STAYING IN THE LOOP

Tribal gaming in the US is a money-spinning industry. It’s estimated to be worth $33.7bn, with 460 gaming establishments country-wide, operated by 240 federally recognized tribes in 29 states. The sovereignty status in the areas in which tribes operate gives states limited ability to forbid gaming there, and limited powers to pass certain legislation, with policy issues overseen by the Bureau of Indian Affairs (BIA), and decided in the federal court system.

However, when it comes to sports betting, it has made passing legislation to legalize it in certain states improbable, with the main stakeholders at loggerheads, unable to reach a compromise.

Since PASPA was repealed in May 2018, sports betting is now live in 18 states and legal but not yet operational in four more, taking the total tally to 22. There are a further 16 states with active legislation and only seven states which haven’t had any, and five with ‘dead’ legislation.

Currently, there are six states where sports betting is operated by tribes in one form or another: New York, Oregon, Michigan, Montana, Mississippi and New Mexico. However, in some of these states, sports betting is only available in tribal casinos or is retail only, such as in New York or New Mexico; Washington State has passed legislation but has not launched tribal sports betting yet.

Tribes are often criticized for being slow in implementing sports betting, but the reasons are much deeper than that, according to someone with plenty of experience on the matter. Gene Johnson, executive VP of Victor Strategies, the professional firm that focuses on Indian gaming, told Gaming America that while there’s an emphasis on profit from gaming, it’s mainly about obtaining economic self-sufficiency for the tribes.

“Tribes do not pursue gaming for the same reasons that commercial gaming companies do,” Johnson explains. “It’s about maintaining sovereignty, preserving culture and providing for the next seven generations.

“Having a casino has enabled tribes to have economic self-sufficiency; and children can go to college, get educated, and be taught their own language. These are all things gaming has brought about for the Indians that people tend to forget.”

While sports betting is a new vertical in the US with huge potential revenue, you could argue that it’s not as

important to the tribes as what they’ve achieved with Indian gaming. With tribal gaming nearly a $34bn industry with strained relations with governors in many states, pushing sports betting could be seen as too much of a risk.

“Tribes are certainly on board for sports betting; they understand that this is not internet poker and it has direct correlation to casino gaming,” Johnson mentions. “They want sports betting but they want it under their own terms. They don’t want to sacrifice the economic self-sufficiency they’ve achieved in order to get sports betting.”

Another challenge to consider is the Indian Gaming Regulatory Act, which was passed in 1988. While it allows tribes to offer gaming on their reservations, there are no provisions for mobile betting. The Mohegan Tribe and Seminole Tribe are among the tribes that offer mobile betting, with the latter offering it in its Hard Rock Casino in Atlantic City, but under state regulatory regimes that include taxation to the state. You can count that as another obstacle.

Looking at specific states, California is a potential sleeping giant when it comes to sports betting. It has the potential to be the largest sports wagering market in the US, with annual estimates ranging from $750m to $3.2bn, depending on the legislation and how available sports betting would become.

However, with 25% of the $34bn tribal gaming is worth being generated in California, the tribes are understandably concerned about endangering existing options by accepting legislation that might not be in their best interests.

There are currently two sports betting bills proposed in California. Last year, in conjunction with the horse racing

tracks, the tribes proposed a constitutional amendment that would allow sports betting. It would legalize sports betting at limited locations, including Indian gaming casinos and licensed racetracks, which would be taxed at 10%.

The signature gathering initiative, which needs 1m signatures before being put to a vote at the November elections, was halted by the Governor’s COVID-19 stay at home order. The tribes have recently been granted an extension to the campaign, which reached more than 950,000 votes, and will now likely qualify for the 2022 election.

However, there’s a rival sports betting bill in the state, proposed by Democratic senator Bill Dodd, and assemblyman Adam Gray, titled SCA-6. The bill would legalize mobile and online sports betting for tribal casinos and four horse racetracks, but the tribes would only be able to conduct mobile sports betting in partnership with a major sports betting provider.

The online operator license fee would be set at $5m and it would allow card rooms to offer banked games such as blackjack. The bill has since been pulled from being included on the ballot at the November election with Dodd citing the impact of COVID-19, but is now eyeing 2022 to push through the legislation.

The bill was opposed by the tribes, with the Pechanga tribal chairman Mark Macarro stating the provisions for the card rooms made the proposals a non-starter. Less foot traffic at tribal casinos and limited regulations are also concerns for the tribes.

