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[toc]Quite correctly Pennsylvania state politicians have more important issues to focus on than online gambling regulation. Their time—and attention span—is limited. But online gambling regulation is on the table, so there are some basics that need to be mastered.
If politicians misunderstand or have misconceptions about online gambling regulation, then we, as part of the industry, are at fault. Policy making that is not based in reality results in bad laws that fail to meet their objectives.
Debate and proposals currently under consideration in Pennsylvania prove that there is a disconnect between reality and what politicians believe.
Here then, is a simple primer on the key regulatory issues for any state considering online gambling regulation.
Objective is consumer protection, increased tax revenue, business for PA casinos
Nobody wants to say it out loud, but it is completely legal for Pennsylvania residents to play online poker and casino games online. Providing them is illegal, but playing them isn’t.
Not just in Pennsylvania, but in all fifty states, not one person has ever been prosecuted for playing online poker or casino games. That includes the handful of states where it is an offense to play online poker or casino.
The proposed legislation is not therefore about legalizing online gambling. It is about:
- whether or not to regulate it to provide consumer protection;
- whether or not to collect taxes on the revenues it produces;
- and whether or not to give Pennsylvania casinos the business or leave it in the hands of offshore operators.
The proposed system must bring people to the regulated online gambling market
All of the above benefits only come if the people switch their play from offshore sites to sites licensed under the new regulations.
There are two primary factors that decide how much online gambling the regulated sector will capture: price and product.
- If it costs a lot more to play at regulated sites than unregulated sites, then many players will keep playing with the offshore operators.
- If the product is not comparable with what is offered by offshore sites, then people will go where they get the product they want.
European regulators call this channelization, a concept that embodies the regulatory system capturing as large a share of the market as possible.
The gambling tax rate determines the capture rate
Price is heavily dependent on the tax rate set for online gambling. Operators can absorb gambling taxes up to around 15 percent of gross gaming revenues, thereafter they must on the costs to their customers.
Independent research on the 14 EU countries which have introduced online gambling regulation shows that customers are price sensitive. There is a direct correlation between tax rate and the proportion of players captured by the regulated market.
Tax revenues are dependent on players entering the regulated market
If most players don’t enter the regulated sector, it follows that the state’s tax revenues will be low.
The tax rate that maximizes the proportion of players moving their play to regulated sites is between 15 percent and 20 percent.
That is also the sweet spot for maximizing tax revenues. It enables the casinos to make reasonable profits on their online business.
A tax rate in the region of the 54 percent currently paid on Pennsylvania slot machines would generate less than 40 percent of the tax revenues that can be expected from a rate in the sweet spot.
However, at 54 percent, the casinos will find it unattractive to offer a full product suite. The few which decide to apply for a license will find it commercially unviable to offer online slots.
New Jersey online gambling regulation has now created revenues in excess of $500 million. The effective tax rate is 17.5 percent, producing around $87 million in gambling tax revenues for the state.
The benefit is even greater when other taxes and additional employment are factored in.
At the moment, all that revenue in Pennsylvania flows offshore to unlicensed operators.
Consumer protection is stronger at online casinos
Opponents of online gambling regulation hold that age verification and problem gambling is easier to detect in a casino than at an online gambling operators.
This turns out not to be the case.
The experience in New Jersey, Delaware, as well as in the EU countries which have introduced online gambling regulation, all indicates that age verification systems work, and underage online gambling is prevented.
Unlike in a live casino, online casinos track every action and every transaction. This big data enables them to use sophisticated systems to identify problem gambling early. Behavior patterns are more visible in online gambling than on the casino floor.
Money laundering is minimized by regulation
There are no cash transactions online.
Everything goes through the banking system, so it becomes easier to track sources of funds. Not only does this help in combating problem gambling, it also makes it more difficult to use regulated online gambling sites for money laundering.
The money laundering risk comes not from players at online sites (paywall) but from organized crime setting up unlicensed gambling sites.
