BILL ANALYSIS Ķ AB 431 Page 1 Date of Hearing: April 27, 2015 ASSEMBLY COMMITTEE ON GOVERNMENTAL ORGANIZATION Adam Gray, Chair AB 431 (Gray) - As Introduced February 19, 2015 SUBJECT: Gambling: Internet poker SUMMARY: Would authorize the operation of an Internet poker Web site within the borders of the state. The bill would require the California Gambling Control Commission (CGCC), in consultation with the California Department of Justice's Bureau of Gambling Control (Bureau), to promulgate regulations for intrastate Internet poker. Specifically, this bill: 1) Provides an Internet poker Web site authorized pursuant to this bill may be operated within the borders of the state in accordance with all applicable laws and regulations, including, but not limited to, the Unlawful Internet Gambling Enforcement Act of 2006. 2) Provides for purposes of this bill, the following definitions apply: (a) "Commission" means the California Gambling Control Commission. AB 431 Page 2 (b) "Department" means the Department of Justice. 3) Provides the CGCC, in consultation with the Bureau, shall promulgate regulations for intrastate Internet poker. These regulations shall include, but not be limited to, both of the following: (a) A licensing process for an individual or entity to become an operator of an Internet poker Web site. (b) Rules for the operation of an Internet poker Web site. 4) Makes legislative findings and declarations. EXISTING LAW: 1) In 2000, Californians approved Proposition 1A which amended Article IV, Section 19 of the State Constitution to allow slot machines, lottery games, and banking card games on Indian tribal lands if: (1) the Governor and an Indian tribe reach agreement on a compact; (2) the Legislature approves the compact; and (3) the federal government approves the compact. Proposition 1A was a follow-up to a court's determination that a 1998 statutory initiative authorizing tribal casinos (Proposition 5) was unconstitutional. The State of California has signed and ratified Tribal-State Gaming Compacts with 72 Tribes and there are Secretarial Procedures in effect with one Tribe. There are currently 60 casinos operated by 58 Tribes. 2) Existing federal law, the Federal Indian Gaming Regulatory Act (IGRA) of 1988, established the jurisdictional framework that presently governs Indian gaming. Under IGRA, before a tribe AB 431 Page 3 may lawfully conduct class III gaming (games commonly played at casinos, such as slot machines and black jack), the following conditions must be met: (1) The particular form of class III gaming must be permitted in the state; (2) The tribe and the state must have negotiated a compact that has been approved by the Secretary of the Interior; and (3) The tribe must have adopted a tribal gaming ordinance that has been approved by the chairman of the National Indian Gaming Commission. 3) In 1984, California voters passed Proposition 37, an exception to the State Constitution prohibition against lotteries. Proposition 37 included the California Lottery Act and created the California State Lottery. 4) In 1933, California voters passed Proposition 5, an exception to the State Constitution, legalizing pari-mutuel wagering on horse racing. Regulation of horse racing is the responsibility of the California Horse Racing Board, which was established by the Legislature in 1933. 6) Authorizes and defines "Advance Deposit Wagering" as a form of pari-mutuel horse wagering in which a person "establishes an account with a board-approved betting system or wagering hub where the account owner provides 'wagering instructions' authorizing the entity holding the account to place wagers on the owner's behalf via the phone or Internet. 5) Provides an exception to the California Constitution to allow the Legislature to authorize cities and counties to provide for charitable bingo games. (Cal. Const. art. IV, §§ 19(b), 19(c).) 7) The Gambling Control Act of 1997 established the CGCC to regulate legal gaming in California and the Bureau of Gambling AB 431 Page 4 Control within the Department of Justice (DOJ) to investigate and enforce controlled gambling activities in California. It prohibits gambling in a city or county that does not have an ordinance governing certain aspects of the operation of gambling establishments, including the "hours of operation" of gambling establishments. The Act granted the CGCC licensing jurisdiction over the operation of card clubs and of all persons having an interest in the ownership or operation of card clubs. 8) Provides that, until January 1, 2020, if a local jurisdiction had not authorized legal gaming within its boundaries prior to January 1, 1996, then it is prohibited from authorizing legal gaming. Furthermore, until January 1, 2020, the California Gambling Commission is prohibited from issuing a gambling license for a gambling establishment that was not licensed to operate on December 31, 1999, unless an application to operate that establishment was on file with the division prior to September 1, 2000. 9) Provides "Gambling operation" means exposing for play one or more controlled games that are dealt, operated, carried on, conducted, or maintained for commercial gain. 10) Authorizes a licensed gambling establishment to contract with a third party for the purpose of providing proposition player services. 