Johnson alluded to the challenge to tribal casino gaming exclusivity posed by the card rooms as being the biggest hurdle to passing any sports betting legislation in California.

He said: “Card rooms now offer player-banked games that are widely considered illegal under the state constitution. “Originally, the card rooms were only supposed to allow peer-to-peer games such as poker. They now operate blackjack and have third-party dealers assume the role as the bank, through a corporate entity, which is considered by the tribes as directly contradicting the state constitution.

“Also with the card rooms, you have to keep in mind they have a dismal record with regulatory compliance. It has been noted by a former CA regulator that there’s been more federal raids on card rooms in the state in the last five years than any other gaming operations nationwide.

“The tribes are very reluctant to accept the card rooms as responsible gaming providers. People of California should be concerned about that too.”

Johnson concludes on the California topic, believing there is still hope of legislation being passed in 2022 if the signature-gathering effort succeeds.

While tribes are protecting their own interests, it can be argued this is acting as a barrier to sports betting being

legalized in the state. Bill Pascrell III Esq., trustee at GVC Foundation US and partner at Princeton Public Affairs Group (PPAG) certainly believes so, with perhaps some common ground and negotiation needed.

Pascrell tells Gaming America: “The primary barrier to sports betting being legalized and regulated in California are the tribes. The tribes need to be a part of the conversation and a part of the solution.

“Once the tribes are comfortable with a legal process pursuit, that will accelerate sports betting happening in California. I do believe we're making progress, but I don't see it happening in the relative near future, within the next year.”

However, you could say the situation with tribal gaming in Oklahoma is a much more serious case. Despite Oklahoma being the second-largest Indian gaming state with more than 100 tribal casinos, it has been a chaotic time, leaving sports betting legislation languishing in the background.

The tribal compacts in the state enacted in 2004 were scheduled for renewal by January 2020. However, rather than consulting with the tribal governments, state Governor Kevin Stitt issued an op-ed in July 2019 that erroneously claimed the compacts would automatically expire on 1 January. He then demanded immediate renegotiation at a higher tax level than typical compacts across the US, even though states cannot tax tribal governments, which is left up to the US federal government.

The tribes opposed the Governor’s attempts and began a lawsuit against him, with nine tribes continuing in their litigation, despite the Otoe Missouria and Comanche Nation signing new compact agreements, which included sports betting. This was not in the Governor’s power and was rejected by Chief Judge Timothy DeGiusti, who said in a ruling that “it would be inappropriate for a federal court to interfere in the resolution of such a sensitive state law matter, which implicates important concerns of sovereignty and comity that underlie many federal abstention doctrines.”

That led to the two tribes being removed as members of the Oklahoma Indian Gaming Association (OIGA) for the rest of 2020, based on a bylaw that states “a member tribe found by a vote of the Board of conduct not in the best interest of the Association may be suspended for the remainder of the calendar year.”

Speaking about the dispute with Stitt, OIGA executive director Sheila Morago told Gaming America: “We believe Chief Judge DeGiusti’s ruling to be appropriate on this matter, which moves us one step closer to resolving this unnecessary situation.”

In terms of the current state of sports betting legislation in Oklahoma, Morago commented: “It simply didn’t fly in the first year. It was included in the ball-and-dice legislation the following year and got pulled from that. We tried again in the next session, but between the compact dispute with Oklahoma’s Governor and the pandemic, the effort came to a temporary halt.

“At this point, we can’t know what a sports betting offering would specifically look like. It’ll depend largely on the appetite of the legislature and what the model would look like. When we get to the point of being able to offer sports betting, there will be appropriate discussion in each tribe to determine how or if they might choose to proceed.

“The biggest hurdle we face is still Gov. Stitt’s refusal to recognize that the gaming compacts have renewed. It’s impossible to predict the timing for the process.”

Johnson adds to the Oklahoma situation, saying prior to the issues with Stitt, tribes were planning to introduce legislation that would’ve seen sports betting begin in January, but that effort has now been shelved.

He said: “It will be very interesting to see what happens as tribal gaming is huge in Oklahoma. It provides so many jobs and local infrastructure. These jobs are not just for Indians, these are for people throughout the state. The Governor is trying to divide the state between Indians and non-Indians and I don’t think it will work.”

