Remote Gambling: Industry Trends and Federal Policy
Released: 2014-07-02T00:00:00

Summary:
Gambling, once widely outlawed, is now a regulated, taxed activity that is legal in some form—bingo, card games, slot machines, state-run lotteries, casinos, and even online—in all but two states. Like so many other industries, the gambling industry is being transformed by technology that has begun to shift patronage from casinos, bingo halls, or stores selling lottery tickets to desktop computers and tablets connected to the Internet and to mobile devices that may communicate by telephone or direct satellite links. This report discusses remote gambling and the likely implications for the broader gambling industry.
State governments have the main responsibility for overseeing gambling, but Congress historically has played a key role in shaping the industry. The Unlawful Internet Gambling Enforcement Act (UIGEA; P.L. 109-347) of 2006 prevents payments to illegal gambling-related businesses, but does not outlaw all forms of remote gambling. It allows states and Indian tribes to offer remote gambling within their territory if certain conditions are met. A majority of states allow Internet betting on horse racing, and a few now permit Internet lottery ticket games. A number of Indian tribes and gaming companies have created entities to develop remote gambling, and seem likely to expand them rapidly if the legal issues are clarified.
Another major development was the U.S. Department of Justice (DOJ) clarification of the scope of long-standing laws it has used to prosecute Internet gambling, including the 1961 Wire Act. In December 2011, a DOJ interpretation of the Wire Act authorized states to allow online gambling, except for sports betting. Since then, Delaware, New Jersey, and Nevada have implemented online gambling programs within their borders. Several more states are considering whether to legalize online gambling, and some have laws that expressly prohibit online gaming.
Several of the larger casino operators favor expanded remote gambling. Proponents have formed the Coalition for Consumer and Online Protection, which asserts the need for comprehensive national regulation and points to anticipated federal revenue from taxes and registration fees generated by authorized remote gambling sites. In the 113th Congress, bills have been introduced that would allow and tax remote gaming nationwide, and create a new federal department to oversee online gambling, with proposals for either an Office of Internet Poker Oversight in the Department of Commerce or an Office of Internet Gambling Oversight in the Department of the Treasury. An opposing group that also includes prominent casino owners, the Coalition to Stop Internet Gambling, supports the Restoration of America's Wire Act (S. 2159 and H.R. 4301), which would expressly prohibit all online gambling in the United States. Opponents are concerned that a national online gaming market could draw customers away from traditional casino operations, and that remote gambling could result in increased fraud and money laundering. Congress also faces consideration of the balance of federal and state regulation and the possible social costs of expanded gaming, including problem gambling.

subsections: section_title: Introduction
paragraphs: Gambling, once widely outlawed, is now a heavily regulated, taxed activity that is legal in some form in all states except Hawaii and Utah. No federal legislation governing online gambling has been passed in recent Congresses, but there have been major developments at the state level. Three states and the U.S. Virgin Islands allow intrastate Internet gambling. In addition, 39 states permit casino gambling, and 44 states and the District of Columbia have a state-run lottery. While state governments have the main responsibility for overseeing gambling, Congress historically has played a significant role in shaping the industry. Congressional actions date back to 1960s-era anti-racketeering laws, a 1988 statute setting policy for Indian gaming, and a 1992 law banning sports betting in all but four states.
A survey by the American Gaming Association (AGA) found that 3% of U.S. adults who gambled in 2012 did so over the Internet. Online gambling is expected to account for an increasing share of the overall U.S. gambling market in coming years. The rise of Internet gambling worries certain gambling operators because they fear losing customers at some of their land-based casino operations to online gambling. Other casino owners disagree, seeing Internet gambling as a significant new revenue source.
section_title: The Evolution of Remote Gambling
paragraphs: Like so many other industries, the gambling industry has been transformed by developments in computing and telecommunications. The first online poker site, Planet Poker, was launched from Costa Rica in 1998. Antigua and Barbuda offered the first Internet gambling sites in the mid-1990s. Online gambling is now legal in about 85 countries. The AGA estimates that 1,700 easily accessible and unregulated websites accept online bets, generating annual revenues of between $4 billion and $6 billion. Many of the most popular sites are licensed in the European Union (EU), which accounts for approximately 45% of the worldwide online gambling market. According to private estimates, annual gross global revenue from online, television, and mobile gambling is now around $40 billion, and is forecast to exceed $50 billion by 2018 (see Figure 1 ).
Some of the biggest potential markets, including China, Japan, South Korea, and the United States, continue to prohibit many forms of gambling over the Internet. Nonetheless, according to AGA, Americans gambled $3 billion on foreign gaming websites in 2012.
As online gaming grew, federal officials acted against it under a series of 1960s statutes, including the Wire Act, which makes it a federal crime to use telecommunications to conduct illegal gambling. In one of the best-known cases, Jay Cohen, a co-operator of the Antigua-based World Sports Exchange, was arrested in 1998 and charged with violating the Wire Act for advertising his company's services in the United States and accepting wagers from bettors in states where such gambling was illegal. Cohen was sentenced to 21 months in prison and fined $5,000. The U.S. Supreme Court declined to hear his appeal.
