BILL ANALYSIS Ó
AB 2863
Page 1
ASSEMBLY THIRD READING
AB
2863 (Gray)
As Amended August 18, 2016
2/3 vote. Urgency
-------------------------------------------------------------------
|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+---------------------|
|Governmental |19-0 |Gray, Bigelow, Alejo, | |
|Organization | |Bonta, Campos, | |
| | |Cooley, Cooper, | |
| | |Gallagher, Cristina | |
| | |Garcia, Eduardo | |
| | |Garcia, Gipson, | |
| | | | |
| | | | |
| | |Roger Hernández, | |
| | | | |
| | | | |
| | |Jones-Sawyer, Levine, | |
| | |Linder, Maienschein, | |
| | |Salas, Steinorth, | |
| | |Wilk | |
| | | | |
|----------------+-----+----------------------+---------------------|
|Appropriations |14-1 |Gonzalez, Bigelow, |Jones |
| | |Bloom, Bonilla, | |
| | |Bonta, Calderon, | |
AB 2863
Page 2
| | |Daly, Gallagher, | |
| | |Eduardo Garcia, Roger | |
| | |Hernández, Holden, | |
| | |Obernolte, Quirk, | |
| | |Wood | |
| | | | |
| | | | |
-------------------------------------------------------------------
SUMMARY: This bill, which would be known as the Internet Poker
Consumer Protection Act of 2016 (Act), would establish a
framework to authorize intrastate Internet poker in California,
as specified. Specifically, this bill:
1)Establishes the Internet Poker Consumer Protection Act of 2016
(Act) and authorizes the California Gambling Control
Commission (CGCC) and the Department of Justice (DOJ) to
license and regulate internet poker.
2)Defines the types of entities eligible to get an operator's
license, including that the operator must be either a cardroom
or a federally recognized California Indian tribe meeting
certain criteria.
3)Provides an entity, as defined above, shall have operated its
land-based gaming facility for at least three immediately
preceding its application to secure a license to operate an
Internet poker Web site pursuant to this Act, and shall be in
good standing during that time period with the applicable
federal, state, and tribal regulatory authorities.
4)Allows a person who is 21 years of age or older and located
within California to participate as a registered player in an
authorized Internet poker game provided by a licensed operator
on an authorized poker Web site.
AB 2863
Page 3
5)Provides the bill does not authorize any game offered in
Nevada or New Jersey other than poker. Provides an authorized
Internet poker game shall not include any feature that uses an
element of chance to determine the amount or availability of
any prize, payment, or award.
6)Requires CGCC, in consultation with DOJ, to adopt regulations
within 270 days after the effective date of the Act, as
defined.
7)An eligible entity seeking to offer authorized Internet poker
games shall apply to DOJ for a determination of suitability.
If DOJ determines the applicant is suitable to receive a
license, the applicant shall then apply to CGCC for an
operator license. The applicant shall pay an
application-processing fee sufficient to cover the reasonable
costs associated with the determination of suitability and the
issuance of the license.
8)Provides that an operator license denoting full licensure
shall be issued for a term of seven years. Each initial
operator license issued pursuant to this legislation shall
take effect on the same date. A licensee's employees in
direct contact with registered players shall be physically
present in the state. All primary servers, facilities, bank
accounts, and accounting records of the licensee related to
authorize Internet poker shall be located in the state, except
as defined.
9)Provides after receipt of the tribal gaming regulatory
authority's notice, as specified, and upon completion of the
necessary review, the CGCC shall issue a notice to the tribal
gaming regulatory authority stating its finding that the
applicant is suitable or is not suitable for the requested
AB 2863
Page 4
permit. The CGCC shall defer to the tribal gaming regulatory
authority's determination unless it concludes that the
determination was clearly erroneous.
10)Provides an applicant for a service provider license that is
found unsuitable as a covered person shall not be eligible to
be found suitable for a license until January 1, 2022.
a) During the waiting period, as described, an applicant or
person shall not use any covered asset in this state, as
described.
b) A covered person shall not be found suitable for
licensure unless that covered person expressly submits to
the jurisdiction of the United States and of each state in
which patrons of interactive gaming operated by that
covered person after December 31, 2006, were located and
agrees to waive any statutes of limitation, equitable
remedies, or laches that otherwise would preclude
prosecution for a violation of any federal law or the law
of any state in connection with that operation of
interactive gaming after that date.
11)Provides the applicant or any person employed or affiliated
with the applicant is a covered person.
