IP Geolocation Can Ensure Compliance with New iGaming Regulations

Getting Back in the Game

 

Background

Online gambling in the U.S. has been effectively prohibited since passage of the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006, which was signed into law by President Bush in 2007. The UIGEA accomplished this by restricting the use of payment systems (e.g., banks, payment processors, credit card companies) for Americans who gamble over the Internet. It was conceived as a measure to prevent activities, such as money laundering and bank fraud within the gaming sector, as well as a means to prevent underage and compulsive gambling through unregulated access to Internet gambling sites.

Beyond curtailing individuals’ online gaming activities, the impact of this legislation extended to a variety of interests, including ISPs, state governments and, of course, various segments of the gaming industry. Rather than contest what were often perceived as unclear provisions of the law, many igaming businesses chose to shut down; while others simply moved their business to an off shore base – and U.S. players followed them. In spite of considerable legal wrangling over provisions of the Act since its passage, final regulations went into effect in January 2009 and compliance with these regulations is now required as of June 1, 2010.

From the outset, many viewed this legislation as an inappropriate interference with individuals’ personal freedom to spend their money as they see fit. Members of Congress shared this point of view and began drafting a new bill that, instead of prohibiting Internet gambling in the U.S., would regulate and license it. In May, 2009, Representative Barney Frank, Chairman of the House Financial Services Committee, introduced the Internet Gambling Regulation, Consumer Protection and Enforcement Act of 2009.

This Act would establish a federal regulatory and enforcement framework under which Internet gambling operators could obtain licenses authorizing them to accept bets and wagers from individuals in the U.S. Conditions of the license would require that operators maintain effective protections against underage and compulsive gambling, money laundering and fraud, and enforce prohibitions or restrictions on types of gambling prohibited by states and Indian tribes. The House Financial Services Committee passed this legislation on July 28, 2010. The bill now goes to the Senate for review and ultimately to Congress for vote.

A companion bill, The Internet Gambling Regulation and Tax Enforcement Act of 2009, introduced in the House by Rep. Jim McDermott, is designed to capture revenue for the federal and state governments and would require licensed establishments to pay a two percent fee (i.e., federal tax) on all deposits. States and tribal governments would receive a 6% share of online gaming taxes earned within their borders. Provisions of the bill would also increase protection against tax cheating.

This report looks ahead at the regulations these bills propose, outlines the concept of geolocation technology, and examines how this technology can help igaming businesses be ready to get back in the game by meeting potential requirements for licensing and compliance with new laws governing operation.

Geolocation and IP Intelligence: Know who your customers are and where they are located

In the U.S. online gaming world of the future, knowing where your customer is located will be a matter of significant importance. Accepting a single wager or payment from a state or tribal entity that has laws restricting either all or specific types of online gambling can bring stiff legal consequences, including asset freezes, loss of business license, monetary fines and even imprisonment. Proposed new regulations will require online gaming businesses to practice greater diligence than ever before and be subject to more rigorous oversight by government regulators.

Today, in countries outside the U.S., many online gaming companies and payment processors are attempting to mitigate their risk of doing business, by knowing beyond a doubt who their customers are – in particular, where they are located and how they are connected to the Internet. To do this, many of these enterprises have turned to geolocation, a technology that immediately determines the real-world geographic location of website visitors –from country of origin down to city-level accuracy if desired – at the instant they click into the site.

Geolocation technology uses Internet infrastructure information to determine the geographic location of Internet Protocol (IP) addresses associated with Internet-connected devices. This can be used by online gambling sites to comply with national as well as local laws. In the US, the most obvious application of geolocation for online gaming sites and payment processors would be to deny bets placed from users in states and tribal regions where online gambling is prohibited.

However, due to the increased scrutiny that regulators will place on the gambling industry under proposed new regulations, simply blocking a user based on the state or tribal region they say they are in will likely be deemed insufficient. Geolocation and IP Intelligence

Public-source geolocation data, widely available in the industry, can help identify the location of IP addresses at the country, state and city levels. Often, however, the IP location is not necessarily equivalent to the actual location of the end user. Neustar IP Intelligence has spent more than six years analyzing IP location, determining which IP addresses are representative of user location and which require more scrutiny. The combination of this Internet domain knowledge with IP geolocation information is something Neustar has coined ―IP Intelligence.

European Gaming Operators Early Adopters

Neustar’s customers, especially in the U.K., have been early adopters of Neustar’s IP Intelligence technology. For example, Ladbrokes, the world’s biggest bookmaker, was ordered by a Dutch court to prevent domestic gamers from placing bets on its web site. Ladbrokes was able to comply with the ruling by blocking online users from locations inside the Netherlands – a task that was achieved with virtually 100% accuracy.

