Ever since Bugsy Siegel opened the Flamingo Hotel in 1946 and launched the Las Vegas Strip, gambling has held a tenuous position in American life, suggesting glamour, wealth, depravity and corruption all at once. Now that casinos have spread throughout the nation and allegedly shed their mafia ties, a new branch of the industry is fighting for legitimacy here.
Las Vegas-based casinos and overseas operators have begun an all-out battle over Internet gambling, which is mostly banned nationwide but carries with it the promise of billions of dollars in additional revenue for casinos and state governments. Three states began licensing online betting last year, and lawmakers are debating online gambling bills in seven others right now. In Washington, meanwhile, Congress is facing increasing pressure to either bar or regulate the fledgling industry federally.
The moves are coming in response to a concerted push orchestrated by a colorful cast of characters, including one of the most prolific political donors of the Super PAC era, an offshore company that only recently settled federal allegations of money laundering and bank fraud and a pair of benignly named groups backed by millions of dollars in casino cash.
In the process, the war over online gambling has created surprising alliances and divisions that are just now surfacing. Some in the industry warn that the practice poses a threat to the casinos’ hold over gambling since customers would no longer need to actually visit a casino. Furthermore, since online gambling has been legal in other countries for years, American casinos face competition from more established online companies based in exotic locales like Costa Rica and Gibraltar.
One casino mogul, Sheldon Adelson, a prominent backer of conservative political causes, has pledged to spend “whatever it takes” to get Congress to ban Internet gambling outright, while industry giants like Caesars Entertainment and MGM Resorts have taken the opposite tack, banding together in an effort to legalize and control the growing market. Maneuvering quietly in the background are foreign entities, including the Isle-of-Man-based PokerStars, the world’s biggest online poker operator, which so far has been denied a license to operate in New Jersey because of pending federal money-laundering charges against its founder. Along with the Garden State, Nevada and Delaware have legalized online gambling.
All together, this rich mix of interest groups spent $8.2 million lobbying the federal government on Internet gambling last year, according to the trade publisher GamblingCompliance, and millions more in state capitals from Trenton to Sacramento. The casino industry is also among the most generous in giving to political candidates across the country. According to figures from the Center for Responsive Politics and the National Institute on Money in State Politics, from 2009 to 2012 (state data for 2013 aren’t yet available), the gambling industry contributed $287.6 million to state and federal campaigns, some directly to candidates and state ballot initiative efforts and the rest to groups like the Republican Governors Association, which can send the money to states where casinos are barred by law from making political contributions.
Lost in the cacophony are warnings from gambling industry critics who say politicians are rushing headlong into expansion with little understanding of the potential social and fiscal risks. Problem gambling — which the American Psychiatric Association last year classified as an addictive disorder akin to alcoholism — already afflicts millions of Americans. As for the Internet, “Now instead of having to drive to Atlantic City, I can sit at home,” said Les Bernal, national director of the Washington, D.C.-based advocacy group Stop Predatory Gambling. “It’s the most extreme and most addictive form of gambling — because there’s no turning it off.”
For close to 50 years, Nevada had gambling to itself. Even after 1976, when New Jersey legalized casinos in Atlantic City, the gambling industry was essentially relegated to just a few cities. But when Congress passed the Indian Gaming Regulatory Act in 1988, which allowed tribes to run casinos, the move led to a swift series of reactions by states hoping to cash in on the action. In 1989, South Dakota legalized non-tribal casinos, and Iowa, partly as a response to tribal gambling, authorized riverboat casinos. Soon, states up and down the Mississippi River were legalizing gambling, and casinos spread through the country like a colony of industrious ants.
Today, 39 states have some form of casino gambling, and Americans bet away some $90 billion each year, including lotteries, more than on they spend on movies, concerts, theater and sporting events combined, according to the gambling scholar I. Nelson Rose, who teaches at Whittier Law School. Much of that money goes to state governments to fund programs for seniors or property tax rebates, tying the states into an uneasy partnership with the gaming industry.
Just as book sales and movie rentals have moved from brick-and-mortar stores to online operations, many gambling executives see a move to the Internet as inevitable. It began around the turn of this century, when a handful of companies based in loosely regulated jurisdictions in Europe and the Caribbean began offering online gambling games worldwide, including to American players. The industry quickly flourished, but all beyond the grasp of American regulators and tax assessors and, importantly, the big casino companies.
At the time online betting inhabited a legal gray area: neither forbidden nor permitted explicitly by state laws, which generally require any gambling operation be licensed by the state. For years, the federal Department of Justice argued that the 1961 Wire Act, passed to limit bookies’ use of interstate telegraphs, prohibited all forms of betting online. Advocates for Internet gambling, including an aggressive Washington lobbying group for poker players that’s funded by the offshore online companies, countered that the Wire Act applied only to wagers on sports and shouldn’t bar poker or online slots. With the issue unsettled, states were unwilling to challenge the Justice Department’s interpretation, and none tried to license the practice.
It all came to a head in 2006, when Congress passed the Unlawful Internet Gambling Enforcement Act, or UIGEA, which prevents banks from processing the financial transactions of unlicensed Internet betting. Essentially, it gave the Justice Department a tool to go after the offshore companies that were offering games to Americans. Some of these operators saw the law as a warning and pulled out of the U.S., but a handful did not.
In 2011 the Justice Department sued the three biggest operators that remained, including PokerStars, for alleged money laundering. Prosecutors portrayed an elaborate scheme to deceive banks, charging that executives established dozens of fake online businesses with names like www.petfoodstore.biz to hide transactions worth billions of dollars. The companies eventually settled the suit without admitting guilt. As part of the agreement, Ireland-based Full Tilt Poker forfeited its assets to the federal government, which then sold them to PokerStars for $731 million. PokerStars agreed to cease its U.S. operations until a state or the federal government legalized online betting. The third company, Absolute Poker, forfeited its assets.
