisory letter, “Speaking more directly to the issue you have raised, it is important for the industry to understand that the board and NGC [Nevada Gaming Commission] have historically taken exception to any practice whereby a company utilizes an affiliate to engage in impermissible conduct the company itself cannot engage in.”8

As a result, before entering into any arrangement with an Internet gaming company, Nevada licensees must consider whether the Internet operator is engaging in conduct that the company itself cannot engage in.

Clean, Cleaned-Up and Rogue Operators
Sayre has used an informal categorization structure to help clarify the Internet gaming landscape for Nevada licensees. His discussions have fleshed out roughly three types of operators:

• Clean Operators: Internet gaming operators that have never taken wagers in violation of player host nation laws.
• Cleaned-Up Operators: Internet gaming operators that may have taken bets in violation of player host nation laws at some time in the past but that no longer do so.
• Rogue Operators: Internet gaming operators that accept wagers in violation of player host nation laws.

CLEAN OPERATORS
(Never took wagers in violation of player host nation laws)

CLEANED-UP OPERATORS
(No longer taking bets in violation of player host nation laws)

ROGUE OPERATORS
(Disregard for player host nation laws)

The key is how the U.S. Department of Justice views the Internet gaming operator. As Sayre mentioned in his May 2010 letter: “As you are aware, this board will not disregard the Department of Justice’s interpretation of federal law and the effects that interpretation has on existing state law. On a state level, the board is obligated to enforce existing law and in this regard I call your attention to NRS 465.093. I anticipate that the board’s increased attention directed at this issue will level the commercial playing field as current and proposed relationships are assessed on a property-by-property basis.”9

Sayre makes two important points here: First, that the interpretation of federal law by the U.S. Department of Justice and not simply enforcement, will likely be the measuring stick employed by Nevada gaming authorities10; and second, that future scrutiny of relationships with Internet gaming operators may “potentially level the commercial playing field.” How the playing field will leveled is critical. The obvious inferences from Sayre’s letter are that (1) relationships with red or Rogue operators will be curtailed as enforcement increases, and that (2) relationships with green or Clean operators will survive. What will happen with yellow or Cleaned-Up operators is less clear.

According to Sayre’s letter: “As in any regulatory environment, any acts of rehabilitation undertaken by a company to address past practices is appropriate when giving consideration to the suitability of that company’s methods of operation. Through this assessment process, the board has an interest in past and present compliance efforts and will look favorably upon those companies that are currently operating within compliance of not just U.S. law, but international laws, as they pertain to Internet gaming.”11

Commercial relationships between Nevada gaming operators and formerly Rogue, but now rehabilitated, Internet gaming operators will almost certainly be reviewed by Nevada gaming authorities at some point. Whether the Nevada Gaming Control Board’s review of Cleaned-Up operators will ultimately require a finding of suitability will likely depend upon a number of factors, including the gravity of the former violations, their duration, how much time has passed, etc. One thing, however, is clear—to be genuinely “Cleaned Up,” it is not enough to simply stop taking wagers from U.S. customers just to do a deal with a U.S. land based operator; the online operators must not be taking wagers from any player where doing so violates the laws of the player’s host nation.

Final Thoughts
Nevada licensees must use caution and good judgment in entering into any business arrangement or relationship with a company that is engaged in online gambling. Licensees should conduct sufficient due diligence to determine if their prospective business counterparts or their affiliates are, or have been, engaged in taking online wagers from players in the U.S. in violation of U.S. law. Nevada licensees should vet potential business counterparts through appropriate compliance processes and should review any formal legal opinions the prospective business partner has regarding their activities, particularly if the prospective business partner takes or has taken online wagers from players in the U.S. Nevada licensees should also review Sayre’s letter carefully to determine whether the prospective relationship will require regulatory approval or a finding of suitability.

Finally, while regulatory bodies in the U.S. often differ in terms of operation and how different issues are handled, the position taken by and the suggestions of Sayre are not uncommon and all U.S. gaming licensees may want to review the letter in reviewing their compliance plans, policies and the vetting of prospective business relationships.

1 Kerry Capell, “Britain Bets on Internet Casino Games”, Business Week, May 15, 2006, available at www.businessweek.com/print/globalbiz/content/may2006/gb20060515_495673.htm (last visited June 10, 2010).
2 Randall Sayre, May 28, 2010 Advisory Letter, Nevada Gaming Control Board.
3 Currently the Interstate Horse Racing Act does permit the use of electronic media for the placement of interstate horse racing wagers. See 15 USC 3002(3).
4 In In Re Mastercard, 313 F. 3d 257 (5th Cir. 2002) the Fifth Circuit held that the Federal Wire Act was applicable only to sports wagering, while U.S. v. Lombardo, 639 F. Supp.2d 1271 (D. Utah 2007) held that that the Federal Wire Act contains three prohibitions, only one of which is arguably limited to sports wagering.
5 See NRS 465.092. Note that many other states have prohibitions on accepting online wagers (for example, WI Stats 945.03 prohibits the use of a wire communications facility for the transmission of bets or information assisting in the placement of bets).
6 What is the difference: .com, .org, .net, .biz, & .info & others?, www.domainregister.com/comorg.html (last visited June 29, 2010).
7 Id.
8 Randall Sayre, May 28, 2010 Advisory Letter, Nevada Gaming Control Board, at 2.
9 Id.
10 See Section II for discussion.
11 Randall Sayre, May 28, 2010 Advisory Letter, Nevada Gaming Control Board, at 2.

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