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The New Jersey online gambling law allows online providers to offer any game that meets the state's current standards for casino games. The list includes popular table games such as blackjack.

LEGAL US ONLINE GAMBLING GUIDE Gambling online is quickly becoming the way to place a bet. More Americans are turning to their mobile devices and laptops to play their favorite slots, poker games or bet on sports online. 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, Nevada and Delaware, as well as in the EU countries which have introduced online gambling regulation, all indicates that.

Dear Mr. Freeman:

Thank you for your December 23, 2014, letter to FinCEN Director Jennifer Shasky Calvery with your concerns about a news article referencing potential FinCEN guidance concerning sports betting. While the article apparently was based on unauthorized sources without a clear understanding of the facts, we have been planning on communicating to the casino industry directly with respect to a particular concern in this regard.

It has come to the attention of the Financial Crimes Enforcement Network (“FinCEN”) and its law enforcement and regulatory colleagues that increases in sports betting conducted on behalf of third parties are facilitating criminal activity and posing a money laundering risk to the U.S financial system. In connection with this, it has also come to our attention that casinos may be under the impression that unless specifically directed to do so, a casino never has to ask a patron whether he or she is betting on his or her own behalf or on behalf of another party. We are communicating directly with your organization to correct any such misperception and to remind your industry about the importance of applying a risk-based approach with respect to this issue as well as the need to implement reasonably designed AML programs to address among other risks, the risks associated with third-party betting.

Anti-Money Laundering (“AML”) Vulnerabilities and Risk Exposure

FinCEN understands that certain organizations and individuals have been circumventing various laws related to sports betting.¹ More specifically, criminals are making bets with legally operating sports books, including by using intermediaries to place bets on behalf of unidentified third parties (third-party betting). In these cases, the intermediaries rarely voluntarily disclose to the casino that a transaction is being conducted on behalf of a third party, thereby disguising the third party’s role in the transaction and obscuring the source of funds used to place the bet. This poses distinct money laundering risks for casinos.

In addition to concealing the owner and the origin of funds, third-party betting poses distinct money laundering risks for casinos because it allows criminal organizations, illegal sports books, and others located in any state, where gambling may be illegal, to place bets within states where sports betting is legal.

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Law enforcement has been focusing on this activity for some time. For example, in October 2012, law enforcement closed down a significant bookmaking operation associated with a major organized crime group that had connections to Las Vegas sports books.² Additionally, FinCEN has observed numerous instances in which casino sports books failed to identify in Currency Transaction reports (CTRs) third-parties on whose behalf transactions had been conducted.

Money laundering and Bank Secrecy Act (BSA) compliance risks associated with unidentified third party-betting may include:

• Increased money laundering exposure.
• Failure to identify and report suspicious activity.
• Failure to file accurate CTRs.
• Possible AML Compliance program deficiencies.

AML Compliance Program Requirements

Casinos subject to the BSA are required to develop and implement a compliance program reasonably designed to manage the risk of illicit activity and ensure compliance with applicable regulations. The BSA requires casinos to file reports, properly identify customers conducting transactions, and maintain appropriate records of transactions. These reports and records are highly useful in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.³ Casinos’ compliance programs also must include risk-based procedures to prevent customers from circumventing BSA requirements.

The BSA requires casinos to file accurate and complete reports of each transaction in currency involving either cash in or cash out, of more than $10,000 (Currency Transaction Reports) (CTRs).⁴ Casinos also are required to aggregate transactions in currency (that is, treat the transactions as a single transaction) if the casino has knowledge that the transactions are conducted by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any gaming day.⁵ With respect to completing a CTR, the BSA requires casinos to verify and record the name and address of the individual presenting a transaction, as well as record the identity, account number, and the social security or taxpayer identification number (if any) of any person or entity on whose behalf such transaction is conducted.⁶