Neustar is uniquely qualified to provide such services to online gaming businesses. It began working on this issue in 2001, providing IP geolocation services to the early online casino ventures of MGM MIRAGE and Hard Rock Casino among others. These pioneers chose an IP geolocation solution to protect against regulatory violations that could have undermined the integrity of their entire operations.

Through research and real time deployment, the science of Internet geolocation has become a reality and is a technology that can support the online gaming requirements as defined by Congressman Frank’s recent bill.

Geolocation and Local Legislation: Comply with State and Indian Tribal Laws Governing Online Gambling

Traditionally, the Tenth Amendment of the Constitution has left it up to individual states to decide whether or not to legalize and regulate gambling activity for their citizens, with laws varying widely from state to state. Federal gaming laws were mostly designed to support state law in the face of interstate or international gambling. That changed in 2006 with federal legislation prohibiting online gaming in all states under the UIGEA.

Chairman Frank’s legislation once again reinforces the rights of each state and tribal government to determine whether to allow Internet gambling activity for people accessing the Internet within their jurisdiction, and to apply other restrictions on the activity as determined necessary. Restrictions could be enforced if individual states decide to opt out from permitting persons in their states from Internet gambling.

With the ongoing recession, several States that had previously prohibited gambling altogether, notably Ohio, Maryland and Massachusetts, among others, have recently begun to look favorably on casinos in general as a potential source of revenue. Now, with the potential passage of Congressman Frank’s bill to legalize internet gambling at the federal level, these states may embrace igaming as well.

California, another state looking for recession relief, is at the forefront in pursuing in-state-only Internet gambling as a means of offsetting its crippling budget deficit. By preventing online operators elsewhere from tapping its residents, California would not have to share revenue with the federal government or with other states.

With some state or tribal laws prohibiting online gaming entirely and other states allowing in-state-only operators and players, geolocation technology will be an essential capability for every U.S. online casino. In-state only operators will need to comply with specific license agreements for their jurisdiction and U.S.-wide operators must be able to identify and restrict players from prohibited locations. Neustar’s geolocation technology has already proven highly effective in meeting similar emerging requirements for jurisdiction-specific licensing and operating compliance for Internet gaming businesses across Europe and further afield.

Geolocation as a Requirement for Licensing: Demonstrate you have the necessary safeguards and capabilities in place to meet regulations for operation

In proposed legislation to regulate Internet gambling, licensed operators would be required to implement proven security controls to ensure consumers are protected and each financial transaction is safe, secure and free from fraud and abuse. Specifically, any online gambling operator receiving a license would need to demonstrate they have the appropriate safeguards in place and are able to maintain the following requirements:

  • Consumer protections – Safeguards to ensure the individual placing a bet or wager is of legal age to gamble as defined by the law of the State or tribal area in which the individual is located and there are protections to combat compulsive gambling
  • Safe financial transactions – Safeguards to prevent fraud, identity theft and money laundering
  • Tax collection – Mechanisms to ensure all appropriate taxes and fees are collected from the licensees and individuals
  • Location verification – Safeguards to ensure that the individual placing the bet or wager is physically located in a jurisdiction that permits that form of Internet gambling

Additionally, license applicants would be:

  • Subject to review of their financial condition and corporate structure, business experience, suitability, and criminal background checks, and agree to be subject to U.S. jurisdiction
  • Prohibited from accepting any type of bet or wager that is initiated or terminated in a state or tribal land that prohibits that type of Internet gambling, or any sports gambling or wager prohibited under the Professional and Amateur Sports Protection Act.

Regulations will be strictly enforced by the Department of the Treasury, which will have the authority to revoke or terminate the license of any operator who fails to comply with the bill’s provisions. Violators could be fined or imprisoned for up to five years, or both.

Given the nature of these regulations and the potential penalties associated with violations, it is likely that operators will adopt – and indeed may be required to adopt – some form of geolocation component as a necessary part of their online gaming operations.

Geolocation and Technical Standards: Understand what new record-keeping standards may be required

As legalization of online gambling in the US moves closer to reality, it is not unreasonable to assume that geolocation will play an integral part in the new standards for record keeping. Websites will need to integrate geolocation systems to adapt to emerging regulations, especially if they have both a country-wide platform along with a jurisdiction-specific licensed website.

New regulations will undoubtedly stipulate specific technical requirements that licensed Internet operators must have in place for tax accounting in addition to those to prevent criminal activity. For example, to prevent the threat of fraud and money laundering, the current proposed legislation requires these safeguards be instituted:

  • Money transacted on Internet gambling sites would be traceable, as they would come directly from an established banking network
  • Transactions could be cross-checked with existing databases used in antifraud, anti-money laundering and antiterrorism efforts
  • Payments to an Internet gambling operator could be held in escrow, giving consumers an opportunity to contest unauthorized transactions (e.g. conducted with a stolen credit card).