In 2003, the U.S. Department of Justice (DOJ) warned media outlets that running advertisements for gambling websites could violate the Wire Act. Microsoft, Google, and Yahoo agreed in 2007 to pay a combined total of $31.5 million to resolve DOJ claims that they were promoting illegal gambling by running advertisements for certain websites.
In 2006, partly in response to the recommendations of a congressionally created commission, Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA; P.L. 109-347 ). The law bars gambling-related businesses from accepting payment that is outlawed by state or federal statutes. UIGEA makes it illegal for banks and credit card firms to process payment to online gambling companies. However, UIGEA does not outlaw any specific types of gambling over the Internet, and allows states and tribes to continue or initiate Internet gambling within their borders if they apply certain safeguards. While UIGEA included exceptions for intrastate online betting such as horse racing, "fantasy" sports, and online lotteries, it did not clarify the scope of older laws that DOJ has used to prosecute Internet gambling, such as the Wire Act.
On April 15, 2011, which online poker players have dubbed "Black Friday," the U.S. Attorney for the Southern District of New York indicted the founders of three major Internet poker websites—PokerStars, Full Tilt Poker, and Absolute Poker/Ultimate Bet—for allegedly using phony corporations and websites to disguise illegal payments to their operations. DOJ charged that the companies, which were located overseas but took bets from U.S. players, violated UIGEA, the Wire Act, and other federal laws. In September 2011 DOJ filed a civil suit against Full Tilt Poker, which had an estimated 60% of the global Internet poker market, for allegedly defrauding bettors. On July 31, 2012, all civil complaints against PokerStars and Full Tilt Poker were dismissed following agreements with DOJ, payments of $731 million to settle the claims, and the purchase of Full Tilt by PokerStars. Fulltiltpoker.com reopened in Europe, but Americans cannot access the Full Tilt website. PokerStars has yet to acquire a license to operate in any state.
DOJ announced a major shift in its view of Internet gambling in December 2011, when it concluded that the Wire Act of 1961 applies only to sport-related gambling activities. This reversed its long-held assertion that all forms of Internet gambling are illegal. DOJ's opinion has been widely interpreted to mean that states can allow online gambling if it does not involve sports.
A number of states and tribes have taken advantage of the DOJ memo to allow online betting on horse races and Internet lotteries. Nevada now permits online poker, and Delaware and New Jersey have authorized all forms of remote gambling (poker, slots, and various table games), with the exception of sports wagering. Internet gambling is also regulated in the U.S. Virgin Islands. These state-authorized activities rely on software that uses global positioning technology, Internet addresses, and other data to ensure that gamblers are physically located within the state's borders and are old enough to gamble legally. Regulations to implement UIGEA have also made it easier for state lotteries and other legal gaming operators to receive payment via credit cards and other electronic payments.
With at least some restrictions now lifted, many participants in the gambling industry, from Indian tribes to state lottery commissions to casino operators, have been exploring ways to increase their involvement in remote gaming. Companies not involved in the traditional gaming industry are also interested. Social gaming—games hosted on social networking sites such as Facebook and Google+—provides venues to play online games in the United States, but not real-money versions. Internet sweepstakes cafes, where consumers buy phone cards that, as a bonus, include sweepstakes entries and then use the cards to play games that resemble slot machines, are estimated to bring in more than $10 billion a year, but some states have begun to ban them. In 2013, Ohio, Florida, and Mississippi outlawed Internet cafes, and other states may follow.
section_title: The U.S. Gambling Industry
paragraphs: Many traditional forms of gambling, which can require substantial capital investments, could be affected in significant ways by the legalization of additional remote gambling. On the one hand, online gambling could allow land-based casinos to expand their businesses and promote their brands. Yet it could also present a new competitive challenge if fewer customers frequent brick-and-mortar gambling establishments. Casinos that rely heavily on slot machines may face the greatest challenges, especially those that primarily serve day trippers.
Taken together, gambling industries and casino hotels employed nearly 400,000 people nationwide in 2013 (see Figure 2 ). Of these, 132,800 worked in gambling, while 265,800 were employed in casino hotels. More than half of these jobs were located in Nevada or New Jersey. Gambling industry and casino hotel employment fell 2% between 2003 and 2013. In 2013, the average wage for gambling industry employees was $29,679, and casino workers earned an average of $35,832.
The U.S. market for gambling consists of several distinct sectors, each with its own business model and technology.
subsections: section_title: Lotteries
paragraphs: Lotteries, generally defined as games of chance with the winner chosen via the drawing of lots, are the most widespread form of gambling in the United States. Regulated by state governments, lotteries are now run in 44 states and the District of Columbia. Since New Hampshire reinstituted the modern lottery in 1964, state offerings have moved from rudimentary games with preprinted tickets and weekly or monthly drawings to instant scratch-off tickets, lotto games (in which players pick their own combination of numbers), and, in a growing number of states, video lottery terminals, commonly referred to as VLTs, that offer casino-type games such as blackjack and poker. States often retain 30%-40% of gross gaming revenues (sales less prizes).
States have banded together to offer lottery games such as Powerball across state lines, working through the Multi-State Lottery Association and the Mega Millions consortium. The two lottery groups in 2010 agreed to cross-sell tickets. Such mega-games allow states to offer jackpots that can be in the millions of dollars, increasing demand. In 2012, Mega Millions made history with a jackpot of $656 million. Unlike many other countries, including Ireland, the United Kingdom, and Germany, the United States does not have a national lottery.