12)Defines "Covered asset" as any tangible or intangible asset
specifically designed for use in, and used in connection with,
the operation of an interactive gaming facility that, after
December 31, 2006, knowingly and intentionally operated
interactive gaming that involved patrons located in the United
States, unless and to the extent such activity was licensed at
all times by a state or the Federal Government, including,
without limitation:
a) Any trademark, trade name, service mark or similar
intellectual property under which an interactive gaming
AB 2863
Page 5
facility was identified to the patrons of the interactive
gaming
facility;
b) Any information regarding persons via a database,
customer list or any derivative of a database or customer
list; and
c) Any software or hardware relating to the management,
administration, development, testing or control of an
interactive gaming facility.
13)Defines "Covered person" as any person who:
a) Has at any time owned, in whole or in significant part,
an interactive gaming facility or an entity operating an
interactive gaming facility that after December 31, 2006,
knowingly and intentionally operated interactive gaming
that involved patrons located in the United States, unless
and to the extent such activity was licensed at all times
by a state or the Federal Government;
b) After December 31, 2006, acted, or proposed to act, on
behalf of a person, as described, and knowingly and
intentionally provided, or proposed to provide, to such
person any services as an interactive gaming service
provider, with knowledge that the interactive gaming
facility's operation of interactive gaming involved patrons
located in the United States; or
i) Purchased or acquired, directly or indirectly:
ii) In whole or in significant part, a person described
in subparagraph a) or b); or
iii) Any covered assets, in whole or in part, of such
person.
14)Provides that there is a rebuttable presumption that an
application for a service provider license is unsuitable if
AB 2863
Page 6
either of the following:
a) The applicant or any person employed or affiliated with
the applicant is a covered person.
b) The applicant owns, leases, operates, or in any manner
utilizes covered assets, where purchased or otherwise
acquired directly or indirectly.
Provides an applicant may rebut the presumption stated-above by
proving to DOJ, by a preponderance of the evidence, any of the
following:
a) The acceptance of the bet or wager, the engagement in
the transaction, or the facilitation of the wager or
financial transaction was not knowing or intentional.
b) The bet or wager was accepted, or the transaction was
engaged in, notwithstanding reasonable efforts by the
applicant, or its corporate or marketing affiliate, to
exclude bets or wagers from the person
15)Defines "Interactive gaming" as the conduct of gambling games
through the use of communications technology that allows a
person, utilizing money, checks, electronic checks, electronic
transfers of money, credit cards, debit cards or any other
instrumentality, to transmit to a computer information to
assist in the placing of a bet or wager and corresponding
information related to the display of the game, game outcomes
or other similar information, as described.
16)Defines "Interactive service provider" as a person who acts
on behalf of an establishment licensed to operate interactive
gaming and:
a) Manages, administers or controls wagers that are
initiated, received or made on an interactive gaming
AB 2863
Page 7
system;
b) Manages, administers or controls the games with which
wagers that are initiated, received or made on an
interactive gaming system are associated;
c) Maintains or operates the software or hardware of an
interactive gaming system; or
d) Provides products, services, information or assets to an
establishment licensed to operate interactive gaming and
receives therefor a percentage of gaming revenue from the
establishment's interactive gaming system.
17)Defines "Significant part" with respect to ownership,
purchase or acquisition of an entity, interactive gaming
facility or person, holding 5% or more of the entity,
interactive gaming facility or person, or any amount of
ownership that provides control over the entity, interactive
gaming facility or person.
18)Provides an entity seeking to act as a service provider shall
apply to DOJ for a determination of suitability. If DOJ
determines the applicant is suitable to receive a license, the
applicant shall then apply to CGCC for a service provider
license, and obtain a service provider license, before
providing goods or services to a licensed operator in
connection with the operation of an authorized poker Web site.
The applicant shall pay an application processing fee
sufficient to cover the reasonable costs associated with the
determination of suitability and the issuance of the license.
DOJ may establish a process to conduct a preliminary
determination of suitability based on a partial investigation.
19)Provides before CGCC issues a service provider license to an
applicant, DOJ shall conduct the full investigation of the
following persons: (1) All officers of the license applicant;
AB 2863
Page 8
(2) The owner or owners of either of the following: (a) The
license applicant and (b) Any corporate affiliate of the
license applicant. (3) Any persons otherwise providing goods
to, or performing services for, the license applicant related
to core functions; (4) Any person deemed by DOJ to have
significant influence over the license applicant or its
service providers or their respective operations; and (5) In
the case of a tribe or a wholly owned tribal entity that is a
service provider, the investigation shall be limited to the
business officers of the tribal entity that will serve as the
service provider.
20)Provides a person seeking to act as a marketing affiliate
shall apply to the CGCC for a marketing affiliate license or
registration, and obtain a marketing affiliate license or
registration before providing the services of a marketing
affiliate to a licensed operator in connection with the
operation of an authorized poker Web site, as described.