In a paradoxical twist, though, the 2006 law also paved the way for today’s wave of legalization. The Internet gambling enforcement act had an explicit “carve out” allowing for online bets made entirely within a state as long as state law authorized the activity, and some state lotteries wanted to use that opening to sell tickets online.
New York and Illinois asked the Justice Department whether such a move would be legal, and in late 2011 the department responded by quietly reversing its interpretation of the Wire Act, saying the 1961 law applied only to betting on sporting events. The department did not respond to a request for comment for this story. But suddenly and without fanfare, there was no federal statute barring Internet gambling. States were free to authorize the practice, and some had already begun the process.
An American market: New Jersey
Even before the Justice Department revised its opinion, the offshore companies had begun looking for a legitimate way into the American market, with a particular focus on New Jersey. In early 2009, Joe Brennan Jr., who ran a small, Washington D.C.-based industry group called the Interactive Media Entertainment and Gaming Association, met with state Sen. Raymond Lesniak, a New Jersey lawmaker representing a densely populated patch of the state south of Newark. Lesniak, one of the state’s most powerful politicians, had caught Brennan’s attention when he introduced a bill to legalize sports betting.
The senator, who has thinning red-gray hair, shares a district office with two other legislators in Elizabeth, where he greets visitors in an unadorned conference room. He speaks confidently, as if whatever he’s saying should be self-evident. In a recent interview, Lesniak said he proposed legalizing sports betting after growing tired of annual raids on Super Bowl gambling rings in the Garden State, even as betting on the game is legal in Las Vegas. When Brennan came to visit five years ago, however, he had another idea for the New Jersey lawmaker. Why not legalize gambling over the Internet?
For Lesniak, the proposal offered hope for Atlantic City: a new form of gambling to draw younger clientele and help the state’s struggling casinos, which had been losing money for three straight years because of increasing competition in nearby states. Brennan’s group, which has since ceased operations, never published a list of members. But in a 2007 lawsuit, the group acknowledged that some of its members “provide an Internet gambling opportunity to private individuals located both within and beyond the territorial borders of the United States.” In 2009, when Brennan first met with Lesniak, his organization collected $1 million in membership dues, which Brennan quickly devoted to fighting for a law in New Jersey.
“There was no silver bullet to this,” he said. “It was, very simply, a lot of hard work.” Brennan hired one of New Jersey’s most influential lobbying firms, Princeton Public Affairs Group, which drew up what proved to be an effective strategy. The idea was to have the Atlantic City casinos run the Internet gambling operations, because no bill would pass without their support.
Lesniak was a dogged sponsor, ushering a bill to passage in January 2011. Gov. Chris Christie vetoed the measure, however, saying it would violate the state constitution, which allows gambling only in Atlantic City. Another factor: the casinos, led by Caesars, opposed the bill at the time. The big national gaming companies had gotten behind Internet gambling but wanted a federal law instead, worrying that a patchwork of state statutes would lead to a more arduous and expensive regulatory system. (Lesniak suspects the industry pressed Christie to veto the bill. David Satz, Caesars’ top lobbyist, was a member of Christie’s transition team in 2009 and helped write a report arguing against legalizing Internet gambling at the time.) A spokesman for Christie did not respond to questions about the veto. Neither Caesars nor any of the other casinos contacted for this story offered any comment.
By 2012, though, Caesars and some other casinos had changed course, realizing that Congress was unlikely to approve online gambling, and so they threw their support behind the legislation. Lesniak had reintroduced the bill, tweaking it to address Christie’s concerns, and after two more rounds, Christie signed the law in February 2013.
The online gambling bill received little organized opposition in the state. Only six lawmakers voted against it, compared to 105 in favor. One of the opponents, Assemblyman Ralph R. Caputo, a Democrat, said he was concerned about gambling addiction. One of the few voices against the move from outside the capitol was Carl Zeitz, who served on the state Casino Control Commission from 1980 to 1988.
“It is one thing to have to get on a bus, drive a car, take a train, get on an airplane to Vegas, to go to casinos. It is another thing to sit home in your skivvies in bed or at the kitchen table playing gambling games for real,” he said. “That to me is really unwise public policy.”
The bill allows licensed casinos to apply for online gambling permits and to offer a wide array of games. Players have to be in New Jersey to log in, a detail the casinos verify by tracking a computer’s IP address and using geo-location on cellphones. The state takes 15 percent of the proceeds, along with $400,000 up front and $250,000 each year from any casino running online betting. While the casinos are the only ones eligible for licenses, they have generally partnered with other companies, including overseas operators such as Gibraltar-based Bwin.party Digital Entertainment, to run the websites.
The casinos, which were in favor of an Internet gambling law by 2012, spent $1.2 million on lobbying in 2012 and 2013 in New Jersey, with Caesars spending $703,100 of that both directly and through its donations to the Casino Association of New Jersey. The offshore companies were also active in lobbying. The Interactive Gaming Council, a Vancouver-based industry association for online gambling companies, spent another $253,700, and PokerStars’ parent company, Rational Services, spent $204,353 last year. Both of those entities hired Princeton Public Affairs, the same firm that had represented Brennan’s group.
The various groups also donated generously to Lesniak and other supporters. Brennan, his wife Jennifer and his association gave $22,225 to New Jersey politicians and committees since 2009, including $4,600 to Lesniak and $7,000 to Assemblyman John Burzichelli, the prime sponsor of the legislation in the lower chamber of the legislature.