Effective Sports Betting Regulation Must Cover Mobile and Online Betting, Too.

By: George Calhoun

On May 14, 2018, the Supreme Court struck down the Professional and Amateur Sports Protection Act (“PASPA”), clearing the way for states to legalize sports gambling. In its wake, many states are now rushing to do just that. Currently fourteen states have legislation pending that would authorize some degree of sports wagering. An additional five states already have passed laws (New Jersey, West Virginia, Pennsylvania, Mississippi and Delaware). By bringing sports gambling out of the shadows of the black market, regulation of sports wagering promises to bring greater safety for bettors, verifiable integrity to the games, and revenues to the state. States should take the opportunity to do it right: that means not just regulating sports gambling but bringing it into the 21^st century. Some jurisdictions that have considered authorization of sports gambling have proposed tying it to existing casino properties but have not clearly considered mobile gaming. Having gaming only at a select few physical establishments is unlikely to meet the goals of legalization. Any regulatory scheme must acknowledge the modern reality of today’s consumer. That means they must be allowed to engage in regulated wagers through their mobile device.  Any other choice will fail to make a dent in the existing black market.

Online, mobile gaming is the present and future of the wagering industry. The iDevelopment and Economic Association (“iDEA”) commissioned a study by Alan Meister of Nathan Associates and Gene Johnson of Victor-Strategies of New Jersey’s pioneering 2013 online gaming laws. The resulting study, “Economic Impact of New Jersey Online Gaming: Lessons Learned” concluded that online gaming has been a dramatic success in New Jersey. New Jersey iGaming net revenue has grown from 5.4% of land-based net gaming revenue in 2014, its first full year of operation, to 8.9% of land-based net gaming revenue in 2016, and it is projected to reach 10% in 2017. Online gaming not only contributed significantly to the bottom line of New Jersey’s casinos, it did so without cannibalizing the brick and mortar business. The researchers concluded that, despite a “decade-long downturn in Atlantic City revenues … the land-based casino market stabilized in 2016 [and] the first quarter of 2017 experienced revenue growth in both land-based casinos and iGaming.” This point is key; mobile gaming is keyed to the modern world and consumers who demand access to their entertainment through their mobile device. Because it reaches different customers, in New Jersey, mobile gaming improved the bottom line of casinos.

Although it took some time for iGaming to develop critical mass in New Jersey (in the face of wildly optimistic initial projections), iGaming can now be said unequivocally to be a success. Although New Jersey imposes a modest tax rate of 15%, state and local tax revenue from iGaming in 2016 were approximately $34.5 million and expected to increase to $40.3 million in 2017. Perhaps more significantly, through 2016, New Jersey iGaming has directly and indirectly generated a grand total of:

• $998.3 million in economic output
• 3,374 jobs
• $218.9 million in wages to employees
• $124.4 million in tax revenue to state and local governments, including $83.5 million in online gambling taxes

In addition to providing jobs and tax revenue, a comprehensive regulatory scheme must allow mobile gaming if it hopes to seriously reduce black market gaming, which already is readily available to consumers remotely. Reducing black market gaming is critical both to collecting tax revenues and protecting consumers and the games themselves. Legal sportsbooks—such as those in Nevada or in Europe—are subject to a host of licensing and regulatory requirements that ensure that they operate responsibly. For example, Nevada casinos are subject to the same consumer protection laws as any other business and are held to additional requirements that facilitate the discovery and investigation of corruption or irregularities. Federal and state agencies lack a window into the illegal market, cannot regulate illegal operators, and cannot easily access data related to illegal sports wagering. This makes it much more difficult—and much more resource-intensive—for federal and state authorities to investigate and stop illegal activity or to identify instances of game manipulation. Like law enforcement, the sports organizations have a very limited ability to identify and stop game manipulation as they have no easy access to the sports wagering data of illegal operators.

Where sport betting is legal, however, sportsbooks work aggressively to detect and ferret out corruption or irregularities. Because legal sportsbooks offer their services to the general public—and often are publicly traded—they have a vested interest in maintaining public faith in the integrity of sports betting.   In many cases, it is sportsbooks that lead the charge against gambling-related corruption in sports.  Prominent European sportsbooks, for example, have formed the European Sports Security Association (“ESSA”), which requires its members to keep records of all transactions and to track gambling data as part of an “early warning system” designed to detect unusual betting patterns and to immediately alert all of its members to spot trends and head off suspicious betting activity. ESSA’s early warning system generates dozens of alerts annually, all of which are tracked and reported to the relevant authorities. Many of these irregularities do not lead to any evidence of corruption, but the efforts that legal sportsbooks are able to take—in terms of know-your-customer procedures, information sharing, and compliance—ensure that genuine risks are caught and investigated early, reducing the prevalence of corruption and criminality in legal betting markets.

The value of legal sportsbooks in preventing corruption in sports is no secret. As David Purdum and Ryan Rodenberg explained, “[G]ame integrity concerns—often cited as a reason to oppose regulated sports betting—are now increasingly being used as a reason to support legalized sports wagering, given the ability to track statistical data.” Not surprisingly, the major sports leagues appear to support bringing legal wagering to the “second screen” and making it part of in-game entertainment. To consumers, the availability of mobile gaming applications likely seems a given. But multiple states considering the authorization of sports wagering have either omitted any reference to it or expressly prohibited it. To protect consumers, to protect the integrity of sport, and to maximize tax revenues, legislators who approve legal sports wagering should ensure that any new law expressly permits and regulates online and mobile wagering.

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George Calhoun is a Partner at Ifrah Law and leads the firm’s Payment Processing & Finance and Business Litigation practice groups.