When implementing a compliance program, a casino must consider and manage the risks associated with sports betting on behalf of third parties in order to file complete and accurate CTRs, as required by the BSA. One way that a casino can obtain information about the identity of the person on whose behalf the transaction is being conducted is to ask the person conducting the transaction whether he or she is acting for himself or herself or on behalf of another person.⁷ This approach may be particularly effective for casinos that may not otherwise be able to identify a third party on whose behalf a transaction is being conducted. Casinos may also implement other approaches that are best suited to their business activities and customer base, but that allow them to identify effectively those persons on whose behalf a CTR-reportable transaction is being conducted. Casinos should also consider the possibility that a person conducting a transaction may intentionally fail to disclose a third party on whose behalf the transaction is being conducted. In circumstances where a casino knows or suspects this to be the case, the casino would be required to file a SAR consistent with FinCEN’s regulations.⁸

Casinos should be aware that failure to identify a third party on whose behalf a transaction is conducted may constitute a violation of the casinos’ recordkeeping and reporting obligations under the BSA. In addition, this may prompt concern over the adequacy of the casino’s overall compliance program and result in potential deficiencies and rule violations. FinCEN is authorized to assess civil money penalties against a casino, card club, or any partner, director, officer, or employee of the casino for willful violations of BSA anti-money laundering program, reporting, and recordkeeping requirements, and the U.S. Department of Justice prosecutes criminal violations of the BSA and related money-laundering statutes.⁹

FinCEN appreciates the efforts of your organization to help maintain industry focus on the importance of the BSA, and the effort that the American Gaming Association has put into the recent release of a best practices document. FinCEN invites the AGA to share this letter with its members in advance of FinCEN placing it on our website for future reference. Please don’t hesitate to reach out to us again with any of your concerns. Your association and members are welcome to contact FinCEN’s regulatory helpline at 800-949-2732 with any questions about this letter.

Sincerely, /s/ Jamal El-Hindi Associate Director Policy Divison

¹There has been a ban on land-based sports betting in most states since the passage of the Professional and Amateur Sports Protection Act (“PASPA”) in 1992. Currently, Nevada and Delaware have legal land-based sports betting, though several other states are trying to implement legalized sports betting. Together, the PASPA, the Interstate Wire Act of 1961 (18 U.S.C. § 1084), the Travel Act of 1961 (18 U.S.C. § 1952), and the Illegal Gambling Business Act of 1970 (18 U.S.C. § 1955) prohibit sports betting between states that disallow sports betting. The Interstate Wire Act, often called the Federal Wire Act, prohibits the operation of certain types of betting businesses in the United States. The U.S. Fifth Circuit Court of Appeals has ruled that the Wire Act prohibition on the transmission of wagers applies only to sports betting. The Travel Act forbids the use of the U.S. mail, or interstate or foreign travel, for the purpose of engaging in certain specified criminal acts. The Illegal Gambling Business Act was enacted as part of the Organized Crime Control Act of 1970 and specifically aimed at syndicated gambling, that is, large-scale, illegal gambling operations that were thought to be financing organized crime.

²See FBI New York Field Office press release (February 17, 2012). Four Gambino Crime Family Members and Associates Plead Guilty in Manhattan Federal Court, http://www.fbi.gov/newyork/press-releases/2012/four-gambino-crime-family-members-and-associates-plead-guilty-in-manhattan-federal-court.

³See 31 U.S.C. 5311.

⁴See 31 CFR § 1021.311-313.

⁵See 31 CFR § 1021.313.

⁶31 CFR § 1010.312.

⁷See FIN-1989-R005.

⁸A SAR is required if a casino knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part) is intended or conducted as part of a plan to violate or evade any Federal law or regulation or to avoid any transaction reporting requirement under Federal law or regulation. 31 CFR § 1021.320.

⁹See 31 U.S.C. 5321(a)(4) and 5324 and 31 CFR § 1010.820(e) and 31 CFR § 1010.314; see also 18 U.S.C. 1956 and 1957.

[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 completelylegal 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.

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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 collecttaxes 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 pass 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 low margin games such as online poker, and rely on high margin games such as 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, Nevada and 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 everyaction and everytransaction. 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 easierto 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 crimesetting up unlicensed 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 absenceof 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 support 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 existingcasinos.

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 oneside 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 alsomake 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 fullycompensate 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 70individual 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 support 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 increasesexisting casino revenues. It does not cannibalize them.