11) Provides that a "banking game" or "banked game" does not include a controlled game if the published rules of the game feature a player-dealer position and provides that this position must be continuously and systematically rotated amongst each of the participants during the play of the game. 12) Existing federal law, the Unlawful Internet Gaming AB 431 Page 5 Enforcement Act of 2006 (UIGEA), prevents U.S. financial institutions from processing payments to online gambling businesses. The UIGEA does exempt three categories of transactions: intra-tribal, intrastate, and interstate horse racing. The UIGEA defines intrastate transactions are bets or wagers that are made exclusively within a single state, whose state laws or regulations contain certain safeguards regarding such transactions, expressly authorize the bet or wager and the method by which the bet or wager is made, and do not violate any provisions of applicable federal gaming statues. FISCAL EFFECT: Unknown COMMENTS: Purpose of the bill : For over a century, gambling in California was confined to horse racing tracks and card rooms. Then, the California Lottery was authorized in 1984 and, through a series of federal court cases, changes in federal law, and Proposition 5 and 1A-casino gambling on Native American tribal lands emerged in the last decade of the 20th century. Now it appears that the Internet might be the next phase of gambling expansion in California. The author states, in addition, to countless meetings held among the various stakeholders and interested parties, both supporting and opposing the concept of Internet gaming, the Legislature has held numerous hearings and taken hours of testimony over the past 7+ years on the issues and challenges surrounding the authorization of intrastate Internet gaming in California. On April 23, 2014, the Assembly Governmental Organization Committee held a lengthy informational hearing titled "The Future Public AB 431 Page 6 Policy and Fiscal Implications of Authorizing iPoker Gaming in California." These hearings have helped to identify problems and solutions that have narrowed the differences among various stakeholders, but, to date, no vote has ever been recorded on this issue in a legislative committee. The author emphasizes that although various stakeholders and interested parties have different views relating to the legalization of iPoker in California, those entities have worked together in good faith toward the possible development of a regulatory framework. It has been reported that well over a million Californians are playing Internet poker on Web sites run by offshore companies that are not regulated or licensed by any U.S. government entity - these poker players are at the mercy of unscrupulous operators who may cheat them out of their money with absolutely no recourse. As a result, Californians who play poker on these websites have no way of protecting sensitive personal information when they use their credit card or provide other financial information to such a site. In addition, hundreds of millions of dollars are leaving the California economy, money (and tax revenues) that could stay in the state if intrastate iPoker was legalized in California. The author states, the intent of this bill is to assist the California Legislature to further consider a legislative AB 431 Page 7 framework to authorize qualified entities, which are to be determined, to operate intrastate Internet Poker. The framework shall extend consumer protections to Californians who play online poker, ensure that the revenues from online poker are realized in California, and protect the public interest by ensuring that the various aspects of online poker are sanctioned and regulated by the state. The framework shall take into consideration the negative impacts of gambling, and spur a new industry in California which will provide economic inducements to California's economy, including job creation. Furthermore, the framework shall include strict standards to ensure that the online poker games are fair, played by persons of legal age who are located in California, and using advanced technologies to identify and restrict access by minors. The author states that any iPoker legislative proposal must include a strong regulatory framework that protects Californians and cracks down on illegal online gaming, replacing it with safeguards against compulsive gambling, money laundering, fraud, and identity theft. In addition, the framework should also consider licensing, enforcement, regulatory authority, and taxation. AB 431 Page 8 The author concludes that the goal of this measure is to further explore how a well-regulated iPoker framework can be developed in California that will be used as a national model for creating jobs and revenue for the state while providing a safe, regulated, and responsible entertainment option for its residents. General Background : The global legal framework for Internet gambling is a complicated mix of laws and regulations. In the United States, both federal and state statutes apply. Gambling is