Lottery gross gaming revenues were estimated at $29.4 billion in FY2013, according to NASPL. Those numbers rose 3% from a year earlier, when lotteries generated $19.5 billion. In recent years, state lottery administrators have experimented with strategies to improve sales and returns, such as online sales. Illinois was the first state to privatize the management of its lottery in 2011, in the expectation that a private operator might be better able to boost sales while the state would benefit from an up-front payment. Since then, Indiana and New Jersey have privatized their lotteries.
Georgia and Illinois already sell lottery tickets online, and several others have considered whether to offer online lottery sales, among them New Jersey and Florida. Colorado has expressly prohibited online lottery sales, and Maryland imposed a moratorium through April 2015 while the issue is studied. In a three- to four-year pilot program that started in March 2012, the Illinois Lottery is selling Mega Millions tickets on its website, with reported sales of $36.9 million to date. A mobile app allows players to purchase tickets using their mobile phones.
section_title: Commercial Casinos
paragraphs: According to the American Gaming Association (AGA), in 2012 there were 464 land- or riverboat-based commercial casinos in the United States, along with 49 racinos (gambling venues located at race tracks) and 413 card rooms. Commercial casinos, owned and managed by private companies without the involvement of Indian tribes, were in operation in 17 states. Racinos operate in 14 states. AGA reports gross revenues for commercial casino operators of $37.3 billion in 2012 (see Figure 3 ) and employment of almost 332,000 people. 
Commercial casinos are regulated by the states. States generally mandate background checks for key employees, specify the level of payouts to players, and require audits and inspections. Many large casino companies, such as Caesars Entertainment, MGM Resorts International, Wynn Resorts, and Las Vegas Sands Corp., are publicly traded on U.S. stock exchanges, making them subject to Securities and Exchange Commission financial reporting requirements.
AGA reports that slot machines now account for 70% of revenue on commercial casinos' floors, up from about 40% in the 1970s. The machines are increasingly sophisticated, using electronic screens that display a variety of games, and offering combined jackpots that can run into the millions of dollars. Commercial casinos in South Dakota and Iowa earn more than 90% of their revenues from slot machines. In Nevada, where table games are more important than in other states, slot machines accounted for more than 60% of gambling revenues in 2012.
With more than 260 locations grossing more than $1 million in gambling revenue, Nevada had the largest number of commercial casinos in FY2013. Other major locations with commercial casinos are Atlantic City, the Chicago area (including neighboring parts of Indiana), Detroit, Connecticut, Philadelphia, St. Louis, and the Mississippi Gulf Coast. Each generated $1 billion or more in casino revenues in 2012 (see Table 1 ). While many casinos, such as riverboat casinos, cater to day visitors, major casinos in Las Vegas, Atlantic City, and other select areas market themselves as vacation destinations, with high-end amenities, convention and meeting facilities, and big-name entertainers. On the Las Vegas strip, gambling revenue accounts for 35%-45% of total revenue of casino hotels, according to an analysis by Standard & Poor's.
section_title: Tribal Gaming
paragraphs: According to the National Indian Gaming Commission (NIGC), an independent federal regulatory agency within the Department of the Interior, 237 of the 566 federally recognized tribes ran gaming operations in 2012. The 420 Indian facilities generated $27.9 billion in gross gaming revenue (see Figure 4 ). Aside from recession-related declines in 2009 and 2010, Indian gaming revenues have risen steadily since the Indian Gaming Regulatory Act (IGRA; P.L. 100-497 ) was passed in 1998.
Many Indian gambling establishments are relatively small, but tribes also own major casinos such as the Mohegan Sun, operated by the Mohegan Tribal Gaming Authority Management Board, and Foxwoods Resort Casino, owned and operated by the Mashantucket Pequot Tribal Nation. Foxwoods is not only the nation's largest tribal casino, but one of the largest casinos in the United States. Both are located in Connecticut. The 20 largest Indian gambling operations account for 55.5% of tribal gaming revenues.
Some tribes are interested in sponsoring online gambling, including California's Alturas Indian Rancheria tribe and the Cheyenne and Arapaho tribes. The Tribal Internet Gaming Alliance, which currently includes the Lac du Flambeau Band of Lake Superior Chippewa Tribe and the Bad River Band Chippewa Tribe, was established in 2013 to help shape federal Internet gambling policy.
subsections: section_title: Indian Gaming Regulatory Act
paragraphs: Native American casinos are typically not subject to the same state or local taxes on their revenues as commercial casinos. Under IGRA, tribes are entitled to negotiate agreements with a state, through which they can typically offer any form of gambling that is already legal in that state. Congress passed the law after the Supreme Court held in 1987 that Indian tribes had considerable authority to conduct gaming operations on their land even if they did not comply with all state laws and regulations. IGRA authorizes three classes of gaming:
class I social gaming, for prizes of minimal value or in connection with traditional tribal ceremonies, is subject to tribal regulation; class II bingo and card games, excluding baccarat and slots, are subject to joint tribal and federal regulation; and class III casino gaming is subject to both state and tribal control through a tribe-state compact, which must comply with a federal framework.
