Internet Gaming - Here at Last?

With House Committee approval of the so-called "(Barney) Frank" bill (HR 2267) last Wednesday, legalized internet gaming took a significant step closer to reality. The consensus among pundits is that enactment into law is unlikely in this session of Congress, but that the odds in favor of some form of legalized and regulated internet gaming in the United States have definitely shifted to the plus side.

At first blush, the bill appears to be a fairly straightforward licensing and taxation program. The devil, of course, is in the details and, in this case, that comes in the form of concepts embodied in several sections, as amended. Basically, these provisions of the proposed act would give the Treasury Department - the federal agency designated to license and regulate internet gambling - the option of "outsourcing" its authority to state or tribal gaming agencies in lieu of creating more federal bureaucracy.
The effect of these provisions would be to create a regulatory checkerboard within a nominally federal regulatory scheme. In theory, this is not particularly troublesome since the regulation of gambling in the United States is already based on a decentralized model (as compared to national programs in some European countries). Delegating internet regulation to existing state or tribal agencies, however, poses some serious questions. It's not that these agencies are necessarily incapable of competently regulating internet activity. In fact, we've argued that regulating the internet is not fundamentally different from regulation of brick and mortar casinos (see our article Internet Gaming: Regulating the “Tubes” in the May 2010 edition of Casino Enterprise Management Magazine). The problem is that the authority for the agency to regulate internet activity would derive from federal, and not state, law and the proposed act appears to give the Secretary of Treasury the final say in most matters. Section 5388 vests full regulatory jurisdiction with the Secretary and mandates that the Secretary, for example, establish the standards and procedures for conducting background checks and investigations. Amended subsection (o), however, appears to permit the Secretary to essentially delegate this authority to state or tribal agencies upon request, if the Secretary determines the agency to be "qualified." This presents a variety of questions as to how delegation would actually work in practice : how does the Secretary determine the "qualifications" of a state or tribal agency if one of the apparent premises of delegation is that federal government lacks gaming regulatory expertise?; could the Secretary set uniform regulatory requirements as conditions of initial or continued delegation?; the proposed act provides for an "administrative assessment" (described as a "user fee") to cover cost, but precisely where would funding for additional staff and programs contemplated for delegated state or tribal regulation come from?; if states or tribes took varied approaches to enforcement, how would these differences be resolved? In short, a hybrid federal-state regulatory structure - however well intended - may end up presenting more problems than it solves.
It will be interesting to see how these provisions evolve as the legislation continues towards enactment. Meanwhile, there are other features of the proposal that we'll address in future postings. Stay tuned.