generally regulated at the state level, with federal law supporting state laws and regulations to ensure that interstate and foreign commerce do not circumvent them. In October 2006, the United States Congress passed the Unlawful Internet Gambling Enforcement Act (UIGEA), 31 U.S.C. 5361 et seq., which generally prohibits the use of banking instruments, including credit cards, checks, and fund transfers, for interstate Internet gambling, essentially prohibiting online gambling by United States citizens, but which includes exceptions that permit individual states to create a regulatory framework to enable intrastate Internet gambling, provided that the bets or wagers are made exclusively within a single state under specified circumstances. In summary, federal law prohibits online gambling by U.S. citizens but includes specific provisions that allow individual states to offer intrastate Internet gaming, provided that state AB 431 Page 9 laws permitting and regulating that activity could impose reasonable protections against participation by underage persons or by persons located outside the boundaries of the states. Some gaming experts say that gambling over the Internet is not just inevitable but mainstream and readily available to anyone desiring to partake in this activity. Recent reports state that Americans spent approximately $2.6 billion gambling online in 2012, despite being illegal under UIGEA. Most of that money still goes to offshore gambling websites, meaning the websites are operated in other countries where online gambling is regulated or non-existent. These gaming sites are out of the reach of U.S. courts and regulators, exposing online players to significant risks without effective legal recourse. Many gaming experts believe that legalizing intrastate Internet gaming could have a significant positive impact on state revenues by redirecting gaming revenues into a domestic, legal operation that otherwise currently go abroad. However, others have stated this is not easy because it would take time to establish operations, approve contracts, games, hubs, and convince existing players to redirect their gambling to legal, domestic sites. In March 2015, Morgan Stanley revised its forecast for the nationwide online betting market at $2.7 billion by 2020, down from the $5 billion it predicted in late September 2014. The firm cited several reasons for the reevaluation, from payment processing and geolocation problems, to a lack of effective marketing and the continued strength of the offshore market. Three states - Nevada, New Jersey and Delaware - have legalized Internet gambling, but online betting is off to a slow start. It took in $135 million last year; Morgan Stanley initially forecast $678 million. The firm forecasts the 2017 online market will be $410 million, down from an initial estimate of $1.3 billion. It predicts 15 states will legalize online gambling by 2020, with legalization in larger states prompting smaller ones to follow suit. AB 431 Page 10 Gambling opponents, consumer advocates and addiction researchers warn of potentially dire consequences. They say the gaming industry will use techniques perfected in online advertising and marketing to target vulnerable consumers, leading to a spike in problem gambling and, more broadly, a rise in income inequality. As mentioned above, under federal law, states can authorize online gambling only for residents of their states within their state lines. So far, only three U.S. states allow licensed online casinos and poker sites. These states are Nevada, Delaware, and New Jersey. In all three states, a significant portion of the established gaming interests in the states bought into the idea that online gambling could help - not harm - their business models. It is thought by some analysts that California would be a key U.S. state in the legalization process. California's Involvement in iGaming Legislation : At stated above, under the terms of the federal Unlawful Internet Gaming Enforcement Act, states may authorize intrastate internet poker. California, however, currently has no such law. As such, it is legal to play poker in Native American tribal casinos and state-approved card clubs inside California, but not legal to play online poker on a site that allows players from California, other states, and other countries to wager against each other. The effect of the federal law prohibiting interstate internet gambling and California's lack of a law authorizing intrastate internet gambling has been to channel players in California to offshore sites. Since 2008, eleven legislative proposals have been introduced in California in an attempt to change the nature of Internet gambling. Each bill was referred to the respective Governmental Organization Committee in each house but no testimony or vote was ever taken on the issue. On-line Poker Revenue Projections for California : Gaming experts state that if iPoker was legalized in California, the state would benefit financially in three main ways: taxes paid AB 431 Page 11 on operator revenues and profits, income taxes from player winnings, and taxes paid by suppliers and employees of gaming sites. The largest revenue source would be