States a "Marketing affiliate" means either of the following:
a) A person other than a licensed operator or service provider
who, for a fee or other consideration, provides or refers
players to a licensed operator's authorized poker Web site;
and b) A sub-affiliate of a person, as described, who, for a
fee or other consideration, provides or refers players to a
licensed operator's authorized poker Web site.
21)States employees of the licensed operator or service provider
shall undergo a suitability review and obtain work permits, as
specified. Owners, officers, and directors of licensed
operators shall also undergo a suitability review and obtain
employee work permits, as defined. CGCC may refuse to issue a
license to an applicant, or suspend or revoke a license of a
licensed operator that fails to comply with this requirement.
22)Provides a licensed operator shall ensure that registered
players are eligible to play authorized Internet poker games
AB 2863
Page 9
and implement appropriate data security standards to prevent
access by a person whose age and location have not been
verified, as specified. A registered player shall be
physically located within the State of California at the time
of gambling. Provides DOJ may assess a civil penalty against
a person who violates this provision, whether a licensed
operator, owner, service provider, or player, as specified.
23)Provides all personally identifiable information about
registered players shall be shared with state agencies,
including, but not limited to, DOJ, CGCC, the Franchise Tax
Board, and the Department of Child Support Services as
necessary to assist them in fulfilling their obligations, as
specified.
24)Provides a licensed operator shall establish a book of
accounts and regularly audit all of its financial records and
reports, as specified.
25)States a licensed operator may charge registered players to
play in authorized Internet poker games, as defined.
26)Provides an authorized Internet poker game shall not include
any feature that uses an element of chance to determine the
amount or availability of any prize, payment, or award.
27)Provides a licensed operator shall remit to the Treasurer a
one-time license deposit in the amount of $12,500,000, to be
deposited into the General Fund, as specified. Specifies that
$6,250,000 of the one-time license deposit shall be credited
against the duty imposed the licensed operator's gross gaming
revenues, as described. Upon depletion of the credit amount,
CGCC shall notify the licensed operator to commence with the
annual payments to the state, as defined.
AB 2863
Page 10
28)States each licensed operator shall pay an annual regulatory
fee, to be deposited in the Internet Poker Fund, in an amount
to be determined by the CGCC, for the reasonable costs of
license oversight, consumer protection, state regulation,
problem gambling programs, and other purposes related to this
chapter, determined on a pro rata basis depending on the
number of licensed operators in the state.
29)Requires each licensed operator to remit to the Treasurer on
a quarterly basis for deposit, as specified, an amount equal
to 10% of its gross gaming revenue, as specified.
30)Provides moneys collected each fiscal year, as defined, shall
be deposited as follows:
a) Eighty-five percent, in an amount not to exceed
$57,000,000, in the California Horse Racing Internet Poker
Account, which is hereby created in the General Fund.
Funds shall be annually distributed as follows:
i) One and three-twentieths percent to the defined
contribution retirement plan for California-licensed
jockeys, as specified.
ii) One and three-twentieths percent to provide health
and welfare benefits for California-licensed jockeys,
former California-licensed jockeys, and their dependents,
as defined.
iii) Two and three-tenths percent to supplement the
pension plan for pari-mutuel employees administered on
behalf of the labor organization that has historically
represented the employees who accept or process any form
of wagering at the horse racing meetings and for other
entities licensed to conduct wagering on horse races in
AB 2863
Page 11
California, as specified.
iv) Ninety-five and four-tenths percent to racing
associations or fairs as commissions, to horsemen
participating in the racing meeting in the form of
purses, and as incentive awards, as specified.
a) Five percent, in an amount not to exceed $3,000,000, to
the State Treasury to the credit of the Fair and Exposition
Fund, for use at Class I to IV+ fairs, inclusive, as
defined.
31)Provides the licensed operator shall facilitate the
collection of personal income taxes from registered players by
the Franchise Tax Board and shall be responsible for providing
current and accurate documentation on a timely basis to all
state agencies, as provided.
32)Provides DOJ or CGCC may contract with other public or
private entities, including, but not limited to, state,
tribal, and international regulatory agencies, for the
provision of services related to a responsibility imposed on
the department or CGCC by this Act, as defined.
33)Provides in addition to any other confidentiality protections
afforded to license applicants, the state and its agencies
shall treat the proprietary information of a license applicant
as confidential to protect the license applicant and to
protect the security of any prospective authorized poker Web
site. This Act will not prohibit the exchange of confidential
information among state agencies considering a license
application.