For a tribe to offer class II and class III gaming on a reservation or land held in trust, the tribe must be "located in a State that permits such gaming for any purpose by any person, organization or entity." Federal courts have interpreted this provision to permit tribes to conduct any type of gaming permitted in the state, but without state limits or conditions. For example, tribes in states that permit "Las Vegas" nights for charitable purposes may seek to negotiate a compact with a state that allows for class III casino gaming. On the other hand, the fact that state law permits some form of lottery is not, in itself, sufficient to permit a tribe-state compact allowing all forms of casino gaming.
There has been controversy regarding so-called "reservation shopping," in which tribes, often in rural areas, seek to locate casinos on land closer to urban centers in order to attract more customers. The Secretary of the Interior has authority over tribe-state compacts. NIGC oversees class II gaming, tribal gaming ordinances, and some regulatory issues. Its chairman is appointed by the President and confirmed by the Senate. The other two commissioners are appointed by the Secretary of the Interior.
IGRA places limits on the use of tribal revenues from Indian gaming. Among the permissible uses are education, health care, tribal government and other development activities, and per capita distributions to tribal members. Because Indian tribes are sovereign nations under federal law, they do not pay taxes on income generated by commercial activities. Tribes pay employment taxes, however, and are taxed on wagering. In negotiating compacts with state governments, some tribes have pledged to share a portion of proceeds from class III gambling with the state. According to a report on the Indian gaming industry by a private research group, Indian gaming returned $9 billion to states in the form of taxes, revenue sharing, and other payments including compact revenue agreements in 2012.
section_title: Financing Uncertainty
paragraphs: As is the case with commercial casinos, some tribal operations that expanded in recent years have had difficulty meeting or restructuring debt obligations. The Mashantucket Pequot Nation, which operates the Foxwoods casino, defaulted in 2009 and completed the restructuring of its debt of $2 billion on July 1, 2013. The Mohegan Tribal Gaming Authority, which refinanced $1.64 billion of long-term debt in March 2012, announced layoffs involving hundreds of employees at the Mohegan Sun in 2010 and again in 2012. Because tribes are sovereign nations, there are emerging complications for lenders. For example, the Mohegan tribe's constitution gives its Gaming Disputes Court, made up of a trial court and an appeals court, exclusive jurisdiction over disputes involving gaming. The Mohegan Sun 20 13 Annual Report spelled out some of the potential legal issues:
We, the Tribe and our wholly-owned subsidiaries may not be subject to, or permitted to seek protection under, the federal bankruptcy laws since an Indian tribe and we, as an instrumentality of the Tribe, may not be a "person" eligible to be a debtor under the U.S. Bankruptcy Code. Therefore, our creditors may not be able to seek liquidation of our assets or other action under federal bankruptcy laws. Also, the Gaming Disputes Court may lack powers typically associated with a federal bankruptcy court, such as the power to non-consensually alter liabilities, direct the priority of creditors' payments and liquidate certain assets. The Gaming Disputes Court is a court of limited jurisdiction and may not have jurisdiction over all creditors of ours or our subsidiaries or over all of the territory in which we and our subsidiaries carry on business.
An ongoing dispute between Wells Fargo Bank and Saybrook Investors LLC, and Wisconsin's Lac du Flambeau Band of Lake Superior Chippewa Indians could affect gaming financing. Wells Fargo has sued the tribe over its failure to make monthly payments on a $50 million tribal bond to consolidate debt and invest in a riverboat casino operation in Mississippi. The U.S. District Court for the Western District of Wisconsin in 2010 found that the bond deal was invalid because it had not been reviewed by the National Indian Gaming Commission, as the court said was required under IGRA. After a remand in September 2011 by the Seventh Circuit Court of Appeals, it may take a few more years and possibly a few more appeals for a ruling on the validity of the bond documents other than the bond indenture.
section_title: Pari-Mutuel Betting
paragraphs: Legal in 43 states, pari-mutuel betting is defined as "player-banked betting with all the bets pooled and prizes awarded from the pool." The most common examples in the United States are dog and horse racing and jai alai (a game played on a court with a ball and wicker racket), and other sporting events in which participants finish in ranked order.
In recent years, the industry has developed an extensive system of Internet and off-track wagering. In 2000, Congress approved legislation to amend the definition of "interstate off-track wager" in the Interstate Horseracing Act (15 U.S.C. §§3001-3007). Proponents claim the amendment permits tracks to accept bets online from individuals located in states where pari-mutuel betting is legal (although not necessarily where either off-track or online betting is legal); the Department of Justice disagrees. A bill introduced in the 112 th Congress, H.R. 2702 , would have clarified that the Wire Act and other laws do not apply to the Interstate Horseracing Act.