from site operators who would pay fees based on Gross Gaming Revenues (GGR). GGR consists of total wagers made by customers less the winnings paid back to its customers, and a tax rate is applied on the base. A forecast by Morgan Stanley stated that given California's population of 38 million people (vs. NJ's 8 million), "we expect the market to reach $1.1B by 2017." Morgan Stanley estimates that the online poker market in California will be approximately $435 million in Year 1, growing to $1.1 billion by Year 3. A study published by Academicon and PokerScout in December 2013 stated, if California were to legalize and regulate online poker, the market could generate revenue between $217 million and $263 million in its first year of operation and up to $384 million in year ten. California's population is larger than every country in Europe but eight and is viewed by many as possessing the needed online poker liquidity to maintain the player base that is crucial to ensure that such a system is successful from a monetary standpoint. States that have legalized Internet Gaming : Nevada : An Internet gaming bill, AB466, was enacted in June 2001. It authorized certain commercial casinos to offer so-called "interactive gaming." Interactive gaming, currently limited to intrastate Internet poker, went live in April 2013 pursuant to final regulations that were promulgated in December 2011. New Jersey : An Internet gaming bill, A2578, was enacted in February 2013. It authorized commercial casinos to offer so-called "Internet gaming." Internet gaming, currently limited to intrastate Internet poker, table games and slots, went live AB 431 Page 12 in November 2013 pursuant to final regulations that were promulgated in September 2013. Delaware : An Internet gaming bill, HB 333, was enacted in 2012. It authorized games, such as slots, roulette, poker and blackjack, which are to be played on each Delaware casino's website and controlled centrally by the Delaware Lottery. 2014 Legislative Action by States : In 2014, eight states considered but did not enact legislation that would authorize Internet gambling or amend existing Internet gambling statutes. Some states, including California and New York, considered legislation that would authorize Internet poker, only, while others, including Pennsylvania, considered legislation that would authorize some combination of Internet poker, table games and slot games. The states were as follows: California, Hawaii, Iowa, Massachusetts, Mississippi, New York, New Jersey, and Pennsylvania. It should be noted that California, New York and Pennsylvania, account for roughly 22 percent of the U.S. population. What about Federal Legislation to Regulate iGaming ? On the federal level, proposals have been introduced to establish a federal regulatory system for Internet gaming. Congressmen Barney Frank (2010), Senator Harry Reid (2012), Congressman Peter King (2013), and Congressman Joe Barton (2011 & 2013) introduced bills which would have instituted federal regulation of a legalized system of Internet gaming. However, all of the bills stalled in their respective house of origin. It has been stated that Federal regulation would provide a single, comprehensive mechanism for consistent licensing, operation and enforcement of U.S. Internet gambling laws. 2015 Federal Action on iGaming - The Restoration of America's Wire Act : U.S. Representative Jason Chaffetz (R-Utah) reintroduced a bill (HR 707) called the Restoration of America's Wire Act (RAWA) for the 2015 Congressional session. The bill awaits action by the House Judiciary Committee. In March 2015, AB 431 Page 13 the House Judiciary Subcommittee on Crime, Terrorism, Homeland Security and Investigations held a hearing on RAWA. The bill is pending before the House Judiciary Committee. The Department of Justice's current position on the Wire Act as it applies to online gambling is that the Wire Act only applies to "online sports betting." RAWA would amend provisions of the federal criminal code, commonly known as the Federal Wire Act of 1961, to provide that the prohibition against transmission of wagering information shall apply to any bet or wager, or information assisting in the placing of any bet or wager (thus making such prohibition applicable to all types of gambling activities, including Internet gambling. The bill is a reintroduction of previous bills introduced by U.S. Senator Lindsey Graham (R-South Carolina) and Congressman Jason Chaffetz (R-Utah) in March of 2014 on the same subject matter. The bills were not taken up by either chamber before Congress adjourned. In Support : Writing in support, the Morongo Band of Mission Indians, San Manuel Band of Mission Indians, Commerce Casino, Hawaiian Gardens Casino and Bicycle Casino and Amaya Inc. states, "We strongly support authorizing online poker in California and commit to what we understand will be a deliberative process to develop, and ultimately approve, a bill in 2015 to authorize iPoker and establish a safe California market. We know that finalizing the policy that will ultimately regulate California's online poker marketplace will not be quick, nor will it be easy. The stagnation of the last six years