34)Establishes the Unlawful Gambling Enforcement Fund (Fund) in
the General Fund, which is intended to ensure adequate
resources for enforcement, as specified.
AB 2863
Page 12
35)Requires CGCC, in consultation with DOJ, the Treasurer, and
the Franchise Tax Board, to issue a report to the Legislature
describing the state's efforts to meet the policy goals
articulated in this bill within one year of the operative date
of this bill and annually thereafter. Requires the Bureau of
State Audits, at least 4 years after the issue date of any
license by the state, but no later than 5 years after that
date, to issue a report to the Legislature detailing the
implementation of this bill, as specified.
EXISTING LAW:
1)In 2000, Californians approved Proposition 1A which amended
State Constitution Article IV Section 19 to allow slot
machines, lottery games, and banking and percentage card games
on Indian tribal lands if: a) The Governor and an Indian
tribe reach agreement on a compact; b) The Legislature
approves the compact; and c) 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
may lawfully conduct class III gaming (games commonly played
at casinos, such as slot machines and black jack), the
following conditions must be met: a) The particular form of
class III gaming must be permitted in the state; b) The tribe
and the state must have negotiated a compact that has been
approved by the Secretary of the Interior; and c) The tribe
AB 2863
Page 13
must have adopted a tribal gaming ordinance that has been
approved by the chairman of the National Indian Gaming
Commission.
3)States the Legislature has no power to authorize, and shall
prohibit, casino games of the type currently operating in
Nevada and New Jersey.
4)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.
5)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 (CHRB),
which was established by the Legislature in 1933.
6)Provides an exception to the California Constitution to allow
the Legislature to authorize cities and counties to provide
for charitable bingo games. (California Constitution Article
IV Sections 19(b) and 19(c).)
7)The Gambling Control Act of 1997 established the CGCC to
regulate legal gaming in California and the Bureau of Gambling
Control within the 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.
AB 2863
Page 14
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)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.
11)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.
12)Existing federal law, the Unlawful Internet Gaming
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
AB 2863
Page 15
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: According to the Assembly Appropriations
Committee:
1)Annual special fund costs to DOJ in the range of $5 million to
$10 million in 2016-17, 2017-18, and 2018-19, to review and
approve game rules and gaming activities, hire and retain
staff with technical expertise, and develop and enforce
regulations. Annual costs beginning in 2017-18 will be offset
by application fees and ongoing regulatory fees.
2)Significant one-time special fund costs to DOJ on top of
expected annual costs for the initial processing of potential
licensees. It can be expected that in the initial years of
the authorization of Internet poker, DOJ will need a large
number of additional investigators and enforcement staff to
complete determinations of suitability and to conduct
investigations. The precise number of potential licensees and
the infrastructure that DOJ will need is unknown, but these
startup costs could be as high as $70 million in 2017-18.
3)Significant costs to CGCC of at least $2.5 million, $3.5
million, and $2.9 million in 2016-17, 2017-18, and 2018-19,
respectively. Major cost drivers for CGCC include
promulgating emergency regulations and beginning the
development of permanent regulations, hiring staff with
technical expertise, and one-time equipment costs, and other
overhead expenses. Annual costs beginning in 2017-18 will be
offset by application fees and ongoing regulatory fees.
AB 2863
Page 16
4)Annual transfer of revenue generated from license deposits and
a duty on gross gaming revenues of up to $57 million to the
California Horse Racing Board and up to $3 million to the Fair
and Exposition Fund, as required by this bill.
5)Unknown General Fund revenue, possibly in the millions, from
the tax on gross gaming revenue and the license deposit for
licensed operators.
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 poker 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 poker, the Legislature has
held numerous informational hearings and taken hours of
testimony over the past 8+ years on the issues and challenges
surrounding the authorization of intrastate Internet poker in
California. On June 24, 2015, the Assembly Governmental
Organization Committee (G.O.) held a lengthy informational
hearing titled "The Legality of Internet Poker - How Prepared Is
California to Regulate It." These hearings have helped to
identify problems and solutions that have narrowed the
differences among various stakeholders.
AB 2863
Page 17
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 development of a regulatory
framework. This bill is the product of hours of meetings and
negotiations with all interested stakeholders.
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 Web
sites 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.
This bill contains numerous 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. This bill will
create a new and innovative industry in California that will
provide economic inducements to California's economy, including
job creation. This bill includes 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 this bill includes 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
AB 2863
Page 18
addition, the bill contains detailed criteria in the areas of
licensing, enforcement, and regulatory oversight.
The author states, the bill addresses both of the major
roadblocks that have prevented movement of an iPoker proposal
over the years. The two roadblocks being 1) Horse racing as a
licensee; and 2) Suitability of potential applicants.