A number of European jurisdictions are already in the process of drafting technical standards that will accompany emerging online gaming regulations in their region. In this regard, Neustar’s data is the only IP geolocation data that has been accepted by the judicial systems in several countries. This is due in part to the company’s exclusive ability to provide not only the historical information related to the assignment of an IP address location, but all the evidentiary data that was collected to make that assignment. These detailed reports are useful for forensic and criminal management and audit support.

Geolocation and Taxation: Meet potential federal and/or state regulations for tax allocation

The economic benefits of online gambling regulation have been generating significant attention on Capitol Hill. A companion to Chairman Frank’s bill, the Internet Gambling Regulation and Tax Enforcement Act of 2010, introduced by Rep. Jim McDermott, is projected to generate $42 billion in new federal government revenues and $30 billion in new state government revenues over 10 years. The primary source of the revenue would come from ensuring applicable taxes and license fees on regulated Internet gambling activities are collected.

The crux of McDermott’s Internet gambling tax bill will be to place an 8% tax on all internet gaming business, with the federal government receiving a 2% share and 6% going to the local states or tribes. Gambler’s winnings would also be subject to taxes. The enactment of this legislation will underscore the need for every Internet casino to have technology in place that will be able to identify and capture specific tax information for each state, tribal region and the federal government.

Neustar has geolocation intelligence that can accommodate the need to split revenues based on the geographical location of players, and which may also prove advantageous if demonstrating this capability becomes a requirement for obtaining a license.

Geolocation and Criminal Liability: Prevent violation of gaming regulations and the risk of prosecution

The use of geolocation to prevent the violation of gaming regulation can effectively prevent the risk of prosecution in jurisdictions which have taken a very proactive stance against online gaming. Online gaming operators have used geolocation, especially to block access to players from the United States following the adoption of the Unlawful Internet Gaming Enforcement Act UIGEA) and the arrest of Betonsports.com CEO David Carruthers, for violating the Wire Act in 2006.

The United States remains the best example for the need to identify players from markets which are active in the prosecution of online gaming operators. However, other countries have also stepped up their criminal enforcement.

Turkey, which enacted several laws in 2007 to protect its gaming monopoly and prohibit online gaming, is another example of a jurisdiction where geolocation can be used to avoid regulatory conflict. Two of Sportingbet’s UK-based employees were arrested on holiday in Turkey in 2008 for violations of the online gaming ban. Sportingbet’s share price plunged nearly eight percent on the day of the announcement of the arrests. One employee was detained for three months and the other was forced to remain in Turkey for seven months. Employees of a marketing firm which had conducted business with Sportingbet in Turkey were also detained.

Other countries that have arrested online gaming executives include France, the Netherlands, Israel, China and Malaysia. The risk of arrest also extends to payment service providers as was demonstrated by the arrest of Neteller executives in the United States in January 2007.

The real risk of arrest in many jurisdictions and the consequent negative impact on an operator’s share price and business activities, highlight the role for geolocation in a gaming company’s compliance and regulatory risk due diligence. If Sportingbet or Betonsports had in place technology to prove that the companies were not accepting play from Turkey and the United States respectively, then the likelihood of arrest and the consequences of arrests for ongoing business could have been avoided.

Conclusion

Though the return to legalized – and regulated – online gaming in the U.S. is still to be determined, future igaming operators will likely find they must be ready to comply with substantial new federal regulations as well as wide ranging laws in force at the point of consumption in states and tribal jurisdictions. These laws may be liberal, restrictive, prohibitionist or somewhere in between.

As such, the need for operators to establish geographical intelligence and boundaries will move from the exception to the rule. This is shown to already be the case in Europe and beyond as IP geolocation has been, and is currently, being used to shore up an operator’s competence in meeting potentially far-reaching online gaming regulations as new laws emerge.

This report shows how geolocation may well become necessary in the U.S. for igaming operator licensing and a required part of an operator’s technological architecture, similar to mandates abroad. With new tax laws and crime safeguards, a geolocation solution will be essential to divide gaming tax revenues across the country and as a means of evidence that a website is not being targeted, in order to avoid criminal liability or business risk.

What this report finally reveals is that geolocation is emerging as a tool in both online gaming companies’ compliance arsenals and may become a mechanism that is mandated in legal, regulatory and technical frameworks. Through research and real time deployment, the science of Internet geolocation has become a reality and is a technology that can support the requirements as defined by Congressman Frank’s recent bill.

It seems possible that U.S. gamblers will be back at the table in the foreseeable future, but in the interim, online casinos will be well served to deploy technology that tells them exactly where their customers are—and keeps them out of the line of regulatory fire.

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