iGaming and the Unated States

Nevada has been working toward the legalisation of iGaming for the last decade

THE STATE OF Nevada has been working toward the legalisation of iGaming for the last decade. In 2001, in my role as Chairman of the Nevada Gaming Control Board (GCB), I worked extensively on state legislation that would legalise, regulate and tax iGaming activities both on an interstate and international level. The then Chairman of the Nevada Gaming Commission (NGC), Brian Sandoval (now the Governor of Nevada), also worked extensively on the legislation and was supportive of its passage. The law was enacted and became known as the ‘Nevada Interactive Gaming Act’. This law did not allow the regulators to go forward without making a finding that the activities could be done in accordance with all applicable laws, including federal laws.

Toward that end, the regulators began a dialogue with the US Department of Justice (DoJ) in an effort to examine the interaction between federal and state law. In a rare move, the DoJ authored a letter concluding that the authorisation of iGaming as set forth in the state law would violate several federal laws, principally the Wire Act. For the next decade, regulators and policy makers monitored the explosive developments in online gaming but were stopped from going forward by the DoJ opinion.

In 2011, the US Congress began consideration of various pieces of legislation that would address the issue. In an effort to prepare for the possibility that the activity may become legal, Nevada lawmakers, regulators and other interested parties began debating the issue. The Nevada Interactive Gaming Act was amended to require the regulators to adopt regulations to implement iGaming. However, a provision was added that does not allow any iGaming licences to be issued unless there is some clarification of the federal law by Congress or the DOJ.

The Nevada regulators held a series of public workshops from June through December of 2011. After assuring themselves that the regulations properly implemented the law by including required protections of player funds, game integrity, and assurances that minors and the vulnerable would be reasonably protected, the NGC adopted the regulations on December 22. Then, in a surprise move, the DoJ issued an opinion on December 23 that appears to clarify and reverse its prior opinions in respect of the applicability of the Wire Act to certain iGaming activities. This letter was in response to an inquiry from the states of Illinois and New York regarding whether they could sell lottery tickets to out-of-state residents over the Internet. The DoJ opined that the Wire Act applied “solely to sport-related gambling activities in interstate and foreign commerce”. Many gaming experts have concluded that this allows states to offer at least online poker and some argue other casino games as well. The opinion seems to open the door for legalisation on a state-by-state basis of at least some gaming activities. In Nevada, the Attorney General’s Office (counsel to the regulators) is considering the ramifications of the opinion and will advise the regulators in due time. The much publicised indictments that were issued on Friday April 13, caused that day to become commonly known as ‘Black Friday’. The new DoJ opinion issued on Friday December 23 is now being dubbed by some as ‘White Friday’.

Meanwhile, the state has begun accepting applications for iGaming licences and has started the probity and financial investigations of the applicants.

As of this writing, seven applications for some form of iGaming activity have been filed. Although not part of the iGaming legislation, in separate legislation, the state authorised the use of independent testing laboratories for terrestrial and iGaming systems. The regulators are currently drafting regulations to allow independent testing labs to work with the state lab to test both types of systems. These regulations are expected to be effective in May or June. What follows is a description of the major provisions of the new Nevada Regulations.

I. iGaming licence requirements

Nevada maintains two main types of iGaming licences. First, the operator of an Interactive Gaming Licence authorises the licensee to operate the interactive gaming system and to accept and pay out wagers. This is similar to an operator’s licence in Europe. The second type of licence is a Service Provider Licence. In order to be eligible for an Operator of an Interactive Gaming System licence, the applicant must have held a land-based licence in Nevada for at least five years and depending upon the location of the licensee, operated a resort hotel with at least 500 slot machines and table games. (These requirements are by law, not regulation.) In order to qualify for a Service Provider Licence, there is not a requirement that the company be a Nevada v Company or have a history in Nevada. This type of licence will allow existing iGaming companies outside the US to participate by affiliating with Nevada Companies.

II. Licence conditions and application process

The provisions for licence conditions and applications are similar to what Nevada has used for land-based gaming. There is an application fee and a deposit that is drawn upon to pay the costs of the investigation. The criteria or standards for licensing are very similar to land-based casinos including an in-depth evaluation of character, reputation, financial status and associations.

With respect to licence conditions, the regulators are free to impose any conditions they deem reasonable. There are a number of reporting and auditing requirements that must be met by virtue of the fact that in order to hold an operator licence, the company must already be licensed to conduct land-based operations and all the reporting requirements that are already in the land-based regulations would still apply.

iGaming is restricted to persons 21 years of age or older and advertising must be truthful.