In an effort to solve the horse racing issue, this bill creates
the California Horse Racing Internet Poker Account, which would
require the first $60 million collected annually from license
fees and taxes on gross gaming revenues be deposited into the
fund. The continuously appropriate fund would be distributed as
follows: 1) a contribution retirement and welfare plan for
California-licensed jockeys, past and present, as well as their
dependents; 2) to supplement the pension plan for pari-mutuel
employees administered on behalf of the labor organization that
has historically represented the employees; 3) to racing
associations or fairs as commissions and to horsemen purses; 4)
breeder incentive awards; and 5) California's network of fairs.
The subsidy is intended to resolve one of the main points of
contention amongst the state's diverse gambling interests. Over
the years, many tribal gaming interests have stated they that
would not support an iPoker proposal where horse racing is an
eligible entity for licensure. Specific tribes have stated that
only they and card-clubs have the right to offer live poker in
the state, and if horse racing were allowed to participate, it
would violate this exclusive right. The author states that a
subsidy in lieu of a license will allow this long-storied
agribusiness to continue to operate and thrive in California
while not being financial impacted by the further expansion of
iGaming in California.
In an effort to solve the suitability issue, this bill would add
tougher suitability standards to further strengthen the
standards that already exist under current law in the Gambling
AB 2863
Page 19
Control Act. Specifically, the bill would: 1) Specify that an
applicant for a service provider license that is found
unsuitable as a "covered person" shall not be found suitable for
licensure until January 1, 2022; 2) Cause any assets to be used
such as trademarks, trade names, databases or other intellectual
property, as described, from unlicensed internet gambling after
December 31, 2006, to be ineligible for use during the
above-referenced waiting period; 3) Place a universal two-year
ban on using any customer lists accrued by a service provider
prior to the enactment of this bill; and 5) Allows CGCC to
impose limitations and conditions upon the issuance of the
service provider license or the utilization of the applicant's
assets acquired. The author believes that with these additional
standards - on top of what is already required under current law
- this bill will induce the strongest suitability standards in
the nation for iPoker operations.
The author believes this bill will create well-regulated iPoker
framework 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: Some gaming experts say that legal 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 it
being illegal. Americans generate nearly 10% of the current $33
billion worldwide online gambling market. Most of that money
went to illegal offshore gambling Web sites, meaning the Web
sites are operated in other countries where online gambling is
regulated or regulation is 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.
AB 2863
Page 20
Experts state that by 2020 the online gaming market is expected
to witness substantial growth. This may be attributed to
increasing number of users taking up online gaming as an
entertainment tool. Furthermore, increasing consumer awareness
towards interactive entertainment systems is also expected to
drive the online gaming market demand. Availability of high
speed internet connectivity, efficient hardware compatibility,
sophisticated gaming techniques and increased consumer
disposable income are some of the key factors driving the online
gaming market.
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.
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 United States Code
Section (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
AB 2863
Page 21
single state under specified circumstances.
On April 15, 2011, three online poker companies (PokerStars,
Full Tilt Poker, Absolute Poker/UltimateBet) were indicted for
violating U.S. laws that prohibit the acceptance of any
financial instrument in connection with unlawful Internet
gambling. The companies argued that poker is a game of skill
rather than a game of chance, and therefore, online poker is not
unlawful Internet gambling. The indictments, quickly dubbed
"Black Friday" by the poker community, came as a shock to a
large number of Americans - estimated between 1.3 million and 15
million - who were playing poker online for real money.
On July 31, 2012, the U.S. Attorney's Office announced that the
United States had entered into settlement agreements with
PokerStars and Full Tilt Poker. U.S. District Judge Leonard B.
Sand approved the $731 million settlement. Under the terms of
the settlement with Full Tilt Poker, the company agreed to
forfeit virtually all of its assets to the U.S. to fully resolve
the charges in the complaint. Under the terms of the settlement
with PokerStars, the company agreed to forfeit $547 million to
the U.S. and to reimburse the approximately $184 million owed by
Full Tilt to foreign players in order to fully resolve the
allegations in the complaint. The settlement further provided
that PokerStars would acquire the forfeited Full Tilt assets
from the government. The settlements with regard to Full Tilt
Poker and PokerStars, and a proposed settlement with Absolute
Poker, "did not constitute admissions of any wrongdoing,
culpability, liability, or guilt by any parties."
On July 14, 2011, Senate Minority Whip Jon Kyl
(Republican-Arizona) and Senate Majority Leader Harry Reid
(Democrat-Nevada) sent a letter to U.S. Attorney General Eric
Holder asking the U.S. Department of Justice to clarify its
position regarding enforcement of online gambling laws.