In terms of which state is next on the horizon for legalizing sports betting, Pascrell believes Connecticut is the most likely, especially with the Foxwoods and Mohegan Sun tribes having been supportive of several legislative initiatives. “TRIBES DO NOT PURSUE GAMING FOR THE SAME REASONS THAT COMMERCIAL GAMING COMPANIES DO. IT’S ABOUT MAINTAINING SOVEREIGNTY, PRESERVING CULTURE AND PROVIDING FOR THE NEXT SEVEN GENERATIONS. HAVING A CASINO HAS ENABLED TRIBES TO HAVE ECONOMIC SELF-SUFFICIENCY; AND CHILDREN CAN GO TO COLLEGE, GET EDUCATED AND BE TAUGHT THEIR OWN LANGUAGE.” – GENE JOHNSON

As Pascrell says: “The most recent of which was introduced by Representative Joe Verrengia, who introduced House Bill 7311, which would authorize Connecticut sports betting at tribal casinos, potentially commercial casinos, offtrack betting parlors, online and with the Connecticut lottery.

“This legislation has had significant input by the tribal gaming interests and most likely would have passed by now if not for the impact of COVID-19. I believe once we're able to get to a new normal, post-COVID, this will immediately be revisited. Connecticut has a very beneficial model that always takes into consideration tribal interests and balances it with non-tribal gaming interests.”

And balancing the interests of all stakeholders will be key for sports betting to be passed in several more states in the upcoming years. Obviously tribes also need to be involved in legislation and having their interests taken into account. But legislators, stakeholders and tribes all working together is essential, otherwise more situations such as the problems that have arisen in Oklahoma will continue to pop up.

America loves a good comeback story. From a broken-legged Karate Kid to an ageing Rocky Balboa, there’s always been great respect for those who can live by the timeless words of Chumbawamba: “I get knocked down but I get up again.”

After experiencing a rocky (no pun intended) few years, the US online poker market could also have been considered down-and-out. However, the market seems to be undergoing a comeback story of its own, albeit through rather circumstantial means. In locking potential customers at home and cancelling most major sports competitions, COVID-19 suddenly placed online poker operators within the small category of gambling companies able to benefit from an otherwise dire situation.

Of course, the story of poker in the US is as old as time itself, but online poker has experienced a different lifespan, one that’s seen a considerable shift in popularity over the last two decades. For us to understand the significance of its recent unprecedented growth, it’s important to look back at this history of highs and lows.

Although the history of real money online poker stems back to 1998, its first real explosion in popularity in the US occurred in the early 2000s with the Moneymaker Effect. In 2003, Chris Moneymaker claimed victory in the main event of the World Series of Poker (WSOP) after winning his entry with a $40 buy-in. Online poker suddenly became a viable skill-based way for amateur players to earn money from home, and Moneymaker’s name became synonymous with the vertical’s growth in the following years.

As a result of this spike in popularity, 2003-2006 became known as the glory years of online poker in the US. In 2003, the number of players in the WSOP main event was 839. Just a year later, that number more than tripled. By 2006, the WSOP main event saw a record 8,773 players compete for the $12m first place prize. The fact that this number still represents the peak for the tournament to this day demonstrates the detrimental effect of the events that followed.

In 2006, President George W. Bush introduced the Unlawful Internet Gambling Enforcement Act (UIGEA) which saw an end to US operations for the majority of online poker operators. Those who did continue to operate in the US would come to regret it. In 2011, a number of top online poker operators were penalized for processing transactions in direct transgression of UIGEA, including PokerStars, Full Tilt Poker and Absolute Poker. The day would become known as Black Friday in the online poker world, as it saw the three largest

poker sites in the country shut down and their domains seized, along with their customers’ accounts and funds.

Adding fuel to the fire, a number of charges were filed against Full Tilt Poker after it failed to pay off players following the forced shutdown of its website. In 2012, PokerStars reached an agreement with the Department of Justice, which saw the operator purchase Full Tilt in an effort to save the brand from extinction completely. Demonstrating the dire circumstances surrounding online poker at that time, in acquiring the company, the operator also adopted almost $1bn in fines.

Of course, US online poker has seen some progress since 2006. Nevada and Delaware were the first two states to offer regulated online poker in 2012, and other states have followed since then. However, it’s clear that online poker activity in the US has been significantly hindered by the events of the past two decades – that is, until COVID-19 lockdowns reached US shores.

