Briefing Report: Poker Fun For Everyone! California'€™s Dabbling With Intrastate Internet Poker

Wednesday, January 6, 2010

Pop-up for Poker!

“Internet poker is fun, exciting, and entertaining!” “Free online poker games!” “Play multiplayer poker with real money and with real people from around the world!” Pop-up windows on your computer screen, promising big-fun and big-money! Americans wager billions of dollars a year through mostly off-shore poker web-sites located in countries such as Antigua outside of American legal jurisdiction. Internet poker is big business that is getting bigger by the day, and government has taken notice. The temptation for government to get in on the action – especially in this era of perpetual state budget shortfalls – is powerful indeed.

Twice, in recent years, efforts to legalize some form of Internet poker play in California have come before the legislature. In both instances, the attempts were made late in the legislative sessions and, wisely, Members expressed caution, understanding that legalizing Internet poker in California has far-reaching consequences that require careful consideration and deliberation. Undoubtedly, the 2010 Session of the California State Legislature will see several such proposals to authorize, regulate and tax some form of on-line poker in this state.

Everybody Wins! Well, Almost...

Studies show that in 2008, Americans wagered more than $10 billion online at off-shore, non-United States Internet gambling Web-sites. More than a million Californians play poker on the Internet every week. There are approximately 2,300 Internet gambling Web-sites that operate outside the United States, unregulated by any United States governmental entity. Currently, regulating this activity is difficult, if not impossible, since the wagering hubs are all located beyond the shores of the United States and American law. Interestingly, when establishing an account by credit card at some of these off-shore gaming sites, a false name of a store or gift center appears on the person’s credit card statement, thus making such transactions even more difficult to trace.

Watching billions of dollars bleed away from our economy and into the hands of international gambling interests has inspired the development of a program known as “intrastate Internet poker” that can be operated within the boundaries of California. “Intrastate” Internet poker is a system whereby Web hubs are established and licensed in California. They are designed to be accessible only to those who are physically within the boundaries of the state. These wagering hubs would be licensed and required to comply with the California Gambling Control Act (GCA) and the federal Unlawful Internet Gaming Enforcement Act of 2006 (UIGEA). The most recent proposals provided that, in order to comply with California’s long recognized moratorium on the expansion of card-club gambling, such licenses would need to be limited to current gaming establishments, licensed by California as well as to California tribes with compacts.

Under such a system, California’s card-clubs would be particular beneficiaries, as they are existing gaming licensees. Card clubs see such a system as a potential savior of its industry. These legal, licensed, regulated, and taxed businesses are legally restricted from growing. The marketplace in which they operate is one of staunch competition brought on, in part, by the development of Tribal gaming in California. These businesses could benefit from such a system by keeping some of the money that currently flows to off-shore sites within the state. Consumer protection measures could be offered through the regulation of the system and the state could see additional tax revenues to help cover the “gambling debt” it has incurred (known as the state budget). So far, the measures brought before the Legislature have provided the card club industry with the monopoly to operate intrastate Internet poker in California and, considering the potential money involved, such provisions were controversial.

Yes, No, Maybe So

As with all gambling issues that find their way to the halls of the Capitol, Intrastate Internet poker does not enjoy universal acclaim. There are those who believe that legalizing Internet poker could increase the problems of psychological gambling. Others, such as those in the horse racing industry feel that they have experience operating online wagering systems. Advance Deposit Wagering on horse racing, a system whereby wagering on horse racing is conducted via the Internet or telephone, has been legal in California since 2004. California Indian tribes are split on the issue. Some desire the opportunity to conduct online poker as well. Others are not so keen on the additional competitive pressures in an already tight marketplace.

There appears to be consensus in two areas, however: Internet poker may only be offered for play in a manner that ensures that each player is twenty-one years of age or older. Furthermore, Internet poker should be offered for play in a manner that ensures that each player is physically present within the borders of the State of California at the time of play.

Legal Wrangling

Existing California law, the Gambling Control Act of 1997, established the California Gambling Control Commission (CGCC) to regulate legal gaming in California and the Bureau of Gambling Control (BGC) within the Department of Justice to investigate and enforce controlled gambling activities in California. Undoubtedly, these entities will be charged with licensing and promulgating the regulations for intrastate Internet poker. Proponents argue that providing a legal mechanism for playing poker over the Internet offers an alternative to illegal gambling now being played on the Internet. Californians can be protected from unscrupulous gambling enterprises by licensing and regulating an intrastate poker system. A system of legalized poker play will assure consumers that they are conducting business with legitimate, regulated companies. The eventual authorization of online poker will not only allow California to protect its consumers, but also help law enforcement agencies work with the industry in preventing underage playing, identity theft and other fraud.

Any effort to legalize intrastate Internet poker would have to be consistent with federal law. UIGEA declares that 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 statutes. It is argued that this exemption in UIGEA is consistent with the idea that state governments have the primary responsibility for determining what forms of gambling may legally take place within their borders, a right given to them under the 10th amendment of the U.S. Constitution.

Legislative Counsel has opined that the operation of online poker for intrastate transactions qualifies under the UIGEA exemption and does not violate federal law. On the matter of whether state law prohibits this type of gambling, Legislative Counsel suggests that so long as the online poker is played with the same rules (non-house banked or percentage games) that applied to the forms of poker available in card rooms in 1984 (the year that the Lottery Act passed and amended the state Constitution to prohibit casinos of the type currently operating in Nevada and New Jersey), the Legislature's authorization of online poker would not violate the casino prohibition.

Truth and Consequences

For over a century, gambling in California was confined to a few horse racing tracks and card rooms. Casino gambling on Native American tribal lands emerged in the last decades of the 20th century and flourished in the first decade of the 21st. It appears that the Internet is the next phase of gambling expansion in California. Authorizing intrastate Internet poker may be something that the state should consider doing at some point. However, this is a process that needs to be thought-out carefully for its implications are significant. It is not the type of issue that should be introduced and considered during the final days of the legislative session (as has happened twice before). The world of international Internet gambling is incredibly complex and sophisticated – and not for the inexperienced or faint of heart. California lawmakers and regulators need to be well aware of the consequences that such an adventure entails. Once this door is opened, it may be near impossible to ever close it again.


For more information on this report or other Governmental Organization issues, contact Richard Paul, Senate Republican Office of Policy at 916/651-1501.