INTERNET GAMBLING REGULATION,
CONSUMER PROTECTION AND ENFORCEMENT ACT

Introduction

The Unlawful Internet Gambling Enforcement Act (UIGEA) was passed in 2006.  UIGEA does not prohibit Internet wagering; it bars banks and credit card companies from processing payments for such wagering by prohibiting the use of credit in connection with unlawful Internet wagering.  The law excludes from the definition of “unlawful Internet wagering” “any activity that is allowed under the Interstate Horseracing Act of 1978,” thus protecting racing’s interstate wagering activities by maintaining the status-quo with respect to such activities under the Interstate Horseracing Act.

Since its passage, opponents of the ban and supporters of licensed, regulated Internet wagering have been pushing for its repeal. 

House Bills Introduced

One of the principal opponents of UIGEA and the prohibition on Internet wagering has been Representative Barney Frank (D-MA), who introduced legislation in the last Congress to roll-back the ban.  As expected, Congressman Frank has introduced two bills in this Congress to do that.  Congressman Jim McDermott (D-WA) also introduced legislation to tax licensed Internet wagering.  

Internet Gambling Regulation, Consumer Protection and Enforcement Act

Mr. Frank’s first bill, the Internet Gambling Regulation, Consumer Protection and Enforcement Act (H.R. 2267), would permit Internet wagering with federally-licensed operators.   

The bill was referred to three committees: the House Committee on Financial Services, of which Mr. Frank is Chairman; the House Committee on Judiciary; and the House Committee on Energy and Commerce.

Congressman Frank’s bill would not repeal the Unlawful Internet Gambling Enforcement Act.  Rather it would create a federal regulatory and enforcement framework under which Internet gambling operators could obtain federal licenses from the Department of Treasury authorizing them to accept wagers over the Internet from individuals in the U.S. The bill applies to both foreign and domestic operators. 

The bill defines an Internet gambling facility as one that manages or controls “an Internet site through which bets are initiated, received, or otherwise made, whether by telephone, satellite, or other wire or wireless communication.”

License Requirements

Operators would be licensed by the Department of Treasury, which would have authority to adopt regulations; authorize, suspend and terminate licenses; employ agents; and enforce the provisions of the Act.

In order to receive a license, operators would have to apply to the Secretary of Treasury and:

• Subject themselves to U.S. jurisdiction and all U.S. laws related to Internet wagering;
• Provide information for review of their financial condition, structure, experience, suitability and criminal background checks.
• Agree not to accept any type of bet that is initiated or terminated in a state or tribal land that prohibits that type of Internet gambling or any wagering prohibited by the Professional and Amateur Sports Protection Act, “sports betting.”

A state regulatory authority may certify to the Secretary that applicants meet the qualifications for licensing.

Licenses would be good for five years.

To be granted a license, Internet gambling operators would have to have safeguards in place to:

• Ensure that a bettor is of legal age in the jurisdiction in which located;
• Ensure that a bettor is physically located in a jurisdiction that permits Internet gambling;
• Combat fraud, money laundering and terrorist finance;
• Ensure that all taxes and fees are collected from operators and individuals;
• Combat compulsive Internet gambling.

“Opt-Out” and Other Gambling Statutes

Individual states and Indian tribes would be able to “opt-out” and thus prohibit or limit Internet gambling within their borders by notifying the Secretary that they will limit such bets.  Bets could not be taken from any such state or tribal land.  Violations would subject operators to loss of license, fines and/or criminal penalties of up to five years.

The bill also provides that the federal wire statute (18 U.S.C. 1084) does not apply to any wagers with an operator licensed by the Secretary under the Act.

Fees

The bill authorizes Treasury to assess “user fees” to administer the act and to meet the expenses of reviewing license applications and administering the Act; but these amounts cannot be used for general government funds.

Record Keeping

The legislation would impose new record-keeping requirements on operators and require them to disclose the name, address, social security number of any person placing a bet.  It would also mandate the disclosure of the bettor’s gross winnings, gross wagers, gross losses and net winnings for the year.  Licensee/operators would be required to withhold on the bettor’s winnings.

Reasonable Prudence in Regulation Act

Mr. Frank’s second bill, the Reasonable Prudence in Regulation Act (H.R. 2266), would delay for one year compliance with the regulations adopted under UIGEA in December, 2008 by the Federal Reserve Board and the Department of the Treasury. 