has made that obvious. But so far, 2015 has been different. Hard lines and tough talk have morphed into open minds and dialogue. Authorizing online poker will be good for millions of consumers and poker players who will benefit from a safe, regulated, commercial gaming environment where they are protected. Every year that California fails to act not only puts consumers at risk while playing online games from offshore localities that provide few protections and regulations, but our AB 431 Page 14 state also loses out on collecting hundreds of millions of dollars that can be used for essential programs like public schools, public safety, healthcare and social services. We are committed to putting in the hours and the time necessary to establish a vibrant, competitive marketplace, one that provides superior consumer protections, requires strict oversight and regulation of licensees, and service providers, and ensures that the state receives a reasonable return." The California Thoroughbred Breeders Association, Thoroughbred Owners of California and Del Mar Thoroughbred Club states, "the Thoroughbred racing industry has enjoyed a storied and historic history in California featuring some of the world's greatest horses, jockeys, trainers and more than a few colorful owners throughout the years. Thoroughbred racing generates more than $2.5 billion dollars to the State's economy and directly or indirectly provides more than 50,000 jobs in the Golden State. It goes without saying that Internet poker is the most significant legislation facing horse racing in more than a decade. Currently, racing benefits from the exclusivity of providing the only form of legal gambling on the Internet. Racing views Internet Poker as a new form of gaming, which will increase racing revenue and provide a marketing tool to create interest in a youthful demographic, which will continue the history of this beautiful sport. We believe passage of an Internet poker bill which allows racing associations, card rooms and Tribal Governments to compete equally in California will benefit state revenues, protect consumers and underage gamblers, protect consumer's privacy and create new job opportunities. The Legislature must act now in order to establish a regulatory and enforcement frame work and put a stop to illegal offshore sites." AB 431 Page 15 The California Teamsters Public Affairs Council writes, "It is crucial to the horse racing industry to be included, along with Indian tribes and card clubs to be allowed to participate fully as licensees in this emerging on-line on-line gaming market. Our industry is currently the only industry that accepts on-line wagers and the program, which has been in effect for five years has proved to be critical source of revenue for our industry and operated without any issues related to corruption or illegality." The horse racing industry employs thousands of workers both at the track and in agriculture. There are many Teamsters employed in the industry. While the horseracing industry has weathered the storm of the growth in competition with other areas of gaming, basic fairness demands that it be a participant in any gaming market expansion. Horse racing deserves equal treatment with other sectors of the gaming industry. In opposition . Writing in opposition, the Agua Caliente Band of Cahuilla Indians states this measure would broadly authorize intrastate iPoker in California and require CGCC, in consultation with the Bureau, to promulgate regulations to enable play. Our Tribal Council supports thoughtful legislation that does not amount to an expansion of gaming in California. The voters have already said "no" to that. A credible bill in our view would include substantive protections for the consumer, including ensuring that only credible and suitable operators are permitted to conduct iPoker in the state, and only those entities currently allowed to offer poker in this state would be AB 431 Page 16 considered licensees. The Barona Band of Mission Indians states, "It was our understanding that the topic of iPoker would be pursued in a thoughtful and deliberate manner this year - including thorough informational hearings during which key issues and stakeholder perspectives will be discussed. Given the complexity of the issue and the landscape of the stakeholder interests, we believe completion of this key step is vital to a debate that should not be rushed." The Pechanga Band of Luiseņo Indians writes, "Online poker legislation is a significant public policy issue with long-term implications for the State of California, its citizens and our tribal governments. Although stakeholders have made a lot of progress in building consensus on language, important issues remain outstanding including bad actor provisions and eligibility for licensure. Just last year, our Tribe and twelve others support comprehensive legislation that abides by the longstanding public policy principle of limited gaming, protects children and the vulnerable, creates jobs for Californians, provides additional revenues for State services and protects both consumers and the high suitability standards of the gaming industry from organizations that do not respect the