For those poker operators who have been able to capitalize on the conditions of lockdowns, it’s been a period of significant growth. This is true not just for the US industry, but across the globe, with some online poker markets doubling in size over the first few months of 2020. Ivonne Montealegre, founder and event director of the Malta Poker Festival, described the lockdown-fuelled comeback as a “second wave even bigger than the Moneymaker,” and as we look at the evidence from US poker operators it would be difficult to disagree.

Despite the brand’s troubles in 2011, the Stars Group currently operates its PokerStars-branded real-money poker and casino products in New Jersey and Pennsylvania. The company saw significant growth across these products in Q1 2020, generating revenue of $735m for the quarter, a rise of 27% year-on-year. Despite the pandemic’s impact on the operator’s sports betting segment and Fox Bet product, increased customer activity across its online poker and casino product offerings more than made up for any disruption from the beginning of March.

In fact, as a result of this spike in poker activity, the Stars Group shifted its marketing efforts behind PokerStars. The operator launched the first Spring Championship of Online Poker in April in its two active states, with a total prize pool of $2m in Pennsylvania.

Meanwhile, 888 Holdings reported a 60% year-on-year increase in US traffic for 888poker in April. Yaniv Sherman, head of commercial development for 888, confirmed that the company’s Interstate Poker Network, which stretches across multiple states, had been majorly beneficial in taking advantage of increased poker activity. Sherman described “similar trends” across the company’s global poker network – something he explained as “a testament of a recreational destination that people are enjoying while sheltering in place.”

Another by-product of the pandemic has been the shift toward the digitalization of US-based poker events. This year, the WSOP tournament became an online-only event, and GGPoker made history by offering the biggest guarantee in online poker tournament history with the event’s $25m prize. Expressing the importance of such a significant moment, Ty Stewart, executive “DESPITE THE BRAND’S TROUBLES IN 2011, THE STARS GROUP CURRENTLY OPERATES ITS POKERSTARSBRANDED REAL-MONEY POKER AND CASINO PRODUCTS IN NEW JERSEY AND PENNSYLVANIA. THE COMPANY SAW SIGNIFICANT GROWTH ACROSS THESE PRODUCTS IN Q1 2020, GENERATING REVENUE OF $735M FOR THE QUARTER, A RISE OF 27% YEAR-ON-YEAR.”

director of the event, commented: “We’re ready for a unique chapter in our history with an ambition as great as anything we’ve done, period. It’s the esports version of the WSOP and it’s going to be huge.”

Despite clear strides made in online poker’s credibility in the US, the question remains as to how long this popularity will last when lockdowns ease and sports return. For a number of reasons, it will be difficult for the vertical’s growth to maintain the pace experienced in the past few months. The economical situation in the US may well become worse as a result of the pandemic, and rising unemployment could create a decrease in spending levels. Then, of course, there’s the inevitable reality that the return of sports will divert some interest away from online poker – particularly in newly regulated states in which sports betting is the new shiny toy.

In its Q1 trading update, even The Stars Group seemed relatively pessimistic about the longevity of the vertical’s success. The operator admitted that the return of sporting events earlier than anticipated could benefit sports betting revenues but “could negatively impact the current increased activity across its online poker and casino products.”

The unprecedented nature of online poker’s comeback during the COVID-19 pandemic seems befitting of an unclear era. The period has seen some operators experience up to a 300% increase in revenue, but that growth has also recently levelled off. Regardless of whether we continue to see the same levels of poker activity, it seems that online poker is beginning to find its feet again in the US market. All it needs now is the stamina to hold its ground.

If you’re trying to get from Point A to Point B without getting caught by the authorities, you’ll likely head for the back roads where there are fewer police than on the highway. For the same reason, an increasing volume of illicit financial flows – money laundering, terrorist financing and sanctions evasion – has been moving from the highways of the traditional financial system to the back roads of the casinos and gaming industry.

Casinos and gaming are generally grouped together as a sector of anti-money laundering and counter-terrorist financing (AML/CTF) activity, but they cover a range of businesses. In addition to physical casino facilities, online gambling is a growing sector of activity. Sports betting can be done at the venue, at a licensed betting shop, online or at casinos. Lastly, online video games using in-game currencies are a rising source of activity as criminals and terrorists seek to avoid the well-trodden path of financial institutions.