Presently these regulations must be complied with on December 1, 2009.  This bill would extend that compliance date one year to December 1, 2010.

This bill was referred to the House Financial Services Committee.

Internet Gambling Regulation and Tax Enforcement Act of 2009

Congressman Jim McDermott (D-WA) introduced the third bill this week dealing with Internet gambling.  He introduced similar legislation in the last Congress.

Mr. McDermott’s bill (H.R. 2268), which is the tax component of the Frank Internet regulatory scheme, would impose a 2% fee on any company licensed by Treasury to offer Internet wagering.  The 2% license fee would be paid every 30 days based on the funds deposited with the operator by bettors during that period.  The fee could not be paid out of funds deposited by bettors.  The fees would be paid into the general fund of the Treasury. 

In order to receive a license, the operator must implement measures to ensure that all taxes applicable to Internet gambling are collected from individual bettors and from the operators and paid to the Treasury.

The bill has been referred to the Committee on Ways and Means.

Senate Bills

In late February, a companion bill to Congressman Franks House bill was introduced in the Senate.

Senators Ron Wyden (D-OR) and Judd Gregg (R-NH) introduced the Bipartisan Tax Fairness and Simplification Act of 2010 (S. 3018).  Although the bill is principally a tax bill, including provisions to make the federal tax code simpler, fairer and fiscally responsible, it also includes provisions that would permit Internet wagering with federally-licensed operators and tax it.  Presumably the Internet tax would pay for some of the other tax changes proposed in the bill.   

The bill was referred to the Senate Committee on Finance.

Basically, the bill is identical to Congressman Barney Frank’s Internet Gambling Regulation, Consumer Protection and Enforcement Act (H.R. 2267).  The Senate bill would not repeal the Unlawful Internet Gambling Enforcement Act.  Rather it would create a federal regulatory and enforcement framework under which Internet gambling operators/licensees could obtain federal licenses from the Department of Treasury authorizing them to accept wagers over the Internet from individuals in the U.S. The bill applies to both foreign and domestic operators, including those offering advance deposit wagering on horse racing. 

The Internet Poker and Games of Skill Regulation, Consumer Protection, and Enforcement Act

Senator Robert Menendez (D-NJ) has also introduced an Internet gaming regulation bill.  The Internet Poker and Games of Skill Regulation, Consumer Protection, and Enforcement Act (S. 1597) would also authorize federally-licensed operators to offer poker and other games of skill on the Internet. 

The bill includes several provisions beneficial to the industry.  It would exempt Internet wagering on horseracing under the Interstate Horseracing Act (IHA) from the licensing, regulatory, enforcement and taxing requirements.  It would also clarify that interstate betting pursuant to the IHA is not prohibited by the Federal Wire Act and repeal the current 25% withholding tax on pari-mutuel racing.

The bill was referred to the Senate Finance Committee. 

Licensing Requirements

Like the other bills, Senator Menendez’s bill would not repeal the Unlawful Internet Gambling Enforcement Act (UIGEA).  Rather it would create a federal licensing, regulatory, taxation and enforcement framework under which Internet gambling operators could obtain federal licenses from the Department of Treasury authorizing them to accept wagers on poker and other games of skill over the Internet from bettors in the U.S.  The licensing requirements are similar to the other bills.   

Horseracing Provisions

The bill includes several important benefits for pari-mutuel horseracing. 

• The industry and the Department of Justice have a long-standing disagreement regarding the application of the federal Wire Act (18 U.S.C. 1084) to racing’s interstate wagering activities.  This bill would clarify that the Wire Act does not prohibit activities allowed under the IHA.  (It also provides that the federal wire statute would not prohibit any wagers with an operator licensed by the Secretary under the Act.)

• It effectively exempts horseracing (and poker) from the regulations already adopted under UIGEA in December, 2008 by the Federal Reserve Board and the Department of the Treasury.  Presently these regulations must be complied with on December 1, 2009. 

• It repeals the current 25% withholding tax on pari-mutuel winnings and raises the reporting threshold from $600 to $1,200.

AHC Position

The AHC has not taken a formal position on the various Internet bills, although it would oppose any legislation that did not permit continued interstate wagering on pari-mutuel racing currently allowed under the Interstate Horseracing Act.