Americans Spent $2.6bn On Unlicensed Gambling Sites In 2012

This article originally appeared on the Betable Blog. 

American players spent $2.6bn gambling on illegal offshore gambling websites in 2012 according to research published this week by the American Gaming Association, a group representing US gambling industry interests.

This huge black market starkly illustrates the challenge facing the handful of US states that are seeking to launch real-money gaming markets this Fall. The amount of revenue being sent offshore also shows how ineffective the current Federal ban on gambling via the internet is.

Despite the passage of the 2006 Unlawful Internet Gaming Enforcement Act (UIGEA) and a crackdown on the world’s two biggest poker sites in 2011, consumer demand continues to make the United States one of the largest real-money gaming markets in the world, albeit entirely unregulated and illegal.

At a conference in Las Vegas this week, a whistleblower described how the small Utah bank she worked for was, at one point, making $400,000 a month processing transactions for Poker Stars and Full Tilt Poker in defiance UIGEA. She said the bank processed around $200m in transactions for these companies since the 2006 ban, which made it illegal for financial institutions to knowingly process online gambling transactions. Since the 2011 crackdown on those companies, the unregulated US market has shrunk significantly. But as the AGA’s research, which was carried out on their behalf by UK consultancy H2 Gambling Capital, shows, it is still big business.

Next month Runner Runner, a film about the dark and murky world offshore internet gambling, will debut. Starring Justin Timberlake and Ben Affleck, it follows a Princeton student who sets out to track down the owner of an offshore gambling company he has lost money to, but ends up being embroiled in the industry. While the film is sure to be a somewhat dubious Hollywood interpretation of reality, at least it has an accurate tagline: “you have no idea who you are playing with”. It is no surprise the AGA is targeting the film’s launch as an opportunity to educate lawmakers and the public about the unregulated market.

Once a consumer deposits money with an unregulated gambling operator, there is no legal recourse and no way of knowing if the company holding their funds is legitimate. While Timberlake flys off to Costa Rica to track down gambling boss Ben Affleck in Runner Runner, the reality is that knowing who is behind these companies, where they are based, or what they are doing with your money is next to impossible.

Take, for example, the players who deposited money with Full Tilt Poker. The site continued to take US bets in defiance of the federal ban on online gambling, making it the second biggest poker company in the world. Meanwhile the former owners siphoned off millions of dollars in player funds, leading US authorities to label it a “global ponzi scheme”. But for a crackdown by the FBI in 2011, those players would never have seen their money again. As it is, the remissions process for nearly $200m in player funds was only started this month, more than two years after the site was shut down, and is sure to be a painful and protracted process.

It is important to underline that Full Tilt was a best-case scenario. Federal authorities were able to recover a large amount of funds on behalf of players, but there are plenty of other sites which may be doing the same thing right now while remaining too small to warrant action by law enforcement. Given the way offshore sites present themselves, there is little to indicate to consumers that their funds might be at risk. And it is more than just the money; there is no oversight of whether these companies conduct themselves in a responsible manner when it comes to core issues such as problem gambling.

The chances of a US federal bill being voted on this year are practically negligible, despite three bills being proposed, or in the process of being prepared. With a shutdown of federal government looming as a result of the latest budget/healthcare impasse, it is fair to say House and Senate politicians have bigger issues on their mind. Still, $2.6bn in at-risk spending by US customers should not be put lightly. To put it in perspective, that figure is the same size as world wide social casino gaming revenue in 2012.

New Jersey and Delaware are about to join Nevada in launching regulated online real-money gaming markets in the next couple months. They should be welcomed as legal and regulated alternatives to the black market. But the small population in these states may not support a regulated industry, which will need to compete with the offshore (and untaxed) black market operators.

There are two solutions in the US: a federal law to regulate online gambling, or more states to regulate and cooperate to reduce the cost of licensing in each jurisdiction. Based on the current state of play, the latter is the more likely. The good news is that as more states legalize real money gaming, the regulated market will become big enough to compete with the black market.

How big could it get? Well, the analysts at H2 Gaming Capital say that if 17 states pass gambling laws over the next four years, the regulated US online gambling could be worth $7.4bn by 2017.