A new “eye in the sky”?

Editor’s note: While I’m occupied on other fronts, guest blogger Alan Saway of software firm Quova takes up the slack, examining some of the infrastructural problems associated with Internet casinos.

The Internet Gambling Enforcement Act (UIGEA) of 2006 prohibited online gambling in the U.S. by restricting the use of payment systems (e.g., banks, payment processors, credit card companies) for Americans who gamble over the Internet.  The Act 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.

However, from the outset, many – including members of Congress – viewed this legislation as  inappropriate interference with individuals’ personal freedom to spend their money as they see fit. In response, Rep. Barney Frank (D-Mass., left), then-Chairman of the House Financial Services Committee, introduced the Internet Gambling Regulation, Consumer Protection & Enforcement Act of 2009.

This Act would have established 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 operators to 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.

A companion bill, the Internet Gambling Regulation & Tax Enforcement Act, introduced in the House by Rep. Jim McDermott (D-Wash., above), was designed to capture revenue from proposed legal online gaming activity for federal, state and tribal governments and increase protection against tax cheating. Which is a reminder that …

New online gaming operators will need to know who their customers are and where they are located. In the U.S. online gaming world of the future, knowing where a 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.

Geolocation and IP Intelligence. Geolocation technology (which Quova developes) uses Internet infrastructure information to instantly determine the real-world geographic location of IP addresses associated with Internet-connected devices. 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.

Many online gaming companies and payment processors, especially in the U.K., have been early adopters of Quova’s IP Intelligence technology. We began working on this issue in 2001, providing IP geolocation services to the early online casino ventures of MGM Resorts International and Hard Rock, among others who chose an IP geolocation solution to protect against regulatory violations that could have undermined the integrity of their entire operations.

With the ongoing recession, several states that had previously prohibited gambling altogether, notably Ohio, Maryland and Massachusetts, among others, have begun to look favorably on casinos in general as a potential source of revenue. With Rep. Frank’s bill having raised the issue of legalizing Internet gambling at the federal level, these states may embrace i-gaming as well.

California is considering in-state-only Internet gambling to help offset its budget deficit. It would prevent online operators elsewhere from tapping its residents so that the Golden State would not have to share revenue with the federal government or with other states. As some states or tribes prohibit online gaming entirely and others allow intrastate-only operation and play, geolocation technology will be essential for identifying and banning players from prohibited locations.

Requirements for licensing may include geolocation. Proposed legislation would require licensed operators to implement proven security controls to ensure consumers are protected and each financial transaction is safe, secure and free from fraud and abuse.  The Department of the Treasury will strictly enforce these regulations and will have the authority to revoke or terminate the license of any operator who fails to comply with them. Violators could be fined or imprisoned for up to five years, or both. Given the nature of the regulations and the potential penalties associated with violations, it is likely that operators will adopt some form of geolocation component as a necessary part of their online gaming operations.

New record-keeping standards and forensic reports may be required. Rep. McDermott’s proposed Internet-gambling bill was 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 applicable taxes and license fees collected on regulated -igaming activities. New igaming regulations will undoubtedly stipulate specific technical requirements that operators must have in place for tax accounting in addition to those for preventing criminal activity.

In judicial questions of legal or regulatory compliance, geolocation data (such as Quova’s) would be particularly valuable. This is due in part to all the evidentiary data that was collected to make that assignment. These detailed reports are useful for forensic and criminal investigations, evidentiary claims, compliance management and audit support.

With the proposed new tax laws and criminal safeguards, a geolocation solution may well become necessary for U.S. i-gaming operator licensing and a required part of its technological architecture. It will be essential to divide gaming tax revenues across the country, comply with new federal, state and tribal laws, and provide evidence that a Webs ite is not being targeted in order to avoid criminal liability or business risk. IP geolocation technology can readily support the requirements on the table on Capitol Hill.