In 2016, Italian police seized assets worth 2 billion euros ($2.2 billion) and issued 41 arrest warrants in connection to gambling operations run by the ‘Ndrangheta mafia organization.
The crime syndicate was operating online gambling sites on the unlicensed Dollaro poker network. The gambling sites weren’t being used to launder money, they were used to make a profit using rigged games.
To launder the proceeds, the criminals took their money out of online gambling and used it for such things as buying racehorses in London.
The Italian mafia think even an unregulated online poker site is not a useful place to launder money.
Players are confused when there is no regulation
In the absence of regulation, players are exposed to offshore sites offering a full range of online gambling. Research has shown that many of these players believe that the site they play on is regulated by their state or country.
There are big online sites which offer services to US citizens in defiance of US law. But they are in full compliance with the law where they are situated.
Sites like Americas Cardroom and Ignition offer what looks like the full range of player protection that would be offered by a US regulated site, including for problem gambling. So it is unsurprising that the average customer can’t tell them apart from a legitimately regulated site.
This creates the opportunity for organized crime to produce look-alike sites. Thus, they confuse the customer into believing that they are playing in a safe environment.
Regulated sites can be required to make a prominent display of their legally licensed status with links to the regulator’s official list of authorized providers.
Online gambling provides benefits for land-based casinos
Especially when the gambling law demands that online licensees must hold a land-based casino license, the financial benefits of online gambling largely flow to the existing casinos.
This is the case in New Jersey. There the casinos have reported that online gambling has not just boosted their revenues, it has given them a way to market their physical properties to a demographic they have found hard to address.
They have found no issues with so-called cannibalization.
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Regulation allows the state to restrict offshore operators
Under a state-regulated system, the authorities can use ISP blocking and financial transaction blocking to limit the impact of offshore operators.
Banks and other financial institutions are already prohibited from making financial transactions to offshore gambling websites. The Unlawful Internet Gambling Enforcement Act (UIGEA) makes it tough for offshore sites to accept deposits and make payouts to players.
But that is only one side of the coin. Under a state-regulated system, players can use authorized online payment processors and the regulated banking system to make transactions.
This extra convenience that regulated operators can offer over the offshore sites is a major competitive advantage.
Typically, jurisdictions that introduce online gambling regulation also make it illegal to play on unlicensed sites.
This is a powerful tool because a few high profile prosecutions can help to spread the message that only gambling on licensed sites is legal. It is virtually impossible to bring legal action against the offshore sites themselves because they are not subject to US federal or state law in their own jurisdictions.
The regulated sector still faces stiff competition
Unfortunately none of these measures can fully compensate for all of the attractions offered by the offshore operators.
Americas Cardroom regularly offers online poker tournaments with over $1 million in prize money. None of the US state-regulated online poker rooms can offer such headline prize pools.
The recently announced tournament series from PokerStars in New Jersey offers the largest guaranteed prize pool of any online tournament series since regulation began.
The Spring Championship of Online Poker is providing $1.2 million in guaranteed prize money. But that is spread over 70 individual events, with even the largest only offering a $200,000 prize pool.
This is why the future potential of interstate compacts is so important. With a larger player pool, licensed and regulated gambling sites can offer prizes competitive with those available in the black market.
Summary
- Online gambling is generating huge revenue streams which flow offshore, untaxed and unregulated.
- Regulation provides tax revenue, consumer protection, and for local casino businesses.
- Regulation only works if the gambling tax rate is set at the optimum level for both channeling players to licensed providers, and collecting the desired amount of tax. The optimal rate is between 15 percent and 20 percent.
- The experience of other online gambling jurisdictions shows that regulation can prevent children from gambling online. It can also provide early intervention for players at risk of problem gambling.
- Regulation also prevents criminals from operating online gambling sites as part of their illegal activities. And it helps protect players from being deceived by them.
- Online gambling regulation increases existing casino revenues. It does not cannibalize them.