Despite the legal uncertainty, interstate pari-mutuel betting with remote devices is growing through the use of advance deposit wagering (ADW). With ADW, consumers set up accounts with companies such as Twinspires (owned by the Churchill Downs racetrack), XpressBet, or TV Games Network (TGV). They then use the accounts to place bets electronically on races over the phone, on a computer, or with mobile device applications and set-top remote control devices linked to TGV channels that broadcast horse racing. The Oregon Racing Commission, which licenses and audits many of the largest firms taking advanced deposit wagers, reports that online wagering via its licensed companies rose to $2.5 billion in 2013, from $830 million in 2003.
section_title: Sports Betting
paragraphs: Congress in 1992 passed the Professional and Amateur Sports Protection Act (PASPA; P.L. 102-559 ) with strong support from the National Basketball Association, the National Football League (NFL), Major League Baseball, the National Hockey League, and the National Collegiate Athletic Association, among others. The law generally barred state governments from licensing, sponsoring, operating, advertising, promoting, or engaging in sports gambling. It contained exceptions for Nevada, Oregon, Delaware, and Montana, each of which allowed certain types of sports betting at the time of passage. New Jersey failed to pass legislation in time to qualify for the PASPA exemption. Currently, Nevada is the only state to permit wagers on a full complement of sporting events and leagues. According to the Nevada Gaming Control Board, casino-goers in Nevada wagered about $3.5 billion on sporting events in 2012, a rise from $1.9 billion in 2002.
Delaware, which allowed only limited multi-game or parlay betting on NFL contests at the time the 1992 law was passed, enacted a law in 2009 to create a state sports lottery. The NFL and other sports leagues challenged the law, and the U.S. Third Circuit Court of Appeals ruled that the state was limited to offering narrow betting, similar to what existed in 1992. The U.S. Supreme Court in May 2010 declined to hear an appeal, effectively ending Delaware's effort to expand sports betting. After its voters authorized sports betting at casinos and racetracks in 2011, New Jersey mounted another court challenge to the constitutionality of PASPA. In September 2013, the U.S. Third Circuit Court of Appeals ruled that New Jersey's sports wagering law conflicts with PASPA and should not be implemented. The Supreme Court may consider whether to hear New Jersey's appeal of the lower court ruling in 2014.
Two bills have been introduced in the 113 th Congress related to sports gambling. The New Jersey Betting and Equal Treatment Act of 2013 ( H.R. 626 ), introduced by Representative Frank Pallone, would expressly exempt New Jersey from PASPA. The Sports Gaming Opportunity Act ( H.R. 625 ), by Representative Frank LoBiondo, would amend PASPA to create an exemption from its prohibitions for any state that establishes sports gambling through laws enacted on or after January 1, 2013, and that go into effect no later than January 1, 2017.
section_title: Regulation of Remote Gambling
paragraphs: Federal remote gambling legislation could benefit some sectors of the gambling industry more than others, depending on how it is crafted. State lottery officials, for example, have expressed concern that proposals that would give existing gambling establishments preference for online poker licenses could give those businesses an advantage in the market. By the same token, commercial casinos are worried that under the existing legal framework, online state lottery promotions, such as keno-type games, could encroach on their turf. If the United States passes federal online gambling legislation and all states opt in, which seems unlikely, H2 Gambling Capital, a consulting firm, predicts a U.S. online gambling market of some $26 billion five years after enactment.
Interest groups and gaming companies are at odds over remote gambling. One of the strongest proponents of legalized online poker is the Poker Players Alliance. Caesars Entertainment and MGM are among the large casino operators that have urged Congress to adopt federal legislation to regulate Internet gambling to avoid a patchwork of state regulations and different tax rates. These interests formed the Coalition for Consumer and Online Protection in 2014. Aligned against them are others, including most prominently the Coalition to Stop Internet Gambling. The North American Association of State & Provincial Lotteries (NASPL) and the National Conference of State Legislatures (NCSL) want individual states to have the right to legalize, license, and tax remote gaming. The National Governors Association largely echoes this view, and it has called on lawmakers to include state input before moving on any online gaming legislation. 
Many Indian tribes have declared their opposition to any federal gaming regime because of its broad waiver of sovereign immunity, although some of the larger tribes are now beginning to reverse their previous positions, viewing online gambling as a possible business opportunity. The American Indian Gaming Association has a set of conditions it wants to see met in any bill to legalize interstate Internet gambling. The tribes, as sovereign nations, want to ensure that their Internet gambling revenues are not taxed, that qualified tribal operations are allowed to participate in the online market from the outset, and that existing state-tribal compacts are not undermined. The American Indian Gaming Association has been concerned that some proposals could give commercial casinos and other established businesses early entry into the market, possibly putting tribal operations at a disadvantage.
Even if it leads to the growth of gambling revenues and employment at the national level, federal remote gaming legislation has the potential to cause revenue and employment declines in certain locations. These effects may well depend upon the details of whatever legislation Congress passes and the specific actions taken by individual states in response.
Enforcement of remote gaming laws also presents logistical difficulties, including monitoring myriad websites to make sure that minors do not gamble; verifying the geographic location of gamblers on sites that are limited to certain states or territories; and auditing websites and payment systems. Consumers may experience difficulty resolving disputes with online operators whose physical location may be in countries with weak law enforcement or extreme banking secrecy.
