Federal move could ‘virtually destroy’ online gambling in Pennsylvania, N.J., but help big GOP donor

Online gaming is already a big hit even though it is still in its infancy. Internet gaming has generated a billion dollars in revenue for New Jersey casinos and millions in new income for the state treasuries in New Jersey and Pennsylvania.

But an unwelcome guest crashed the internet gaming party last month. The U.S. Department of Justice on Jan. 14 released a legal opinion that reinterprets the federal Wire Act, which prohibits interstate wagering, to apply to any form of gambling that crosses state lines, not just sports betting.

The opinion has upended the gaming industry, casting uncertainty over existing online betting and lottery operations, and putting the brakes on states considering legalizing internet wagering. Deputy Attorney General Rod J. Rosenstein directed prosecutors to delay implementing the new opinion for 90 days, until April 14, to allow gaming operators to modify their practices.

“It has created a mess of confusion about existing laws that we have on the books on gambling,” said Michelle Minton, a senior fellow and gaming expert at the libertarian Competitive Enterprise Institute. “None of that was in question a couple of weeks ago. Now it’s all up in the air.”

The Justice Department’s reversal is widely regarded as a victory for Sheldon Adelson, the Sands Casino chairman and influential GOP donor who spent millions lobbying to curb online gambling, which he sees as a threat that could siphon business away from his brick-and-mortar casinos. Adelson donated tens of millions of dollars to Donald Trump’s campaign in 2016.

“Not to mince words, Sheldon Adelson is what’s driving the Department of Justice,” said Minton.

This is no petty dispute. Internet gaming generated $1 billion for New Jersey casinos in five years, and $45 million last year in state taxes. In Pennsylvania, the state-run iLottery is expected to earn $30 million in profits this year. Ten Pennsylvania casinos last year rushed to pony up $94 million for license fees to offer interactive casino games, slots and poker.

The Pennsylvania Gaming Control Board, noting on Jan. 18 that the new interpretation is “not of the board’s making,” directed casinos to report back in 30 days how they will restructure their internet operations to comply with the new federal edict. The 10 casinos that bought licenses had been expected to launch online operations by the second quarter of this year.

“It is your obligation to comply with the federal law in all respects,” Kevin F. O’Toole, the gaming board’s executive director, said in a Jan. 18 letter to casino general managers, most of whom had just written $10 million checks to the state for interactive licenses that now might not be so valuable.

New Jersey gaming advocates are preparing to file suit against the Justice Department and are collecting data from gaming operators and state regulators to establish the harm they say the new directive inflicted. State Senate President Steve Sweeney (D., Gloucester) has asked former state Sen. Raymond Lesniak, an author of the state’s gaming law, to lead the legal effort.

“It would virtually destroy the internet gaming business in New Jersey if the Justice Department took an aggressive position on enforcing the opinion," Lesniak said.

Lesniak said the move to online gaming is inevitable — in just six months of legal sports betting in New Jersey, more than 75 percent of the sports wagers are now placed online. If states do not regulate and tax internet gaming, illegal offshore operators have already shown an ability to move into the space, he said.

“The potential for internet gaming is unlimited,” he said. “It’s huge. That’s why New Jersey is the perfect plaintiff, because we can show the importance of unfettered use of the internet for gambling.”

Industry experts said the opinion issued by the Justice Department’s Office of Legal Counsel is contrary to the intent of the Wire Act, a 1961 Kennedy-era law. The pre-internet era law that forbade the use of interstate telephone transmissions to facilitate betting, they argue, was aimed at curbing organized crime’s influence in sports and racetrack wagering.

The Obama administration in 2011 issued an opinion that interpreted the Wire Act to apply only to sports wagering, and not to other types of gambling. That opinion set the stage for states to legalize internet gaming, and to expand state lottery offerings.

The Justice Department reversed course, an action it said it did not take lightly.

“While the Wire Act is not a model of artful drafting, we conclude that the words of the statute are sufficiently clear and that all but one of its prohibitions sweep beyond sports gambling," the opinion said.

Opponents of online gaming, which includes religious advocates who are morally opposed to gambling as well as brick-and-mortar commercial gaming interests that fear losing sales to internet operators, hailed the Trump administration’s stand as a return to sanity.

The Coalition to Stop Internet Gambling, which casino tycoon Adelson supports, called the Justice Department’s memo "a win for parents, children and other vulnerable populations.” Adelson last year sold his Sands Casino Resort Bethlehem, one of the state’s highest-grossing casinos, after the Pennsylvania General Assembly approved internet gaming over his objections.

If the Justice Department’s opinion survives a legal challenge, it’s unclear how much damage it will inflict on the industry. States that have legalized online sports betting have ring-fenced the business within state boundaries, outside of federal jurisdiction of the Wire Act. The same practices might be applied all forms of internet and mobile betting.

It’s not difficult to certify that the sender and the receiver of the bets are located in the same same state. Online gaming operators or state lotteries now typically use geolocation services to verify whether a bettor is physically located inside the state that has legalized the practice. States can also require betting operators to locate their computer servers inside state boundaries, as Pennsylvania did when it wrote its sports-betting regulations.

The issue gets more fuzzy regarding internet or data transmissions, which network operators sometimes route in an instant through other states, depending upon system congestion. The Wire Act also prohibits the cross-state transmission of payments related to betting, as well as “information assisting in placing those bets and wagers.”

The 2006 Unlawful Internet Gambling Enforcement Act spelled out that any incidental cross-state electronic transmissions did not constitute illegal interstate traffic, as long as the sender and receiver were located in the same state. But the Justice Department opinion is unclear on the issue, say gaming advocates.

The opinion also raises concerns about whether processing payments through credit cards or banks constitutes an interstate transmission in violation of the Wire Act. Nevada, which legalized mobile sports betting, has avoided a conflict with the federal law by requiring bettors to physically make deposits at casinos into their online accounts. But that rule has inhibited the growth of online betting in the state, analysts say.

In New Jersey, some credit cards decline to process payments to online betting operators, though bettors can authorize electronic bank withdrawals, instead.

The Pennsylvania Lottery, which last year rolled out a suite of iLottery games on a mobile app and expects to earn $30 million in profits this year, processes credit card deposits to players’ accounts through a third-party vendor, Netbanx, which is owned by Paysafe Group. The charges are processed through a Georgia bank. It’s unclear whether the Justice Department directive will require the state agency to rework its payment system.

“We are in the process of reviewing the DOJ opinion to determine how the Pennsylvania Lottery and the critical senior programs it funds may be affected,” said Jeffrey Johnson, a Department of Revenue spokesman.

Gaming advocates say the courts will need to intervene to sort out the uncertainties, but a legal challenge may first require the government to prosecute a gaming operator for alleged violations. Some argue that the opinion on its own accomplishes the administration’s aims by unsettling the gaming industry and by slowing down the momentum to embrace online gaming.

“There’s a theory that the Department of Justice isn’t going to do anything, that they are not going to prosecute any operator," said Minton. "The memo was meant to stop innovation in the states that have not yet legalized. It’s meant to cast a chill on Congress, on the states — not really to prosecute.”