AB 2863
Page 22
On December 23, 2011, the Office of Legal Counsel of the DOJ
issued a Memorandum Opinion, as an attachment letter to Senator
Harry Reid's July 2011 request. The opinion letter rejected
DOJ's long-held interpretation of the Wire Act, by concluding
that the Act prohibits only sports betting. Until then, DOJ had
consistently declared that the Act barred both "casino games and
sports betting." DOJ noted that there appeared to be a conflict
between the Act and UIGEA. DOJ stated that the "unlawful
Internet gaming" of the UIGEA does not include intra-state
transactions that, among other things, are routed across state
lines. DOJ's new policy did not constitute federal regulation
of Internet gambling, but removed obstacles, which prevented
state governments from enacting legislation, rules and
regulations to regulate intrastate iGaming and issue licenses to
Internet gambling operators and their technology providers.
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
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. 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.
California's Involvement in iGaming Legislation: At stated
above, under the terms of UIGEA, states may authorize intrastate
Internet poker. California, however, currently has no such law.
As such, it is legal to play poker in 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
AB 2863
Page 23
offshore sites.
Internet gambling has been a topic of consideration in
California for some time. With a population of nearly 38
million, California has the potential to be a lucrative Internet
gambling market should the state choose to regulate Internet
gambling, beyond pari-mutuel wagering on horseracing, in the
future.
From 2008-2014, 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.
In 2015, four bills (AB 431 (Gray), AB 9 (Gatto), AB 167
(Jones-Sawyer), and SB 278 (Hall) of 2015) were introduced
relating to the authorization of iPoker in California. Three of
the bills (AB 9, AB 167, and SB 278) were never heard in the
respective Governmental Organization Committee. AB 167 would
have permitted all card clubs, tribes, and racetracks to offer
online poker in California. AB 9 did not permit licensing of
racetracks and included a bad actor clause (would preclude
operators that took bets in the U.S. after the passage of UIGEA
in 2006). AB 431 declared the intent of the Legislature to
authorize iPoker in California and adopt a legal and regulatory
framework. The bill was the first iPoker proposal to ever be
heard and pass a legislative committee (Assembly G.O. and
Appropriations) but was held on the Assembly Inactive File for
further discussion. A summary of the various iPoker legislative
proposals can be found on page 17.
Proponents state that providing a legal mechanism for iPoker
offers an alternative to illegal gambling now being played on
the Internet. Californians can be protected from unscrupulous
gambling enterprises by licensing and regulating iPoker.
AB 2863
Page 24
Proponents further state, the eventual authorization of iPoker,
will not only allow California to protect its consumers but also
help law enforcement agencies work with the industry in
preventing underage gambling, identity theft and other related
fraud activity.
Proponents state that an iPoker framework in California would
not only generate much needed revenue to the state but would
spur a new industry in California that will provide economic
inducements to California's economy, including jobs. In
addition, under a state system, the state would retain tax
revenues in contrast to a federal system where revenues would be
divided between the state and federal government.
Opponents claim that legal Internet gambling represents the
"Mother of All Expansions," turning every home computer, school
laptop, I-phone, I-pad and most cell phones into a gambling
device, and every home, dorm-room, apartment and Wi-Fi business
into a casino. Concerns center on whether widespread
availability of legal and attractive iGaming system would become
problematic with specific subgroups in the population, such as
young adults.
California's horse racing industry is the only legal industry in
this state with experience in the realm of offering wagering
over the Internet. Advance Deposit Wagering (ADW) as authorized
by AB 471 (Hertzberg), Chapter 198, Statutes of 2001 is a system
whereby a person establishes an account, or multiple accounts at
a CHRB-approved "betting system" or a board-approved
"multi-jurisdictional wagering hub." When a person calls to
place a wager from his or her account, the California law
provides that they are actually providing "wagering
instructions," rather than actually making the wager themselves.
In 2014, the total amount wagered by patrons through
California's licensed ADW providers was more than $600 million.
AB 2863
Page 25
On-line Poker Revenue Projections for California: Most gaming
experts agree that the market for regulated online poker in
California will be the largest in the United States. The state
would benefit financially in three main ways: taxes paid 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. New Jersey'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 one, growing to $1.1 billion
by Year three.
A 2011 study by former California Finance Director Timothy Gage
stated that online poker could generate as much as $1.4 billion
in revenue over the first decade if a bill was passed. This
income would come from direct and indirect taxes tied to the
wagering activity. The study further stated that up to 1,300
new jobs could possibly be created - led by jobs in marketing
services, high tech jobs like programmers, and gaming providers.
