Is the UIGEA an Appropriate Benchmark for Bad Actor Clauses?

October 30, 2013
Is the UIGEA an Appropriate Benchmark for Bad Actor Clauses?

The industry disagrees on whether the UIGEA is a proper point in the industry’s timeline to distinguish a bad actor from a company suitable for a gaming license.  While the UIGEA did not make anything new illegal, industry observers have often felt that this was the point that the U.S market changed.  It became harder to make a good faith argument that online gaming was legal or operated in a gray area after it was enacted.

The industry has changed drastically since the UIGEA went into effect on October 13, 2006.  Those that were not involved in the industry at the time may not fully understand that there was no consensus about the legality of online poker and casino games in the U.S.  Most industry observers argued that the Wire Act only covered sports betting.  The Department of Justice drew the same conclusion in 2011, but before that point felt it also applied to online poker and casino games.  This does not cover the situation with state gaming licensing requirements, but that was not a common topic pre-UIGEA either.

It seems easy now to say that companies that operate real money gaming over the Internet to players in a certain state need a gaming license.  State gaming laws were hardly discussed until 2006.  That was when Microgaming decided to stay in the U.S. market after the UIGEA.   It banned players from 11 states and Washington D.C. after the UIGEA went into effect citing specific state laws that applied to online gaming. Paradise Poker used a similar list of states as it opted for an orderly 30-day exit of the U.S. market instead of an instant one like most of its competitors chose.  This was the first time many in the industry had seriously considered state law applying to the Internet.

The UIGEA did not make the state laws valid.  It only inflicted federal punishment for violating them.  Operators may have felt that the feds would be more likely to investigate alleged illegal gambling if there was a specific federal law to enforce.

Many industry observers have argued that since the UIGEA did not make anything new illegal, anyone should be able to get licensed as long as they operated ethically.  This would exclude sites that failed and the people associated with them, but allow companies that always paid players to qualify.

Why is the UIGEA a Benchmark?

The UIGEA has been an industry benchmark for when companies could no longer be perceived as operating in a legal gray area.  It has also been used because companies that left the U.S. market after its passage have been away for seven years.  This eliminates any unfair competition argument that brick and mortar operators may have about their inability to participate in the U.S. market until now.

It seems extreme to punish companies that held a good faith belief that their business operated legally, but that is exactly what Massachusetts did when it investigated Caesars Entertainment.  A management member of the interactive division worked for Party Gaming and a U.S. facing payment processor before the UIGEA.  Party Gaming and the processor eventually settled with federal authorities.

What Online Poker Companies Could Qualify?

The list of online poker companies that could qualify in a state drops to near zero if companies that operated in the U.S. pre-UIGEA are considered unsuitable.  Betfair has never accepted American players.  However, it intends to use software in New Jersey that has.  The company owns a dated online poker platform that was once operated by PokerChamps, which was U.S. friendly.  Betfair as a company would suitable even under strict suitability requirements, but it would presumably have to find a different software partner in a state that excluded any U.S. activity, even before the UIGEA.

Caesars Entertainment owns the rights to a platform that would qualify as suitable under strict requirements, but according to Massachusetts regulators, it is not suitable for other reasons.  A strict interpretation might even exclude the only other online poker platform operating in Nevada because it powered GamesGrid, a site that left the U.S. and eventually closed due to the UIGEA.

This would force companies to use products that are currently under development and not yet proven or contract with smaller operators that launched after 2006 outside the U.S.  This could also exclude experienced management and companies that are vitally important to the success of the industry.

Restricting a company for a certain number of years after the market launches is one solution.  Nevada uses a five-year restriction for companies that operated in the U.S. after 2006.  This gives brick and mortar companies that were excluded a head start.  It also may not make it worth the trouble for a company to challenge the law because by the time the case was settled the period could have elapsed.

States will need to find a proper balance for offshore and brick and mortar operators to get along in the same environment.  Each group needs the other for success.  It appears that New Jersey is on the right path to accomplish that goal.  For the industry’s sake, hopefully other states follow that lead.

Is there a case that companies that operated in the US before the UIGEA owe back taxes?  Absolutely.  Is there a reason to exclude them from operating in a market where there was good faith belief that their business was legal?  Absolutely not.

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