Certain challenges are common across the sector: the need for near real-time screening and transaction monitoring; the transfer of value into a non-traditional currency (chips or in-game virtual currencies); and the cross-border nature of clients and transactions. Taken together, these issues create challenges that are too complex to be addressed by manual processes.

Casinos are the most mature sector of the gaming group, with well-established typologies and comparatively well-developed regulatory requirements. At its most basic, laundering money through a casino involves bringing in cash, purchasing chips or credit for play at the casino, and cashing in with a cheque from the casino, which can then be deposited into the financial system as clean money. A major advantage of using a casino is that large sums can be laundered at once, since it is not unusual for VIPs to spend hundreds of thousands of dollars.

Two prominent casino typologies are worth noting, both of which involve criminal organizations in China. In the Vancouver model, wealthy Chinese gamblers deposit funds in the local accounts of criminal organizations in China, and in return those organizations provide funds in Canada to the gamblers

once they arrive in Vancouver. These funds are the proceeds of criminal activity in and around Vancouver and are held in local Canadian banks controlled by criminals. The gamblers use these funds to purchase chips in the Vancouver casinos, then cash them in and receive a cheque from the property. They deposit the cheque in the same (or different) criminally-controlled banks in Canada. The funds are then wired back to China through a series of shell corporations and then back to the underground banks in and around Vancouver. As the last step, the funds are typically used to buy local real estate.

The second typology involves travel junkets to casinos in Macau. To skirt Chinese currency restrictions, a Chinese businessman (or criminal) will pay a large sum of money in Chinese currency – for example, $100,000 worth of renminbi – to a junket operator. In return, he or she will receive airfare, hotel accommodation and a credit at the casino. After using some of the money gambling, the businessman cashes out in US dollars or another currency and has thus laundered the money without directly sending it through the financial system.

Detecting these and other typologies can be done from an analysis of transactions (e.g. detecting a player who buys chips, does little or no gambling, and then leaves with the proceeds cheque shortly after arriving), but these typologies also offer the opportunity for screening solutions. Because the screening must be done in near real time, modern technology is required since manual processes would take too long and would be prone to error.

In most jurisdictions today, casinos screen against lists of individuals known or suspected of criminal links and against politically exposed persons (PEPs) as rules in Canada and Macau have been tightened in the last few years with respect

to customer due diligence and enhanced due diligence (EDD) by casinos in their jurisdictions.

Of course, casino games and sports betting occur online as well as in physical locations, and this makes the AML/CTF challenges even more daunting. As is the case with online banking, the onboarding and CDD processes are not done in person, and potential customers don’t want to wait days for the process to be completed and the account opened. The only way to have processes that are both robust and quick is to leverage artificial intelligence (AI) and other leading technologies. With these kinds of advancements, online casinos and betting sites can maintain continuously updated lists of sanctioned individuals and PEPs that can be continuously checked to accommodate the operation of the business across time zones. Since money deposits, transfers and withdrawals are done online, technology must also be deployed to check any third parties and to analyze transactions for indications of money laundering, terrorist financing or evasion of sanctions.

Online gaming is a route for money laundering and terrorist financing that is overlooked by most people, but not by the criminals and terrorists. When you think of it, many games allow and encourage players to buy in-game currencies they can use to purchase items or premium content within the game. Criminals can then sell these to other players for real currency or they can sometimes receive a refund for purchases they claim were a mistake. In either case, the funds initially paid into the game come out as money from a legitimate source, an essential element of the layering stage of the money laundering process.

Unlike casinos, you can’t move hundreds of thousands of dollars through a single transaction in a video game. Moving appreciable amounts of money requires multiple transactions, and this can be detected by AI. Additionally, AI can spot the patterns produced by the transactions and as player profiles deviate from expected levels of activity.

The growth of money laundering, terrorist financing and the evasion of sanctions through casinos and gambling reflects the need for criminals to avoid the common and closely watched paths. Having said that, organizations from the Financial Action Task Force (FATF) to national regulators, and to individual businesses, are increasing their focus, expanding their requirements and raising their expectations with respect to how the sector is monitored. There remains a lot of catching up to do, but using the best technologies to create effective processes that are integrated, streamlined and smart can help these businesses reduce their exposure to criminals, and their risk to regulatory sanctions.