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 allows
AB 2863
Page 26
interactive wagering on poker and sports; Delaware allows
betting on table games, video lottery, and poker; and New Jersey
permits casino games and poker. Currently, New Jersey dominates
the market, with about 90% of total U.S. online gaming revenue.
Poker represents about one-third of total online gaming market
in those three states.
Nevada: An Internet gaming bill, AB 466, 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. Nevada prohibits Internet gambling businesses that
knowingly and intentionally took or facilitated unregulated U.S.
bets after December 31, 2006, from obtaining interactive gaming
licensure for five years, after the enactment of AB 466. Nevada
has two web poker operators-a World Series of Poker
(WSOP)-branded online poker site and an online site from South
Point Casino (Real Gaming). Nevada's gross revenue from gaming
is generally subject to a 6.75% tax.
At the end of 2014, an online poker site from Station Casinos
(Ultimate Gaming) stopped offering iPoker due to lackluster
revenue. The Nevada Gaming Control Board (NGCB) also stopped
releasing revenue figures, as the state requires at least three
operational sites before such data is released. In 2015, Nevada
and Delaware entered into an interstate poker player sharing
agreement, and following an initial boost to iPoker revenues,
the revenue numbers returned to pre-compact levels.
New Jersey: An Internet gaming bill, A2578, was enacted in
February 2013. It authorized commercial casinos to offer
iGaming in the state of New Jersey. Internet gaming, currently
limited to intrastate Internet poker, table games and slots,
went live in November 2013 pursuant to final regulations that
were promulgated in September 2013. New Jersey requires its
AB 2863
Page 27
online gambling licensees to collaborate with a brick-and-mortar
casino partner. Six commercial casinos are currently operating
Internet gambling Web sites. Furthermore, each casino has
multiple online gaming Web sites operating under their license.
The Division of Gaming Enforcement (DGE) determines license
suitability of a participant. The state does not have specific
language in its Internet gaming statute or regulations that
expressly addresses so-called "bad actors." New Jersey taxes
online gambling revenue at a rate of 15% of gross gaming
revenue.
In 2015, according to the DGE, the online revenue came to $148.8
million, 21% higher than 2014's total. Total online casino
revenue in 2015 was $125 million, up one-third from 2014, while
poker revenue fell 18% to $23.8 million. The state's annual tax
from online gambling was $18.4 million. Overall, online
gambling has risen in popularity since New Jersey introduced
regulation in 2013, and currently it accounts for approximately
8% of the Garden State's overall gambling market.
In December 2013, the DGE suspended their review of a license
application by the former owners of PokerStars, citing legal
concerns about management's outstanding issues with the DOJ. In
2014, Pokerstars, also the owner of Full Tilt Poker, sold their
gambling business to Amaya Gaming Group for $4.9 billion. In
addition, specific executives stepped down as part of the sale
to Amaya. After a lengthy investigation, in September 2015,
Amaya received its approval (Transactional Waiver Order) to
operate PokerStars and Full Tilt in the state. PokerStars began
accepting wagers on March 2016. On April 1, 2016, Amaya's
online gaming license was renewed (Transactional Waiver Order)
by the DGE for another six months. PokerStars NJ operates in
conjunction with its partner, Resorts Casino Hotel in Atlantic
City, and offers both poker and casino games online at
PokerStarsNJ.com to players who are physically located in the
state.
AB 2863
Page 28
In 2016, the Pala Band of Mission Indians, a California tribe
partnered with the Borgata Hotel Casino & Spa to supply the
casino with its online gaming platform and to provide both
online poker and casino games to residents of the state. The
tribe was licensed by the DGE in 2014.
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 Web
sites (horse racetracks with casinos) and controlled centrally
by the Delaware State Lottery.
A single provider powers the state's online casino and poker
offerings (888 and Scientific Games). Total online gaming
revenue (all games) for 2015 was $1.8 million, 14% lower than
the $2.1 million collected in 2014. Poker accounted for
approximately $500,000 of that total revenue figure. When poker
first became legalized online in 2013, monthly revenues
routinely were between $50,000 and $100,000. The market topped
out in December 2013, as poker rake and fees reached $106,922.
Since June 2014, those amounts have not reached the $50,000
threshold. The state's revenue sharing arrangement with the
three casinos authorized to offer online gambling allows it to
keep the first $3.75 million of online revenue, meaning the
casinos did not share in any of the revenue. The state has
experienced low registration rates and the wagering games are
not available on devices such as tablets and smart phones.