III. Service providers

Nevada is proposing three classifications of service providers. A class i provider is any interactive gaming service provider that supplies the core services related to the offering and acceptance of wagers and the conduct of games or who receives a percentage of revenue from gambling, and any other provider deemed as such by the Chairman of the GCB. The class i provider must make application on the forms and meet the standards of a non-restricted licence (probity and requirements the same as large land-based casinos).

A class 3 service provider is any person who is acting on behalf of an operator of interactive gaming as a marketing affiliate. The class 3 provider is required to make application on forms prescribed by the chairman. The application for this class is more like a registration. The GCB intends to conduct cursory investigations of these marketing affiliates, but they would not be subject to the standard comprehensive probity checks that class i would be. The licence is probationary in nature. The Chairman of the GCB may convert the application to a class i application at any time. The NGC may then either terminate the class 3 licence and issue a class I licence or terminate the class 3 licence. There is no appeal from such a termination. In addition to marketing affiliates, the GCB has added holders of trademarks and trade names to this category.
A class 2 service provider is any person providing service not captured by 1 or 3 above. Such persons must make application on the forms and meet the standards for a restricted licence in Nevada (small bars, convenience stores and the like that may operate only 15 slot machines or less and no other games). The scope of the investigation is much less than a class 1, but slightly more than a class 3.

IV. Hosting activities

The Nevada Legislature enacted a law in 2011 that authorises “hosting centers”. This new law was supported by the GCB and applies to interactive gaming systems including mobile gaming. Previously, Nevada regulators required certain components of mobile gaming systems and server-based systems to be housed within the bricks and mortar casinos. The new law allows hosting centres to be located in any suitable location, but the hosting centre must be within the state of Nevada. The GCB has not yet drafted regulations addressing the hosting centres.

V. Manufacturers of iGaming equipment and disciplinary action

The new regulations provide definitions for what constitutes iGaming equipment and the standards for approval. Any party that manufactures an interactive gaming system will be required to hold a licence. The standards an applicant must meet are the same as the operator standards discussed previously. The regulations also contain provisions for disciplinary action and set forth the available remedies (suspension, revocation, etc) and due process provisions.

VI. Key individuals

The Nevada criteria for key persons are based on the land-based criteria. Persons in a mandatory licensing position include the CEO, COO, CFO and CTO. For privately held companies, all shareholders holding greater than five percent of the equity must be licensed. For publicly held companies, only those shareholders holding greater than ten percent of the outstanding shares are mandatory. The regulations also contain provisions that allow the regulators to call forward anyone they deem necessary for licensing.

VII. Player accounts

The regulations require each licensee to establish a reserve account. This account must be held in a “reserve” (not subject to any company or other uses) with a highest rated financial institution. The reserve is an amount equal to the total amount of all customer deposits per day. This amount is in addition to the actual customer deposits and can be satisfied using cash, a bond or a letter of credit. There is a requirement for the licence to audit the reserve account requirements on a daily basis.

VII. Conclusion

The attorneys and others who drafted the Nevada regulations drew upon the existing land-based regulations but also relied greatly on established iGaming jurisdictions including Alderney, the Isle of Man, and UK regulatory schemes. As a result, while there are some differences, the systems are also similar in many ways. As presently adopted, the regulations will only allow for the game of poker; however, they are crafted to cover all types of games eventually. Nevada should be applauded for moving forward in a proactive way to address this issue. Millions of Americans gamble online every day without benefit of regulation and consumer protection.

The United States approach of partially prohibiting certain activities and relying on antiquated laws has not worked. While the DoJ opinion seems to have opened the door to a state-by-state legalisation of iGaming, I believe a federal solution is best.

Europe and countries in other regions are light years ahead of the US in the regulation of iGaming. The US would be wise to learn from the mistakes of other jurisdictions. iGaming in Europe has created a fragmented marketplace where regulation is difficult and uncertainty is common.

I believe the best course of action is for the US Congress to create a framework that would establish uniform regulatory standards for the states to use in the day-to- day regulation of iGaming. Congress should also establish a fair and efficient scale of taxation that is uniform among the states. The individual states could then decide as a matter of public policy if they want to participate or not. States could also then compact among one another and potentially with international jurisdictions to pool player funds and create an efficient liquid market. It will also be difficult for the states to prevent illegal operators from operating in the US without federal law enforcement tools. Legalising and regulating any activity becomes futile if the regime allows for black markets and unlicensed operators.

Absent of a federal solution, I am supportive of the states’ rights to move forward and regulate these activities that are occurring among their citizens and will occur no matter what the federal government does or does not do. White Friday is going to make 2012 an interesting year in Nevada and the US.
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