law." The California Coalition Against Gambling Expansion opposes this bill stating, "This measure seeks to legalize a massive AB 431 Page 17 expansion in legal gambling in California. This bill would have the state sanction the conversion of every smartphone into a mobile casino, hugely impacting underage gamblers, college students, and those with problem or pathological gambling inclinations. The cots to California families and taxpayers could be immense, far outweighing any possible revenues to the state." CAGE would prefer that state officials clamp down on illegal online gambling which is happening already before opening up the floodgates to state-sanctioned Internet poker. Related legislation : AB 9 (Gatto) of 2015. This bill, which would be known as the Internet Poker Consumer Protection Act of 2015, would establish a framework to authorize intrastate Internet poker, as specified. (Pending in Assembly G.O. Committee - Set for hearing on July 8, 2015) AB 167 (Jones-Sawyer) of 2015. This bill, which would be known as the Internet Poker Consumer Protection Act of 2015, would establish a framework to authorize intrastate Internet poker, as specified. (Pending in Assembly G.O. Committee - Set for hearing on July 8, 2015) SB 278 (Hall) of 2015. An identical measure to AB 431 (Gray) would authorize the operation of an Internet poker web site within the borders of the state. SB 278 requires CGCC, in consultation with the Bureau, to promulgate regulations for intrastate Internet poker. SB 278 would require those regulations to include, but not be limited to, a licensing process for an individual or entity to become an operator of an Internet poker Web site and rules for the operation of an AB 431 Page 18 Internet poker Web site. (Pending in Senate G.O. Committee) Prior legislation : AB 2291 (Jones-Sawyer) of 2013/2014 Session. Would have authorized intrastate Internet poker, as specified. (Never heard in Committee on Assembly G.O.) SB 1366 (Correa) of 2013/2014 Session. Would have authorized intrastate Internet poker, as specified. The bill would authorize eligible entities to apply for a license to operate an intrastate Internet poker Web site offering the play of authorized games to players within California, as specified. (Never heard in Committee on Senate G.O.) SB 51 (Wright) of 2013/2014 Session. Would have authorized intrastate Internet gambling, as specified. The bill would authorize eligible entities to apply to CGCC for a 10-year license to operate an intrastate Internet gambling Web site offering the play of authorized gambling games to registered players within California. (Never heard in Committee on Senate G.O.) SB 678 (Correa) of 2013/2014 Session. Would have authorized intrastate Internet poker, as specified. The bill would have authorize eligible entities to apply for a license to operate an intrastate Internet poker Web site offering the play of authorized games to players within California, as specified. AB 431 Page 19 (Never heard in Committee on Senate G.O.) SB 1463 (Wright) of 2011-12 Session. Would have enacted the "Internet Gambling Consumer Protection and Public-Private Partnership Act of 2012" for the stated purpose of authorizing, intrastate Internet gambling. (Never heard in Committee on Senate G.O.) SB 40 (Correa) of 2011-12 Session. Would have authorized intrastate Internet poker, as specified. The bill required the CGCC to adopt emergency regulations, in consultation with the department, providing for the issuance of licenses to operate intrastate Internet poker Web sites. SB 45 (Wright) of 2011-12 Session. Would have established a framework to authorize intrastate Internet gambling, as specified. The bill would have required the Bureau to issue a request for proposals to enter into contracts with up to 3 hub operators, as defined, to provide lawful Internet gambling games to registered players in California for a period of 20 years, as specified. (Never heard in Committee on Senate G.O.) AB 431 Page 20 SB 1485 (Wright) of 2009-10 Session. Would have enacted the "Internet Gambling Consumer Protection and Public-Private Partnership Act of 2010" for the stated purpose of authorizing, intrastate Internet gambling. (Never heard in Committee on Senate G.O.) AB 2026 (Levine) of 2007-08 Session. Would have authorized the intrastate play of various Internet poker games to be offered by licensed gambling establishments registered with CGCC. (Never heard in Committee on Senate G.O.) REGISTERED SUPPORT / OPPOSITION: Support Amaya Inc. Bicycle Casino California Teamsters Public Affairs Council AB 431 Page 21 California Thoroughbred Breeders Association Commerce Casino Del Mar Thoroughbred Club Hawaiian Gardens Casino Morongo Band of Mission Indians Oak Tree Racing Association Pala Band of Mission Indians Rincon Band of Luiseņo Indians San Manuel Band of Mission Indians The Jockeys' Guild Thoroughbred Owners of California United Auburn Indian Community AB 431 Page 22 Opposition Agua Caliente Band of Cahuilla Indians Barona Band of Mission Indians California Coalition Against Gambling Expansion Pechanga Band of Luiseņo Indians Viejas Band of Kumeyaay Indians Analysis Prepared by:Eric Johnson / G.O. / (916) 319-2531