States that ban iGaming: Eight states have enacted laws
expressly prohibiting iGaming. Illinois, Indiana, Louisiana,
Montana, Nevada, Oregon, South Dakota, and Washington prohibit
Internet Gambling. Additionally, Washington law provides that a
person that transmits or receives gambling information by the
Internet is guilty of a felony.
2015 Legislative Action by States: In 2015, seven states
AB 2863
Page 29
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 bills that would
authorize some combination of Internet poker, table games and
slot games. The states were as follows:
California, Delaware, Illinois, Massachusetts, New Jersey, New
York, Pennsylvania.
In Pennsylvania, HB 649 (Representative Payne) would legalize
and regulate online gaming with licenses going to the state's
existing land-based casinos. The tax rate the state will impose
on online gambling operators remains unresolved at this point,
with the House calling for a 16% tax on gross gaming revenue,
while the Senate's bill version would impose a 54% tax on GGR.
The bill does not contain so-called "bad actor" language. HB649
is pending on the House floor. It should be noted that
California, New York and Pennsylvania, account for roughly 22%
of the U.S. population.
In May 2015, New York State Senator John Bonacic introduced
S5302B that would license online poker in the state. Online
poker companies would be required to partner with an existing
racino or commercial casino. The bill contains a tax rate of
15% on online poker operators, who would also have to pay $10
million for a 10-year license. Up to 10 licenses could be
awarded. The bill does not contain so-called "bad actor"
language. The 2016 Legislature adjourns on June 16.
What about Federal Legislation to Regulate iGaming? On the
federal level, proposals have been introduced to establish a
federal regulatory system for Internet gaming. Congressional
representative Barney Frank (2010), Senator Harry Reid (2012),
Congressman Peter King (2013), and Congressman Joe Barton (2011
AB 2863
Page 30
& 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 - The Restoration of America's Wire Act: In
2015, Representative Jason Chaffetz (Republican-Utah) and
Senator Lindsey Graham (Republican-South Carolina) respectively
introduced the Restoration of America's Wire Act (RAWA) bill in
the House and Senate for the second consecutive year. 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. Two Congressional hearings were held on the
contents of RAWA but no further action was taken.
Related legislation: AB 1437 (Gray) of the current legislative
session. Would enact the Internet Fantasy Sports Games Consumer
Protection Act, which would require a person or entity to apply
for, and receive, a license from the DOJ prior to offering an
Internet fantasy sports game for play in California. (Pending
in Senate Governmental Organization Committee)
Prior legislation: AB 431 (Gray) of 2015. Would declare the
intent of the Legislature to authorize Internet poker in
California and adopt a legal and regulatory framework that
complies with federal law. The bill declares the framework
shall include strict standards to ensure the fairness and
integrity of the games, appropriate consumer protections, fair
revenue for the state, safeguards against underage play, and
mechanisms to address negative impacts of Internet poker
AB 2863
Page 31
gambling. (Died on inactive file)
AB 9 (Gatto) of 2015. This bill, which would be known as the
Internet Poker Consumer Protection Act of 2015, would have
established a framework to authorize intrastate Internet poker,
as specified. The bill did not permit licensing of horse racing
entities and excluded any company that accepted bets after
December 31, 2006 in the U.S. without proper licensing, as
specified. (Never Heard in Assembly G.O. Committee)
AB 167 (Jones-Sawyer) of 2015. This bill, which would be known
as the Internet Poker Consumer Protection Act of 2015, would
have permitted card clubs, tribes, and racetracks to offer
intrastate online poker in California, as specified. (Never
Heard in Assembly G.O. Committee)
SB 278 (Hall) of 2015. Would have authorized the operation of
an Internet poker web site within the borders of the state. The
bill required CGCC, in consultation with DOJ, to promulgate
regulations for intrastate Internet poker. The regulations
would 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 Internet poker Web
site. (Never Heard in Senate G.O. Committee)
AB 2291 (Jones-Sawyer) of 2014. Would have authorized
intrastate Internet poker, as specified. (Never heard in
Committee on Assembly G.O.)
SB 1366 (Correa) of 2014. 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
AB 2863
Page 32
Committee on Senate G.O.)
SB 51 (Wright) of 2013-2014. Would have authorized intrastate
Internet gambling, as specified. Would have authorized 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. 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.
(Never heard in Committee on Senate G.O.)
SB 1463 (Wright) of 2012. 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 2011-2012. 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 2011-2012. 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 three 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 2863
Page 33
SB 1485 (Wright) of 2010. 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 2008. The introduced version 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.)
Analysis Prepared by:
Eric Johnson / G.O. / (916) 319-2531 and Kenton
Stanhope FN:
0004581