Federal rules to implement UIGEA require financial firms to engage in due diligence to ensure that businesses engaged in Internet gambling furnish proof of legal operating authority and that state or tribal gambling ordinances include requirements verifying the age and geographic location of clients. Nonetheless, the Department of Justice, the Department of State, and state attorneys general have raised questions about the potential for fraud and money laundering. In September 2013, J. Britt Johnson, deputy assistant director of the FBI Criminal Investigative Division, cautioned that Internet poker could "provide more opportunities for criminals to launder illicit proceeds with increased anonymity," but that "these methods could be detected and thwarted by a prudent online casino, for example, by blocking software designed to enable online anonymity." Still, he cast doubt on the ability of the gambling industry to readily identify or deter some sophisticated methods.
The Oregon Racing Commission has addressed some of the regulatory issues in its procedures for licensing firms that provide advanced deposit wagering on horse races. Some ADW firms ran into difficulties after final regulations to implement UIGEA took effect, as several credit card issuers blocked payment to the companies out of concern that they might be linked to illegal gambling operations. Oregon now requires such firms to be licensed and audited by the commission, whether or not they are physically headquartered in the state. ADW firms must provide financial information including resources and detailed projections of revenue, expenditures, and cash flows by month; a list of all personnel; a segregated account with a federally insured bank to hold the funds of its account holders; a $50,000 security fee; and proof of "an operational presence within the State of Oregon" such as a call center or a subcontract with an existing call center.
The Remote Gambling Association (RGA), a trade association of licensed gambling operators in Europe, has worked with regulators to develop industry standards. In July 2010 the RGA issued anti-money laundering guidelines for the Internet casino industry, designed to supplement laws and regulations. The guidelines recommend third-party verification of data, including use of software or approved third parties for "face to face" verification of customer documents; validating a customer's address; and ensuring that transactions are carried out through recognized credit institutions. In August 2012, RGA published model technical guidelines for the online gambling industry, including responsibilities for credit card payments.
section_title: Problem Gambling
paragraphs: As states have expanded legal gambling, several have also created programs—funded through tax revenues or assessments on private companies—for treatment of individuals who are considered problem or pathological gamblers. The National Council on Problem Gambling (NCPG) estimates, based on previous research, that about 1% of the population can be classified as pathological gamblers and another 3% as problem gamblers. It has estimated that problem gambling affects 6 million to 8 million Americans. Adolescents and males are considered to be at higher risk of a gambling disorder. In April 2012, NCPG released standards for responsible Internet gambling, which are intended to provide guidance to new online operators and regulators.
According to a survey by the Association of Problem Gambling Service Administrators, nearly 40 states offer some type of publicly funded gambling addiction service; about 15 states fund employees who work full-time on the issue. Spending ranges from nothing in a dozen states to a high of about $1.42 per capita in Delaware.
NCPG endorsed legislation before the 112 th Congress, H.R. 2334 , the Comprehensive Problem Gambling Act of 2011, which would have included problem and pathological gambling in federal mental health programs and would have initiated research on problem gambling. A bill on problem gambling has not been introduced in the 113 th Congress. Opponents of legislation to expand remote gaming cite the potential for an increase in problem gambling if the ease of online gambling encourages even more people to gamble. As dissenting members of the House Financial Services Committee wrote in opposing a bill in the 111 th Congress that would have allowed Internet gambling ( H.R. 2906 ),
[y]oung people are particularly at risk. John Kindt, Professor of Business Administration at the University of Illinois says: "It's 'click the mouse, lose your house.' It puts gambling at every work desk and every school desk and in every living room. It would increase problem gambling rates exponentially." By approving this bill, the largest expansion of gambling in history, the Committee has taken steps to open casinos in every home, dorm room, library, iPod, Blackberry, iPad and computer in America.
Because Internet gambling has developed only recently, the scientific literature on its effects on problem gambling is in its infancy. In 2013, the American Psychiatric Association classified problem gambling as an addictive disorder akin to alcoholism. Gambling addiction experts at Washington University in St. Louis found that "based on available research, it is unclear if the Internet contributes to more gambling problems, but we know that those who choose to gamble using the Internet and experience problems are often involved in other forms of gambling as well." Likewise, a survey of more than 4,500 participants in Internet gambling in Australia found that "online gamblers were not more likely to be classified as problem gamblers than non-online gamblers." Iowa's Department of Public Health recently studied the potential health issues related to legalizing Internet poker in Iowa. Among other findings, the study said "the literature cannot support a claim that Internet poker will cause people to become problem or pathological gamblers; however, researchers have asserted that Internet gambling has the potential to contribute to problem gambling."
section_title: Gambling as a Government Revenue Source
paragraphs: Revenues from lotteries, taxes on commercial casinos, and other gambling represented an average of 2.4% of own-source general revenue raised by state governments in FY2012, according to the most recent numbers complied by the Rockefeller Institute of Government. State gambling revenues rose from $15 billion in 2000 to $25.8 billion in 2012, in good part because more casinos, racinos, and lottery products came into the market (see Figure 5 ). 
Although minor on a national scale, gambling taxes are extremely important for certain states. In some instances, the state or local tax on casino winnings may be less than 10%, while in others, it can exceed 20%. In Nevada, gaming taxes made up about 24% of the state's general fund revenue in 2013, compared with 31% from sales and use taxes. In Delaware, in FY2013, the lottery's contribution to the state's general fund was $235.3 million, which makes it the fourth-largest source of revenue for the state, ahead of corporate income and gross receipts taxes. In Indiana, gaming revenue came to $752 million during FY2013, constituting around 5% of the state's general fund revenues. In Rhode Island, casino revenue represents the third-largest source of income, behind income and sales taxes, with the state receiving more than $300 million in revenue from its two gaming facilities in FY2011. Even though Las Vegas is the nation's number one gambling venue, Pennsylvania collected more commercial casino tax revenue ($1.5 billion) than Nevada ($869 million). Tax rates may partly explain the difference. Pennsylvania taxes at a rate of 55% of gross slot machine revenue and 16% of table games revenues, whereas Nevada's rate tops out at 6.75% on gross gaming revenue, with additional county fees and levies.
Nationwide, gambling revenues that shrank during the 2007-2009 recession as a result of falling consumer income and state spending have largely recovered. However, the expansion of gambling is not leading to increased revenue for all state governments. The creation of new lottery games and construction of casinos in new locations may be leading to market saturation, especially in the Northeast, where casino revenue in New Jersey fell 6% in 2013. Harrah's in Tunica, MS, has shut its doors. 
section_title: State Action on Remote Gambling
paragraphs: In recent years, a few states have legalized online gambling, others have considered legislation on Internet gambling, and still others have made it illegal (see Figure 6 ).
Among recent developments at the state level are the following:
Nevada in 2001 became the first state to develop a regulatory framework for online gambling. It awards online gaming licenses for poker only. By federal law, online poker games approved in Nevada can only be played within the state. Before any online system can go live, the licensees must "prove their systems are capable of identifying players by location and that players are of legal age." Three of Nevada's 265 casinos currently offer online poker. From February to April 2014, Internet poker revenue totaled about $2.5 million. Analysts estimate that Nevada's online poker intrastate market will yield between $50 million and $60 million in annual revenue. Delaware became the first state to authorize full online casino-style gambling (poker, table games, and video lottery games), legalizing it in June 2012. Full-scale online gambling was launched in November 2013 at the state's three racetrack casinos. The Delaware Department of Finance estimated the law would generate at least $3.75 million in revenues for the state in FY2013. Delaware's authorized online casino and poker offerings are operated by a single provider, 888 Holdings. New Jersey's regulations governing online gambling took effect in October 2013, which allows licensed casinos to apply for online gambling permits and to offer poker, table games, and slots. Seven of the state's 12 casinos offer online gambling. Each authorized casino has partnered with an online gaming operator, such as Gibraltar-based Bwin.party Digital Entertainment and 888 Holdings, to run its website. New Jersey's virtual casinos generated $50.5 million in revenue from December 2013 to the end of April 2014. California has debated legislation over the last few years that would authorize Internet gambling within the state. The state's Native American tribes currently have the exclusive right to offer gaming on video devices, and their opposition in the past has led to withdrawal of Internet-related bills. It has been estimated that legal online poker in California could generate more than $260 million in revenue the first year. It is uncertain if, or when, California will vote on an online poker bill. Pennsylvania is considering a measure to allow Internet poker, slots, and table games, and also a bill that would prohibit them. A May 2014 study commissioned by the state's Joint Legislative Budget and Finance Committee concluded that Internet gambling would either have a small cannibalization effect on traditional offline casino gaming or possibly might complement the state's physical casino industry. New York is considering an Internet poker-only bill, which would require operators to purchase a gaming license at $10 million, and gross gaming revenue would be taxed at 15%. The state's Gaming Commission could issue up to 10 licenses for interactive gambling.
In addition to these developments, about a dozen states expressly prohibit online gambling, including Illinois (except for lottery ticket sales over the Internet), Indiana, Louisiana, Montana, Oregon (save for pari-mutuel online horse race betting from licensed operators), South Dakota (does not apply to the state lottery), and Washington.
section_title: Congressional Action on Remote Gambling
paragraphs: While states are moving forward on a piecemeal basis, recent Congresses, including the 113 th Congress, have considered various bills that would either legalize or regulate interstate Internet gambling nationwide or prohibit online gambling. Committees in both houses of Congress held hearings on the subject in 2013. In 2012, the Senate Committee on Indian Affairs discussed Internet gaming and how it might affect Indian tribes.
The congressional Joint Committee on Taxation in 2010 estimated that licensing fees from the Internet Gambling Regulation, Consumer Protection, and Enforcement Act, introduced as H.R. 2267 in the 111 th Congress, would have led to a net federal revenue increase of $283 million over a 10-year period. That legislation would have authorized the Secretary of the Treasury to establish a system to license and regulate Internet wagering, subject to additional oversight and licensing investigations performed by recognized state gaming authorities, with operators paying fees to meet the cost of reviewing license applications and administering the act. The Joint Committee on Taxation also estimated that the federal government would collect an additional $42 billion over 10 years under H.R. 2230 , the Internet Gambling Regulation and Tax Enforcement Act of 2011. That legislation would have imposed a license fee for online gambling operations equal to 2% of all funds deposited by customers into special accounts that could be used for online wagering, and it would have given states and tribes the option of accepting from licensees, on a monthly basis, an online gambling fee "equal to 6 percent of all deposited funds deposited by customers residing in each State or area subject to the jurisdiction of an Indian tribal government." The revenue estimate was based on the assumption that no states opted out of the system.
In the 112 th Congress, Senate Majority Leader Harry Reid and Senator Jon Kyle circulated draft legislation to restrict online gambling in most forms, except for poker, off-track horse race wagering, and certain state lottery sales. The draft called for the establishment of a new regulatory body, the Office of Online Poker Oversight in the Department of Commerce. The bill was never introduced.
In the 113 th Congress, the Restoration of America's Wire Act ( S. 2159 and H.R. 4301 ), introduced by Senator Lindsey Graham and a companion bill by Representative Jason Chaffetz, would amend the Wire Act to prohibit all forms of Internet gambling in the United States, including in the three states where online gambling has already been licensed and regulated. This bill would not make online games themselves illegal, but rather would prohibit use of the communications network to play games like poker or bingo over the Internet, restoring the original interpretation of the Wire Act. The bill contains exemptions for online interstate horse race wagers and state-licensed computer-generated retail lottery sales.
Representative Peter King introduced the Internet Gambling Regulation, Enforcement, and Consumer Protection Act of 2013 ( H.R. 2282 ), which would create an Office of Internet Gambling Oversight (OIGO) in the Department of the Treasury to oversee state and tribal agencies that license and regulate online gambling operators. Most forms of gambling, except sports betting, would be permitted. The bill includes an "opt-out" provision for any state or tribe that does not wish to participate in the federal licensing system, and would grandfather in any states with laws that permit some kind of online gambling before the passage of the bill. Representative Jim McDermott sponsored a companion bill, the Internet Gambling Regulation and Tax Enforcement Act of 2013 ( H.R. 3491 ), that would impose a 12% tax on any licensed operator that offers Internet wagering. Of that, one-third would go to the federal government and two-thirds to states and tribes that participate in the national regime. A 50% tax would be imposed on all unlicensed operators.
An online gambling measure under consideration in the 113 th Congress is the Internet Poker Freedom Act ( H.R. 2666 ), introduced by Representative Joe Barton. Adapted from similar bills in previous Congresses, the measure would allow a state or tribal gambling oversight commission approved by a new Office of Internet Poker Oversight in the Department of Commerce to license online poker sites only. Registered sites would be subject to regulation and inspection to, among other things, prevent minors from playing, stop money laundering, and identify problem gamblers. The bill would prohibit the use of credit cards. Certain established gambling businesses would initially have preference for licenses.
subsections: section_title: Appendix. A Short History of U.S. Gambling and Lotteries
paragraphs: Government-supported gambling has been part of America's development since the earliest days of colonization, starting with a 1612 London lottery to raise money for the Virginia Colony. While gambling restrictions were imposed in some of the colonies, the Continental Congress used lotteries to raise funds for forces during the Revolutionary War. Lotteries were used to finance public works projects and establish universities, including Harvard, Yale, Columbia, Dartmouth, and Princeton. By 1832, there were more than 400 lotteries in eight states. Annual ticket sales came to 3% of national income and were several times larger than the federal budget.
Public opinion began to sour due to high-profile scandals and graft in lotteries, and by the time of the Civil War legal lotteries basically had been halted. Some gambling and gamblers moved west with the Gold Rush. During Reconstruction, Louisiana created a special lottery to help rebuild the state, drawing players from around the nation. The Louisiana Lottery continued for years, despite evidence of mismanagement and theft. Congress intervened, passing legislation in 1876 banning the use of mail for lottery advertising. Congress approved a second bill in 1890 to ban the use of mail to sell lottery tickets, and in 1895 banned the transport of lottery tickets in interstate commerce.
By 1910, U.S. legal gambling, with the exception of horse racing, was moribund. State-sanctioned gambling began a comeback during the Great Depression as a means to raise money for charity and government services. States began to legalize bingo games in the 1930s, and Nevada legalized casino gambling in 1931.
Illegal gambling also proliferated, leading Congress in 1950 to investigate organized crime and gambling casinos. In 1951 lawmakers passed the Johnson Act, which barred transport of gambling machines in interstate commerce unless they were being moved to a legal jurisdiction. A second round of congressional investigations (from 1955 to 1960) resulted in a series of laws to combat gambling and racketeering.
In 1964, New Hampshire became the first state to reinstate a lottery, and, in 1976, New Jersey voted to allow casinos in Atlantic City. In 1979, Indian gambling began on the Seminole reservation in Florida. In 1987, the Supreme Court upheld the right of Indian tribes to offer unregulated gambling on sovereign lands, so long as they did not violate state criminal laws. In response, Congress in 1988 passed the Indian Gaming Regulatory Act (IGRA) providing for Indian gambling to be regulated under compacts negotiated between state governments and tribes. In 1992, Congress passed the Professional and Amateur Sports Protection Act (PASPA) limiting states' ability to offer sports gambling. After viewing the success of Indian gaming, states began approving non-Indian casinos, riverboat gambling, and racinos, which are racetracks with other forms of gambling such as video slot machines. By 2012, 22 states had commercial casinos. State-licensed boat or barge casinos are now permitted in six states, including Mississippi, Louisiana, and Missouri. Online lottery sales are legal in six states, online gambling is allowed in three states, and explicitly outlawed in nine states, including Louisiana, Montana, and South Dakota.